FCA makes cautious comment about London Capital & Finance

Maria Nikolova

In what appears to be another evasive comment about LCF, the UK regulator notes the investigation into its actions, policies and approach in this case.

The UK Financial Conduct Authority (FCA) has earlier today published its Annual Perimeter Report 2018/19, which deals with the question what and who the FCA regulates.

The document covers, inter alia, the controversial topic about the regulation of mini-bonds. As might be expected, the FCA mentions the failure of London Capital & Finance (LCF). Unfortunately, instead of providing clarity on the matter, the FCA makes yet another non-committal comment about how some firms may be authorized but their activities stay unregulated and, hence, consumers may be left without any compensation.

The FCA explains that the mini-bonds market has changed over recent years, with more complex mini-bonds being issued and marketed to retail investors. Issuers of these more complex products have often been able to rely on the same exclusion as ordinary commercial companies to issue their securities without the need for authorisation. In a low-interest environment, these high-risk investments, offering the potential of higher returns on capital, have often been offered as retail investments.

Mini-bonds have drawn widespread attention after the collapse of LCF, which has left approximately 14,000 consumers who had invested in its mini-bonds at risk of losses.

The FCA explains that the Financial Services Compensation Commission (FSCS) may compensate protected types of claim relating to a regulated activity. Although LCF was an authorised firm, issuing non-transferable mini-bonds is typically not a regulated activity in itself. However, there may be FSCS protection where customers also received a service which is a regulated activity. For example, if they received regulated advice when they invested in mini-bonds.

The FSCS is currently considering whether LCF has generated any protected types of claim.

Then, the FCA notes that it requested the Treasury to direct an investigation into its actions, policies and approach in this case, and it has appointed a senior judge to conduct this investigation. The Treasury has also announced a review of the wider policy questions this case raises, including the current regulatory arrangements for the issue of mini-bonds and other non-transferable securities.

A similar evasive comment on the matter of LCF compensation was made earlier this week by John Glen, Economic Secretary to the Treasury, who successfully avoided giving a definite answer to a question on whether there may be an “ad hoc” compensation scheme for those affected by LCF’s failure.

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