Updated: May 22
The Treasury has today set out details of how the Government will compensate investors in London Capital & Finance (LCF). The FSCS has already paid out £57m to 2,800 bondholders, yet there are many whose claims were not eligible yet still suffered losses.
While LCF was an FCA regulated firm, many claims are not eligible for FSCS compensation because they cannot be connected to regulated activity undertaken by the firm.
The written statement by John Glenn highlights that many of the bondholders were elderly and, while for some it was just a portion of their portfolio, for others it was their whole life savings. It is for this reason that the Government is setting up support scheme that will compensate up to 80% of each bondholder's initial investment, up to £68,000 which is 80% of what the FSCS would have covered.
Notably, the statement makes it clear how this is a solution for the particular situation:
"It is an important point of principle that government does not step in to pay compensation in respect of failed financial services firms that fall outside the FSCS. Doing so would create the wrong set of incentives for individuals and an unnecessary burden on the taxpayer. However the situation regarding LCF is unique and exceptional."
The statement also refers to the need to strike a balance between compensating these investors and using taxpayer money, but it's clear that the government is willing to break precedent for this extraordinary case. The government expects to pay out around £120m in compensation to bondholders within 6 months of securing the necessary primary legislation.
The statement references Dame Gloster's report into the regulatory framework's role in allowing the LCF situation to arise and has clearly been affected by the outcome of her review. The statement goes on to say:
"Bondholders have been badly let down by LCF, but they have also been let down by the regulatory system that is designed to protect them."
The Treasury looks to make it clear that this is an extraordinary measure and emphasises that investors should not expect that, in future, the Government will compensate against losses from fraud, investment performance, mis-selling or mis-buying.
This unusual action shows yet again how impactful the LCF case has been. We'll be posting again shortly with thoughts on the takeaways from Treasury's statement for regulated firms.
In the meantime, it is worth noting that the Treasury is also consulting on bringing the issuance of mini-bonds into the regulatory framework to ensure the market is better regulated and consumers are protected.