London Capital and Finance plc
LCF sold unregulated 'mini-bonds' to investors and fell into administration in January

The UK’s financial compensation scheme has offered a glimmer of hope to some 11,500 customers wiped out by the £236m collapse of London Capital & Finance by stating they could have grounds to claim, rowing back on an earlier decision.

The Financial Services Compensation Scheme said on Friday it was exploring whether or not LCF was conducting regulated activities “which might give rise to a claim”. This represents a U-turn on its original position when the FSCS told investors the company’s activities fell outside its remit.

LCF sold unregulated “mini-bonds” to investors and fell into administration in January, sparking a criminal probe, a regulatory investigation and an inquiry into rules around unregulated mini-bonds, the proceeds of which fund small businesses.

The FSCS originally told customers they were not protected because LCF “issued its own mini-bonds to investors on a non-advised basis” and the bonds were not transferable. Although the company was regulated by the Financial Conduct Authority, the mini-bonds it sold were not, meaning most anguished investors could not claim.

To make matters worse, some bondholders who checked with the FSCS before investing were not told about this caveat. The FSCS has since apologised.

On Friday the FSCS said: “The promotional materials that we have reviewed stated that the LCF mini-bonds were not FSCS-protected. However, after further analysis of LCF’s business practices, investment materials, and calls recorded with investors, FSCS is now investigating whether regulated activities were in fact carried out which might give rise to a claim.”

The change in position follows pressure from lawyers and administrators at Smith & Williamson, who have trawled through hours of recorded calls between LCF sales people and promotional material to uncover evidence of regulated activities, such as proving customers were advised to buy mini-bonds.

According to the FSCS and insolvency experts at law firm Mishcon de Reya, certain phone conversations and meetings with salespeople at LCF, could have constituted financial advice, and be liable for claims.

Guy Wilkes, a finance disputes partner at Mishcon, said: “The sales people were well instructed to avoid giving investment advice but in some cases they may have gone over the top and strayed over the line. Once they start recommending a course of action, there’s an argument that it’s financial advice.”

An FSCS spokesperson said its view had changed after “reviewing some of the calls” between customers and sales people and reviewing LCF’s business practices.

Shearman & Sterling, a law firm representing some of the bondholders on a pro bono basis, has proposed more sweeping proposals that the FSCS is also considering. These proposals could mean even investors who did not invest after conversations with salespeople may be able to get their money back.

According to the law firm, LCF was “dealing in investments in principal” and was “operating a collective investment scheme”. It claims the latter should bring all LCF investors into the scope of FSCS protection and the former should cover all investments after January 3 2018.

Thomas Donegan, a Shearman partner, said: “We welcome this latest announcement by FSCS and we hope it will be an important step on the way to a fair outcome for investors.”

Nathan Brown, a 29-year-old account manager, said he had been shocked to discover his investments were not protected by the compensation scheme.

“I was shocked that selling investments to the public doesn’t count as a regulated activity, and I just looked at the FCA-authorisation badge and thought it would all be regulated. I think we are owed compensation and I think the FCA has failed us.”

Any compensation issued by the FSCS could result in a backlash from the financial services industry, which pays a levy to fund payouts.

The redress scheme has asked investors to register for updates via its website.

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