LCF mini-bond Isa investors get typical payout of £20,000

Investors in failed London Capital and Finance mini-bonds have received £2.7 million from the Financial Services Compensation Scheme.

More than 100 investors in failed London Capital and Finance (LCF) mini-bonds have received payouts from Financial Services Compensation Scheme (FSCS) at an average of £20,000 each.

The FSCS has paid out £2.7 million to 135 LCF customers in relation to 151 failed mini-bonds, it said in a statement.

Payouts were to investors who put money into LCF mini-bonds via a transfer from their stocks and shares Isas. The FSCS has made these payments automatically, without the investors needing to apply for compensation.

Investors received compensation because arranging a transfer out of a stocks and shares Isa is a regulated activity, meaning that it is covered by the FSCS if, as in the case of LCF, something goes wrong. Usually mini-bonds, which are high risk and unregulated, are not an FSCS-protected investment.

The Financial Conduct Authority (FCA) ordered LCF to stop promoting the mini-bonds and deemed the investments ineligible for Isas in December 2018.

The following month LCF entered administration.

Isa investors in LCF mini-bonds who have not received a letter from FSCS by 24 February 2020, are invited to provide evidence to the FSCS about their claim.

Around 11,600 bondholders purchased 16,700 bonds from LCF worth £237 million, however, only Isa investors have so far been told they are covered by the FSCS.

The FSCS has concluded some customers were given misleading advice by LCF and so have valid claims for compensation. In relation to advice claims, the FSCS statement said that it is “continuing to review the evidence we hold”.

At this stage, non-Isa mini-bond investors do not need to submit a claim to FSCS, which will provide a further update by the end of March 2020.

Caroline Rainbird, chief executive of the FSCS, says: “We appreciate that this is a difficult time for the majority of LCF’s customers who are still waiting to find out if they are entitled to compensation.

“The FSCS is making progress in finalising its arrangements for reviewing advice claims and is committed to ensuring the process is as quick and as easy as possible for customers.”

A mini-bond is essentially an IOU issued by a company to an investor, in exchange for a fixed rate of interest over a set period of time. At the end of this period, the investors’ money is due to be repaid.

Mini-bonds typically offer high returns and this reflects the much higher risks involved compared to other types of investments. A business does not generally have to be regulated by the FCA to issue mini-bonds.

From 1 January 2020, it is against FCA rules to promote ‘speculative mini-bonds’ to retail consumers, unless they are considered to be ‘sophisticated’ or have a high net worth.

An FCA statement says: “You should think carefully before investing in a mini-bond, and not invest any money you can’t afford to lose.”

This article was first written by our sister magazine Moneywise.