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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 2019 that investors might only get 20% of their investment back.

What was the specific problem with mini-bonds?

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. Because of this, bondholders were not generally entitled to compensation from the Financial Services Compensation Scheme (FSCS).

Early actions and responses

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 the FCA regulated mini-bonds and supervised LC&F. The Financial Reporting Council announced an investigation of the audits of LC&F over the relevant period.

The Financial Services Compensation Scheme had reviewed bondholders’ experiences and potential eligibility for compensation. In 2020 it paid compensation to 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.

The Gloster Report into the FCA’s oversight

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 FCA and the Treasury have implemented and reported on changes made in response to the findings. In particular, the FCA has continued to undertake a radical programme of cultural transformation.

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

A government compensation scheme

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. It would however limit compensation to a maximum of 80% of the FSCS equivalent.

The legislative arrangements for the scheme are set out in the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021,which received Royal Assent in October 2021. We discuss the stages of the legislation in a separate Bill Paper.

The Financial Services Compensation Scheme is overseeing the compensation scheme. In February 2022, it reported that it had written to 8,500 bondholders and issued total payments of £105 million. It still had 700 bondholders to contact and promised that all would receive an offer by 20 April 2022.

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