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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.

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 Financial Conduct Authority (FCA), but giving financial advice about them was.

The Serious Fraud Office and the FCA are working together to investigate potential criminal actions and the wider circumstances surrounding the sale of mini-bonds and ISA bonds by LC&F. The Government launched an independent investigation into how 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.

The Financial Services Compensation Scheme has reviewed bondholders’ experiences and potential eligibility for compensation. In 2020 it paid compensation investors who had switched stocks and shares ISAs to LC&F mini-bonds. It also considered many individual cases to determine whether a regulated activity had taken place. By April 2021, the FSCS had paid out £57.6m to 2,871 bondholders who held 3,900 LCF bonds.

In December 2020, the Gloster 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. The legislative arrangements for the scheme are set out in the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill 2021-22, introduced in the House of Commons on 12 May 2021. We discuss progress on the proposed legislation in a Bill Paper.

But there have been calls for further scrutiny and some criticism of the exclusion of “personal culpability” from the review.

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