The Treasury’s compensation for London Capital & Finance (LCF) bondholders is likely to be a unique event, experts say.
It emerged last month that the Treasury will pay out approximately £120m to around 8,800 investors who lost money when the mini-bond provider collapsed in 2019.
A lawyer representing LCF bondholders in their battle for compensation from the Financial Services Compensation Scheme (FSCS) said the Treasury will likely never again step in to repay investors in a collapsed firm.
Thomas Donegan, a regulatory partner at Shearman & Sterling, said that LCF was an exceptional case, as it was a Financial Conduct Authority (FCA) regulated firm issuing very unusual bond instruments, holding just £50,000 of capital against a £200m book of exposures.
As far as he is aware, the FSCS has never previously refused to compensate ISA investors in a failed FCA-regulated firm.
“LCF had an FCA licence as a broker and adviser, but purported to avoid FCA-regulation of its business as a deposit-taker or dealer by issuing bonds which to all intents and purposes were pretty standard looking products, except for a quirky and unusual non-transfer provision,” said Donegan.
“The non-transfer provision which supposedly supported LCF’s regulatory structure has now been found in a judicial review case to be void and unenforceable.
“Finally, LCF is not a case of investment loss and reduced returns – the public’s money has simply all disappeared under the FCA’s nose. All this goes to the unique nature of LCF as a situation.
“Several of the other recent financial scandals involve unregulated firms, or regulated firms out of scope of the FSCS such as payment services firms, which the government will unlikely want to bail out. And failures of authorised firms are expected to be covered by the FSCS. So, I do not see this sort of thing happening very often.”
More than 11,000 LCF investors were left with £237m in losses when the mini-bond provider entered into administration in January 2019.