UK FSCS steers clear of estimating compensation costs in relation to London Capital & Finance’s default

The UK Financial Services Compensation Scheme (FSCS) today published its Annual Report and Accounts 2019/20, with the body saying that providing an estimate of the compensation costs stemming from the default of London Capital & Finance plc (LCF) would not be practicable.

LCF was declared in default on January 9, 2020. Since LCF entered administration, FSCS ben investigating how the firm operated. The aim of this was to determine if any of the activities LCF carried out were regulated, as this is the only way its customers could be eligible for FSCS compensation.

FSCS determined that LCF had carried out some regulated arranging activity and that FSCS could therefore protect the 159 bondholders who switched from existing stocks and shares Individual Savings Accounts (ISAs) to LCF mini-bonds. Compensation for these claims were paid in February 2020.

FSCS also determined that the bondholders who dealt with LCF before June 7, 2016 were not eligible, because LCF was not fully authorised to carry out financial services business before that date.

The Scheme considers that LCF did not carry out a regulated activity in issuing its own mini-bonds and, therefore, such claims would not be eligible under FSCS’s compensation rules. Some bondholders disagree with FSCS’s analysis on this point and have commenced a judicial review of our decision in relation to LCF ISA mini-bonds. Legal proceedings are ongoing and there is therefore uncertainty regarding the outcome.

FSCS can provide compensation to those who were given misleading advice. FSCS’s wider investigation concluded that LCF gave misleading advice to some of about 11,600 customers, so they may have valid claims for compensation on this basis. The body has begun assessing these potential claims on a case-by-case basis, although it will take some time to process them all.

As FinanceFeeds reported in June, FSCS said it had started paying compensation to customers who received misleading advice from LCF. As of June 25, 2020, the body has issued 281 decisions and paid £5,155,344 in compensation to LCF customers.

The total value of LCF non-ISA mini-bonds was £129,050,000 and the total value of LCF ISA mini-bonds was £108,157,000, based on the latest administrator’s report available. There is significant uncertainty around the number of claims FSCS will receive from these customers, the likelihood of eligible claims, the amount of compensation we will pay, and the timing of those payments.

FSCS would only compensate up to a maximum of £85,000 per eligible customer.

The body notes that it has a statutory duty to pursue recoveries that are reasonably possible and cost-effective to pursue, which may offset some of the compensation FSCS pays out.