The Treasury is to pay out £120m to London Capital & Finance (LCF) bondholders who have struggled to get their money back since the firm collapsed in 2019.
The Financial Services Compensation Scheme (FSCS) has already paid 2,800 bondholders a total of £57m in compensation. But thousands of other investors were unable to claim any losses due to complex rules around unregulated investments, such as the mini-bonds issued by LCF.
Under the proposed new government scheme around 8,800 other bondholders are to receive compensation, which will see investors get back 80% of their initial investment, capped at £68,000.
Here, Which? looks at how the scheme will work, and whether unregulated investments are ever a good idea.
LCF offered mini-bonds that promised tempting rates of return, but LCF went into administration in January 2019. 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, such as shares and funds, and usually can't be recouped through the FSCS.
The new compensation scheme comes after an independent review into the firm's collapse published by the government last year heavily criticised the FCA for the failures that put people's money at risk.
Led by Dame Elizabeth Gloster, it concluded that the FCA did not 'discharge its functions in respect of LCF in a manner which enabled it to effectively fulfil its statutory objectives during the relevant period'.
The new government scheme should be available to all LCF bondholders who have not already received compensation from the FSCS, and it represents 80% of the compensation they could have received had they been eligible for FSCS protection, which is capped at £85,000.
Around 97% of allLCF bondholders invested less than £85,000 and therefore will not reach the compensation cap under either the government scheme or the FSCS. Where bondholders have received interest payments from LCF or distributions from its administrators, Smith & Williamson, these will be deducted from the amount of compensation payable.
If you're affected, you don't need to do anything at this stage. The Treasury has said it will publish further details about how the scheme will work 'in due course'. However, it has warned that bondholders should be 'vigilant to the risk of scammers posing as services to help them claim'.
It's important to note that the scheme must be approved in parliament before the Treasury can start compensation payments. The government has said it will be brought forward 'as soon as parliamentary time allows', and expects to have paid all bondholders within six months of securing the necessary primary legislation.
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.
Spurred by the LCF saga, in March last year the FCA , amid concerns that ordinary investors do not understand the risks mini-bonds carry and are unable to afford the potential financial losses involved.
Mini-bonds aren't the only investments excluded from FSCS compensation rules.
Other investments which aren't covered include:
These investments are very high risk and are often subject to scams.
Even if you see an FSCS logo, don't assume it's legitimate. Websites offering fake investments are becoming more common, with many claiming FCA regulation and FSCS cover that doesn't exist.