FSCS publishes summary note regarding protected claims against London Capital & Finance

The UK Financial Services Compensation Scheme (FSCS) has earlier today published a summary note regarding protected claims against failed London Capital & Finance plc.

LCF, which was originally set up in July 2012 as a commercial finance provider to UK companies, sold mini-bonds from September 2013, with trading significantly increasing from 2015 onwards. As LCF only became fully authorised on June 7, 2016, FSCS protection can only apply in relation to regulated activity carried out after this date.

On December 10, 2018, the FCA issued a Supervisory Notice directing LCF to immediately withdraw its promotional material because the manner in which LCF was marketing its bonds was ‘misleading, unfair and unclear’. Smith & Williamson LLP were appointed joint administrators of LCF on January 30, 2019 by LCF’s directors, with the consent of the FCA.

The issuing of the mini-bonds by LCF was not itself a regulated activity, and on this basis, the mini-bonds had not been marketed to investors as being FSCS-protected. However, following a number of allegations against the firm, including in the administrators’ report, FSCS determined to investigate whether regulated activity had been carried out (after June 7, 2016) that could give rise to compensatable claims. A number of possible bases of claim were considered internally, with the FCA, and with external legal advisers.

As the Scheme confirmed in its update on June 28, 2019, its investigation into LCF leads FSCS to believe that some investors are likely to have compensatable claims. FSCS can pay compensation when a firm in default owes an eligible claimant a civil liability in connection with a regulated activity.

FSCS considered but rejected a number of regulated activities that would have resulted in all or the majority of investors having protected claims.

FSCS’s investigation identified evidence of regulated activity where the Scheme believes LCF has liability. Following a review of call recordings and emails to investors, FSCS believe that Surge Financial Ltd (“Surge”), acting on behalf of LCF, provided a number of LCF clients with misleading advice, in both telephone calls and emails. The administrators’ report states:

“Role of Surge Financial Limited, otherwise known as “SURGE”

SURGE is an online marketing company, which, as it has been explained to us, facilitated information and application details received from prospective Bondholders (and re-investors), prior to the receipt of monies from an investor. The joint administrators were informed by SURGE that John Russell Murphy introduced SURGE to LCF via Spencer Golding.

SURGE employed approximately 40 staff who worked exclusively as agents for LCF, using LCF domain email addresses and contact details. These staff would deal with all applications, whether originating online, by telephone or by post. All applications were checked by SURGE for reasonableness/errors/signatures, before sending to LCF. Client queries were also dealt with by SURGE.

SURGE was responsible for the design and maintenance of the Company’s website, investor portal and for the advertising and publication of the LCF financial products, via website comparison sites, internet search facilities and general press articles”.

FSCS’s review identified a number of cases where Surge went beyond providing information to investors and made comments and value judgements that involved a significant element of evaluation and/or persuasion, i.e. they gave advice. Although the definition of advising has been narrowed for Part 4A permission purposes from 3 January 2018, the scope of FSCS protection was not affected and the Scheme is still able to protect advice without a personal recommendation. There was also misrepresentation of the security/risk of the mini-bonds and their ISA status.

Although Surge is not itself regulated, because it was acting on behalf of LCF and under its control, the Scheme is satisfied that LCF has liability for the advising carried out by Surge. Surge was not an appointed representative, but FSCS is satisfied that LCF is liable for Surge in this regard, as Surge was its agent acting with actual or ostensible authority and LCF is vicariously liable for Surge’s actions. LCF had few employees/staff, and all direct contacts with investors were via Surge, which is understood to have had approximately 40 staff who worked exclusively for LCF. Surge always held itself out as LCF when communicating with investors, e.g. by telephone and email. Sales were routed through Surge to LCF, such that investors would not have known that they were not dealing with LCF.

Only advising that happened after LCF became fully authorised on June 7, 2016 can be protected. FSCS understands that approximately 95% of current bondholders invested after this date. Further, in order to pay compensation, FSCS will have to be satisfied that a particular claimant received advice, relied on this when investing, and suffered financial loss as a result. Claims will also have to meet the usual requirements under FSCS’s COMP rules, e.g. as to eligibility.

The Scheme is in the process of designing its claims process in this regard and may obtain access to further investor communications from LCF’s administrators. FSCS has also requested LCF investors to complete a pre-application questionnaire in order to assist the Scheme in building a better picture of the extent of advising.

LCF has not yet been declared in default and FSCS is not yet accepting applications for compensation.

It is not possible at this time to estimate the number or value of potential advising claims.

Claims in relation to advising will fall to the investment intermediation levy class (Class 2), for which the annual class levy limit is £330 million (including a provider contribution of £90 million). If the levies on an FCA funding class would exceed the annual limit for that class, the excess is levied more widely on the other FCA classes as part of the retail pool.

Ongoing investigations could provide evidence that LCF has liability in connection with other regulated activities.