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11,625 bondholders invested about £237m in the products sold by London Capital & Finance Plc (LC&F). LC&F failed in January 2019. The administrators estimated in March that investors might only get 20% of their investment back.

Individuals at LC&F are being investigated by the Serious Fraud Office. The Government launched an independent investigation into how the Financial Conduct Authority (FCA) regulated ‘mini-bonds’ and supervised LC&F. Most recently, the Financial Reporting Council announced an investigation of the audits of LC&F over the relevant period.

Mini-bonds are a way of raising finance – generally by less established firms – with higher levels of risk and interest. They are also ‘illiquid’, because they can’t be sold on before they mature.

A complication of the case is that ‘mini-bonds’ were not themselves regulated by the FCA, but giving financial advice about them was.

The Financial Services Compensation Scheme is reviewing bondholders’ experiences and potential eligibility for compensation. In 2020 it paid compensation to some investors who had switched stocks and shares ISAs to LC&F mini-bonds. It also faced a judicial review of its approach to compensation.

In December 2020, the report from the independent investigation was published. It was strongly critical of the FCA’s approach, contending that the regulator had failed to fulfil its statutory objectives. For instance, it had inadequately considered issues beyond its “regulatory perimeter” or concerns raised about LC&F. The report made 13 recommendations to the FCA and to the Government, all of which have been accepted.

The Government announced that the combination of circumstances was such that it would establish its own compensation scheme for LC&F bondholders – a somewhat exceptional response. But there have been calls for further scrutiny and some criticism of the exclusion of “personal culpability” from the review.

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