London Capital & Finance (LC&F), which collapsed in January 2019, was authorised by the FCA in relation to its promotional activities. However, the actual sale of mini-bonds by LC&F was not a regulated activity and so not typically protected by the Financial Services Compensation Scheme (FSCS), which has called into question the scope of protection for investors in these circumstances.

In an encouraging development for investors, on 31 May 2019, the FSCS released a statement in which it said that there are “sufficient grounds” for continuing to explore whether investors who purchased mini-bonds from the LC&F may be entitled to compensation. The FSCS indicated that “one increasingly important aspect is the need to consider the different ways investors dealt with the firm when buying their products, as this could impact whether compensation is due or not.”

This statement follows the FSCS’ update on 10 May 2019, when it announced that following a further review of LC&F’s business practices, investment materials and recorded calls, the FSCS was investigating whether regulated activities were carried out, which might give rise to claims by investors. In that update, the FSCS confirmed that it was “focusing on whether there was any regulated advising, arranging or other activities that may trigger [FSCS] compensation.”  The FSCS also said that it needed to understand better the nature of the relationship between LC&F and Surge Financial Limited, a company which promoted the mini-bonds. In its latest statement, the FSCS referred to its improved understanding of LC&F’s business as a driving force behind deciding to share its more optimistic outlook for investors. It warned, however, that this is a complicated case and so will take time to resolve.

Meanwhile, the FCA continues to come under criticism for it supervision of LC&F, with many saying that the FCA should have identified earlier the issues arising from LC&F’s promotional materials and acted more quickly to prevent further sales.  In addition, questions have arisen about LC&F’s regulated status, given that LC&F only needed authorisation in respect of its promotion of the mini-bonds (and not in relation to its sales of them).  An independent review into the failure of LC&F (including the FCA’s supervision of it) was announced on 1 April 2019 and on 23 May 2019, the Treasury announced that Dame Elizabeth Gloster, former Court of Appeal judge, will lead the review.

The issues in this case form part of the continuation of a debate over the boundary of what the FCA regulates.  The FCA is planning to publish its first Annual Perimeter Statement as part of its Annual Report later this year.  The Statement will highlight issues related to the FCA’s regulatory perimeter, for example, any potential gaps in protection that have affected or could affect its ability to fulfil its objectives. It seems likely that LC&F, and the issues arising from its collapse, will be considered.