The Financial Services Compensation Scheme (FSCS) has paid out nearly £2.7m to London Capital and Finance (LCF) investors, in the first claims paid by the service since the firm’s collapse in January 2019.
The long-awaited payout is good news for 135 customers collectively holding 151 bonds who have received compensation, who received the payouts automatically without having to submit an application.
However, it’s expected that tens of thousands of other investors will not be compensated for any losses due to complex rules around unregulated investments.
Here, Which? looks at what happened to LCF, explains what other investors that could be eligible for compensation need to do and why the majority of investors will miss out.
What happened to LCF?
LCF offered mini-bonds offering tempting rates of return but went into administration in January last year.
The collapse saw nearly 12,000 people collectively lose £236m.
While the firm itself was authorised by the Financial Conduct Authority (FCA) to give financial advice, the sale of mini-bonds is not a regulated activity.
Unregulated investments are generally not protected in the same way as regulated savings and investments, and usually can’t be recouped through the FSCS.
Why have some investors got money back?
Investors who have so far been able to claim are those who transferred out of stocks and shares ISAs to invest in LCF bonds, which is considered a regulated activity.
The payments were made automatically by the FSCS without the need for the victims to apply.
The lifeboat fund won’t be able to compensate 283 other victims, because they dealt with LCF before it was authorised to carry out financial services business in June 2016.
The LCF saga spurred the FCA last year to launch an independent investigation into regulatory issues raised after the collapse of the firm.
Last month, the regulator temporarily slammed the door on marketing some mini-bonds in a bid to protect savers.
Find out more: how mini-bonds work
What will happen to the rest of LCF investor cash?
Any LCF customer who hasn’t received compensation from the FSCS by 24 February 2020, but believes they transferred out of a stocks and shares ISA, should send supporting evidence to the lifeboat fund.
More information about this is available on the FSCS website in the LCF Q&A section.
But for the majority of investors, it’s a waiting game to see if they will be compensated.
The FSCS also said there will be other customers who were given ‘misleading’ advice by LCF, which is a valid claim for FSCS compensation. But at this stage, customers don’t need to make a claim.
The body expects to have reviewed all of the cases by the end of March 2020.
How are your investments covered?
The FSCS offers up to £85,000 in compensation per person, per firm, if investment providers fail. If the failure occurred before 1 April 2019, the limit is £50,000.
Both the provider and the firm itself must be regulated by the FCA.
Regulated investments include:
- Investment trusts
- Self-invested personal pensions
If you’re investing for retirement, for example, there’s a decent chance you’ll exceed the cover limit of £85,000 per firm but this doesn’t necessarily mean you’ll lose everything above the amount if the company collapses.
This is because when you invest through a broker, your money will be held separately in what’s known as a ‘nominee account’, which can’t be touched by creditors.
Unfortunately, there’s no FSCS protection for your investments if they perform badly unless it resulted from bad advice given by a regulated independent financial adviser (IFA), which will be the case for some LCF investors.
When dealt with such cases, the FSCS analyses the recommendations that the IFA provided in its suitability report, as well as any further relevant documentation such as email chains and phone call transcripts.
It’s also important to know that the FSCS will only consider compensation against providers and IFAs that are no longer operating.
If you want to complain about a firm which is still operating, you will need to make a direct complaint. If you’re still unhappy with the result, you can escalate this to the Financial Ombudsman Service (FOS).
If the complaint relates to wrongdoing before 1 April 2019, the maximum compensation is £160,000. For complaints relating to issues after this date, the maximum is £350,000. This limit will rise in line with inflation each year.
- Find out more: the FSCS explained
Is investing in mini-bonds ever a good idea?
Mini-bonds typically offer bumper returns but come with a much higher risk and very little protection.
Whatever the rate on offer they are usually issued by smaller companies and start-ups who may find it harder to raise money from institutional investors like banks.
These types of firms are more likely to face cash-flow issues that delay interest payments, or the company could go bust and be unable to pay back money to investors, as seen with LCF.
But it’s not just LCF investors who have lost money by investing in mini-bonds. Other high profile cases have also seen people lose their savings.
For example, in 2018 Mexican food chain, Chilango, issued a mini-bond giving investors the chance to earn interest of 8% as well as a number of perks, including free burritos, to fund its business activities.
Hundreds of people invested over £3.7m into its mini-bonds, but last year it came to light that the chain is struggling to stay afloat.
Before Christmas investors were given the option of either receiving 10p in every £1 they invested or swapping their mini-bond debts for debt-like shares, which promised returns sometime in the future – but this is not guaranteed.
What other investments aren’t covered by the FSCS?
Mini-bonds aren’t the only investments excluded from FSCS compensation rules.
Other investments which aren’t covered include:
- Peer-to-peer investments
- Schemes that invest in stamps
- Fine wines and art
- Other unusual investments such as car parking spaces, burial plots and shipping containers.
These investments are very high risk and are often subject to scams.
Even if you see an FSCS logo, don’t think it’s legitimate. Websites offering fake investments are becoming more common, with many claiming FCA regulation and FSCS cover that doesn’t exist.
It’s important to check the FCA register and warning list to check if you’re dealing with a known scam.
I’m an LCF bondholder – what else do I need to know?
In an update last week, the FSCS said bondholders should be wary of messages inviting them to discuss LCF compensation.
It said such messages are being sent through various online and mobile platforms and targeted at consumers who might be eligible for a claim.
We advise you to not respond to these messages, which may come through on:
- Whatsapp, Messanger, or Facebook posts
- Unfamiliar websites
- Phone calls from strangers or social media friend requests from unusual profiles.
If you have any concerns about any communications you may have received about LCF, contact the FSCS team via its contact page.
If you think you’ve been targeted by an investment scam, you should report it to the FCA Scam Smart website.
If you’ve lost money to a suspected investment fraud, you should report it to Action Fraud on 0300 123 2040 or on its website.
Find out more: how to report a scam