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The Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill 9 of 2021-22 was introduced in the House of Commons on 12 May 2021. It had its Second Reading on 8 June. Public Bill Committee took place on 15 June 2021. Report Stage and Third Reading are to be on 22 September.

The Bill covers arrangements required for two discrete compensation funds.

London Capital & Finance plc compensation fund

London Capital & Finance (LC&F) was a financial services firm that failed in January 2019. While LC&F was regulated by the Financial Conduct Authority (FCA), the ‘mini-bonds’ it sold were not.

In March 2019, the administrators reported that 11,625 bondholders had invested over £237 million in LC&F’s products. They estimated that bondholders would be likely to receive as little as 20% of their initial investment.

In addition, as the mini-bonds themselves were not regulated, the majority of bondholders were not covered by the Financial Services Compensation Scheme (FSCS). By April 2021 the FSCS had paid out £57.6m to 2,871 bondholders who held 3,900 LC&F bonds.

Dame Elizabeth Gloster’s report into the FCA’s regulatory supervision of LC&F was strongly critical of the regulator’s actions. Although her remit explicitly excluded the question of compensation, John Glen, the Economic Secretary, announced in December 2020 that the exceptional circumstances of the case warranted the establishment of a compensation fund.

The Government said the compensation scheme would cap individual entitlements at £68,000 (80% of the £85,000 FSCS compensation limit) and estimated that the total cost of payouts would be about £120 million.

Clause 1 of the Bill would allow the Treasury to finance the compensation fund and for the Financial Services Compensation Fund to administer it.

Fraud Compensation Fund

The Fraud Compensation Fund (FCF) is a compensation scheme that can pay compensation where an occupational pension scheme has had its assets reduced as a consequence of an offence involving dishonesty and where the scheme employer is insolvent and unable to make good the shortfall caused by the offence. It was set up under the Pensions Act 2004 (PA 04) and is run by the Board of the Pension Protection Fund. It is funded by a levy on occupational pension schemes.

Historically, claims on the FCF have been low. However, in November 2020, the High Court ruled in Board of the PPF v Dalriada that “pension liberation” schemes were eligible to apply to the FCF for compensation. These are schemes that have been set up with the aim of persuading people to transfer their pension savings from legitimate schemes to fraudulent schemes with promises of high investment returns.

In years when the FCF needs increased funding, the Secretary of State may impose a fraud compensation levy on occupational pension schemes. This is subject to a statutory maximum (PA 04 s189; SI 2006/558).

The PPF has estimated that compensation payments claimed as a result of the High Court judgment, will be in the region of £350 million. At the time of the judgement, the FCF had assets of £26.2m. Even with future levy income, the expectation was that there would be unfunded liabilities in the region of £200m to £250m (Bill 9 – EN, para 8-9).

Clause 2 of the Bill would give the Secretary of State the power to make a loan to the Board of the PPF to enable the payment of compensation to eligible occupational pension schemes following the High Court in judgment. The loan would be repaid by the FCF levy over a period currently estimated to be between 10 and 15 years. The FCF levy rates and repayment period will be subject to formal consultation, timetabled for the autumn (Bill 9 – EN, para 36).

Second Reading

Second Reading took place on 8 June 2021. The Bill passed without a division.

The Government argued that the measures were required to ensure “financial protection and fair outcomes for those falling victim in these particular circumstances.” Members noted the importance of trying to prevent such situations from arising in the first place.

Public Bill Committee

No amendments were made to the Bill at Public Bill Committee stage on 15 June 2021.

Members emphasised the need for culture change within the FCA. They questioned whether the LC&F case really was exceptional and sought assurances that progress in implementing the Gloster Report’s recommendations would be reported.

They were also concerned about the impact of the FCF levy on two Master Trusts who in 2019 had paid 37% of the FCF levy, despite having holding only around one percent of assets in the workplace pension sector.


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