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LCF bondholders to get 80% of initial investment back

Emma Lunn
Written By:
Emma Lunn

Details of the scheme to compensate bondholders who lost money due to the collapse of London Capital & Finance (LCF) have been published by the government.

The Treasury has also launched a consultation on proposals to bring the issuance of mini-bonds into FCA regulation.

The compensation scheme for LCF bondholders will cover 80% of LCF bondholders’ initial investment, up to a maximum of £68,000. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation payable.

The plans were set out today by John Glen, the economic secretary to the Treasury.

The scheme will be available to all LCF bondholders who have not already received compensation from the Financial Services Compensation Scheme (FSCS). It represents 80% of the compensation they could have received had they been eligible for FSCS protection, which is capped at £85,000.

Glen said: “This has been a very difficult time for LCF bondholders, many of whom are elderly and have lost their hard-earned savings. 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 Financial Services Compensation Scheme.

“However, the situation regarding LCF is unique and exceptional and the government has decided to establish a compensation scheme for LCF bondholders in this instance. The scheme appropriately balances the interests of both bondholders and the taxpayer and will ensure that all LCF bondholders receive a fair level of compensation in respect of the financial loss they have suffered.”

LCF was a Financial Conduct Authority (FCA) authorised firm which issued unregulated non-transferable debt securities, commonly known as ‘mini-bonds’, to investors and then speculatively invested the funds received in a number of underlying businesses.

LCF went into administration in January 2019 and at the point of failure 11,625 bondholders had invested about £237m.

The FSCS is limited in scope and it is only able to pay out when a relevant regulated activity has been undertaken. The FSCS has considered LCF claims in detail and has been able to protect about 2,800 bondholders, paying out more than £57m in compensation.

About 97% of LCF bondholders invested less than £85,000 and therefore will not reach the compensation cap under either the government scheme or the FSCS. The government expects to pay out around £120m compensation to about 8,800 people in total and to have paid all bondholders within six months of securing the necessary primary legislation, which it will bring forward as soon as parliamentary time allows.

The government says bondholders should be vigilant to the risk of scammers posing as services to help them claim. They do not need to do anything at this stage and government will provide further details on how the scheme will operate in due course.

The FCA announced in June 2020 that it planned to ban the marketing of mini bonds.