London Capital and Finance bondholders to be bailed out by new £120m taxpayer scheme

Nearly four months after the original announcement, the Treasury has finally announced that any London Capital and Finance investors who have not been refunded via the Financial Services Compensation Scheme will be bailed out almost in full by the taxpayer, up to a £68,000 cap. Around 8,800 people are expected to be eligible.

In a sop to fans of moral hazard, the new scheme will refund up to 80% of the original investment, minus any interest payments or dividends from the administration. Having faced near total losses for over two years, it is unlikely investors under the cap will be too upset by a 20% haircut. A smaller number of investors who invested significantly more than the cap could be facing very large losses: we are meant to assume that they were too rich for us to empathise with, but there could easily be first-time investors of middling or modest means who invested pension lump sums or inheritances.

The FCA will also make “ex gratia” payments to some investors who contacted it before the collapse, some of whom were told by FCA call centre staff that their investments in LCF were covered by the FSCS. More with-it call centre staff who attempted to protect investors and raise concerns were slapped down by FCA management.

On top of the FSCS bill which in February stood at £56.3 million, this would bring the total bill paid by the general public over the collapse of London Capital and Finance to £176 million, plus any remaining successful FSCS claims, plus the FCA’s “ex gratia” payments.

The conclusion of the saga of LCF compensation confirms a long-standing principle in UK financial regulation: that if a sufficient number of people believe an investment is risk-free, the Government has to spend everyone else’s money to make it so. This principle has previously been applied to Equitable Life, Barlow Clowes, Icelandic banks and defined benefit workplace pensions and others.

Back in July 2019 I noted that an ad-hoc compensation scheme funded by taxpayers was one of the options on the table to resolve the issue of LCF investors let down by the FCA’s incompetence, as detailed in the Gloster Report. One and a half years later the Treasury has finally plumped for that option.

Whether the Government manages to recoup any compensation from the Four Horsemen of LCF remains to be seen. Thirteen individuals were sued by LCF’s administrators last year, alleging that ten of those individuals “misappropriated” investors’ money (now taxpayers’ money). No further developments in that case have been reported as yet.

The £26 million funneled from LCF investors (now taxpayers) to Facebook and Google for their misleading ads will almost certainly never recovered, as there was no rule against Facebook and Google taking £26 million to promote high risk unregulated investment schemes to the public – and still isn’t.

With the compensation saga coming to an end, the next big question is whether the Government will do anything to stop the next wave of unregulated investments taking in a similiarly large sum, which eventually falls on the taxpayer again.

The early signs are not promising. As part of the announcement on compensation, a consultation on bringing mini-bonds under FCA regulation has also been announced.

What this is supposed to achieve I’m not sure, bearing in mind that the FCA was happy to give London Capital and Finance all the authorisation they needed despite

London Capital and Finance’s consistent history of misselling their high risk investments to the publicLCF disclosing to the FCA that 25% of investors’ money was paid out as commissionNumerous other red flags being visible in LCF’s accounts

– all failings identified by the Gloster Report. Also, if it becomes difficult to issue minibonds to the public, all that will achieve is to make the unscrupulous advertise other unregulated investment structures instead – such as the “invest in our hotel room with an 8% assured return” structure, which continues to flourish unabated – or an entirely new structure.

It is depressingly revealing that the Treasury has not announced a consultation into bringing UK investment regulation out of the 1920s and requiring all investment securities offered to the public to be registered with the FCA, which is how it has worked in the USA for decades.

Without comprehensive legislation, an equivalent of the US’s 1946 Howey Test and proactive regulation, the UK will always be fighting the last war.

Nearly four months after the original announcement, the Treasury has finally announced that any London Capital and Finance investors who have not been refunded via the Financial Services Compensation Scheme will be bailed out almost in full by the taxpayer, up to a £68,000 cap. Around 8,800 people are expected to be eligible.

In a sop to fans of moral hazard, the new scheme will refund up to 80% of the original investment, minus any interest payments or dividends from the administration. Having faced near total losses for over two years, it is unlikely investors under the cap will be too upset by a 20% haircut. A smaller number of investors who invested significantly more than the cap could be facing very large losses: we are meant to assume that they were too rich for us to empathise with, but there could easily be first-time investors of middling or modest means who invested pension lump sums or inheritances.

The FCA will also make “ex gratia” payments to some investors who contacted it before the collapse, some of whom were told by FCA call centre staff that their investments in LCF were covered by the FSCS. More with-it call centre staff who attempted to protect investors and raise concerns were slapped down by FCA management.

On top of the FSCS bill which in February stood at £56.3 million, this would bring the total bill paid by the general public over the collapse of London Capital and Finance to £176 million, plus any remaining successful FSCS claims, plus the FCA’s “ex gratia” payments.

The conclusion of the saga of LCF compensation confirms a long-standing principle in UK financial regulation: that if a sufficient number of people believe an investment is risk-free, the Government has to spend everyone else’s money to make it so. This principle has previously been applied to Equitable Life, Barlow Clowes, Icelandic banks and defined benefit workplace pensions and others.

Back in July 2019 I noted that an ad-hoc compensation scheme funded by taxpayers was one of the options on the table to resolve the issue of LCF investors let down by the FCA’s incompetence, as detailed in the Gloster Report. One and a half years later the Treasury has finally plumped for that option.

Whether the Government manages to recoup any compensation from the Four Horsemen of LCF remains to be seen. Thirteen individuals were sued by LCF’s administrators last year, alleging that ten of those individuals “misappropriated” investors’ money (now taxpayers’ money). No further developments in that case have been reported as yet.

The £26 million funneled from LCF investors (now taxpayers) to Facebook and Google for their misleading ads will almost certainly never recovered, as there was no rule against Facebook and Google taking £26 million to promote high risk unregulated investment schemes to the public – and still isn’t.

With the compensation saga coming to an end, the next big question is whether the Government will do anything to stop the next wave of unregulated investments taking in a similiarly large sum, which eventually falls on the taxpayer again.

The early signs are not promising. As part of the announcement on compensation, a consultation on bringing mini-bonds under FCA regulation has also been announced.

What this is supposed to achieve I’m not sure, bearing in mind that the FCA was happy to give London Capital and Finance all the authorisation they needed despite

  • London Capital and Finance’s consistent history of misselling their high risk investments to the public
  • LCF disclosing to the FCA that 25% of investors’ money was paid out as commission
  • Numerous other red flags being visible in LCF’s accounts

– all failings identified by the Gloster Report. Also, if it becomes difficult to issue minibonds to the public, all that will achieve is to make the unscrupulous advertise other unregulated investment structures instead – such as the “invest in our hotel room with an 8% assured return” structure, which continues to flourish unabated – or an entirely new structure.

It is depressingly revealing that the Treasury has not announced a consultation into bringing UK investment regulation out of the 1920s and requiring all investment securities offered to the public to be registered with the FCA, which is how it has worked in the USA for decades.

Without comprehensive legislation, an equivalent of the US’s 1946 Howey Test and proactive regulation, the UK will always be fighting the last war.

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