LCF investors escalate complaint against UK financial regulator

·4-min read
Financial Conduct Authority logo at the agency's headquarters in the Canary Wharf business district of London. Photo: Chris Helgren/Reuters
Financial Conduct Authority logo at the agency's headquarters in the Canary Wharf business district of London. Photo: Chris Helgren/Reuters

London Capital & Finance plc (LCF) investors have submitted a new complaint about the Financial Conduct Authority (FCA) to the Independent Financial Regulators Complaints Commissioner.

It details alleged avoidance of compensation claims for victims of financial crime, and is the latest chapter in a long-running saga involving the former money firm. 

Submitted on Friday by a group of LCF investors, the 37-page document is being overseen on a pro bono basis by law firm Shearman & Sterling.

Shearman & Sterling said that over 1,000 LCF investors have complained to the FCA concerning its conduct in failing to supervise LCF.

The firm said that this resulted in a volume of complaints that the FCA has confirmed are "over 50% higher than the historic norm".

It brings into question a "previously unseen and narrow test of causation" used to determine what compensation was paid.

Watch: LCF scandal - MPs question if FCA would meet its own standards of accountability

The causation test now invoked by the FCA is not found in the Financial Services Act 2012, the Financial Services and Markets Act 2000, the Scheme Rules or any FCA rule or guidance, says Shearman & Sterling.

The established test of causation for these purposes is whether the FCA "contributed to" investor losses.

"The applicable causation test under the statutory complaints and compensation regime for regulators is well-established and has gone unchallenged by the FCA for over a decade," said Thomas Donegan, a financial regulatory partner at Shearman & Sterling, who are representing certain LC&F bondholders.

"The FCA sought to introduce a 'solely or primarily responsible' test of causation via a consultation paper last year, but was forced to abandon its proposals after the public outcry they provoked. The FCA must now recognise the legal regime under which it operates remains unchanged and step up to its responsibilities."

The firm said that the FCA has refused to compensate LCF investors as a whole, writing to investors over the last month with pro forma rejections.

It said that the FCA has offered no compensation for its alleged regulatory failures, receiving repeated warnings and tip-offs but failing to intervene, whilst LCF and its associated persons raised and misappropriated £237m of retail deposits.

An FCA spokesperson said: “We are considering the responses we have received on our consultation on the proposed new complaints scheme. 

"We have been engaging actively with stakeholders, including Shearman & Sterling and Gina Miller, and will be considering all comments before finalising our approach. In the meantime, complaints are being assessed under our 2013 Complaints Scheme.”

The new complaint follows a tense back and forth between investors, LCF and the FCA in recent years.

In 2019, it emerged that LC&F raised over £236m ($287m) selling what many investors believed were fixed rate ISAs. The investment products, which were actually high-risk bonds, were advertised alongside savings accounts on comparison sites and were advertised on Google alongside searches for “best ISA.”

LC&F collapsed at the start of 2019 and administrators had warned that investors could get as little as 25% of their money back. The administrators warned in August 2019 that they are facing a “concerted and very likely co-ordinated” attempt to frustrate the administration process and investors are likely to face long delays in getting any money.

LC&F is subject to ongoing criminal investigations by both the FCA and the Serious Fraud Office.

Read more: 'Perfect storm' blamed for scandals like London Capital Finance

More than 12,000 investors have been facing uncertainty over how much they will get back and when. Regulators and lawmakers have been criticised for their slowness to act and lawyers acting for some of the bondholders previously accused them of frustrating attempts to claim compensation.

The FCA has always argued it was powerless to do anything because mini-bonds are unregulated.

A near-500-page report released in December last year concluded that there were “significant gaps and weaknesses in the FCA’s policies and practices” that meant opportunities to stop LCF were missed and red flags ignored.

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