Government 'unsympathetic' to major bust bond scheme investors

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
FCA headquarters in the Canary Wharf, London. Photo: Chris Helgren/Reuters

The government and regulators are “unsympathetic” to investors who lost millions in a bust bond scheme, lawyers said on Thursday, and are “penalis[ing] the victims.”

A law firm acting for bondholders of the collapsed London Capital & Finance (LC&F) on Thursday wrote a series of letters to government departments and regulators calling for them to do more to help people who lost money.

Thomas Donegan, a partner at law firm Shearman & Sterling, called on the Treasury to write new legislation ensuring that the thousands of savers caught up in the LC&F scandal aren’t punished by losing ISA allowances built up investing with the bust firm. HMRC has so far not allowed balances to be carried over.

£236m scandal

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 the year and administrators have warned that investors could get as little as 25% of their money back. The administrators warned this week 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. The Serious Fraud Office is investigating the scandal and arrests have been made.

READ MORE: 'Perfect storm' blamed for scandals like London Capital Finance

Over 12,000 investors now face 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 on Thursday accused them of frustrating attempts to claim compensation.

Donegan said regulators were fighting against claims of failure “tooth and nail” and pointed out the government’s compensation scheme paid out in similar cases, such as the collapse of Icelandic banks in 2008 and the collapse of Northern Rock.

HMRC, the Financial Conduct Authority (FCA), and the government-backed Financial Services Compensation Scheme (FSCS) are interpreting the law to “deny compensation for investors,” Donegan said, and ignoring “the fundamental features of the ISA products being sold to retail investors. This is incorrect as a legal matter."

READ MORE: Savers targeted with ads on Google for 'bonds' that put all their money at risk

LC&F was regulated by the FCA but the mini-bond products it sold were not. This distinction was not clear and many investors who put money in believed they were protected by the FSCS, which provides a government guarantee of up to £85,000 for savings and ISAs.

The FSCS has said some investments may be covered by compensation, but only those if investor received misleading advice about the product over the phone or email. This would exclude many of the investors who bought the bonds online.

“LC&F bonds would have appeared to retail investors to be a standard ISA product and were marketed in a way similar to those issued by major banks and building societies,” Donegan said.

Yahoo Finance UK has highlighted how high-risk bonds are still being marketed alongside online searches for terms such as “high interest savings” or simply “UK savings.”

HMRC ‘penalise the victims’

As well as writing to the FSCS, Shearman & Sterling on Thursday wrote to tax authorities, calling on them to reverse a decision made in March to void any ISA allowances built up by investing in London Capital & Finance.

READ MORE: Watchdog criticises Google over high-risk bond ads: 'We want to see significant progress'

“HMRC’s purported decisions penalise the victims of a financial scandal as if they were the bad actors,” Simon Letherman, a tax partner at Shearman & Sterling, said Thursday.

“They do not provide appropriate remedies as envisaged by the ISA Regulations for the situation they find themselves in through no fault of their own.”

A spokesperson for HMRC said it is “entirely sympathetic to the situation in which investors find themselves but must act in accordance with the ISA legislation laid down by parliament.” The spokesperson added that the tax man is “not actively checking LCF investors’ tax affairs.”

The FSCS is still investigating and said earlier this month it was working “as quickly as possible to try to establish whether there are ‘protected claims’.” However, it said “the circumstances where we can pay compensation are strictly governed by our rules.”

Shearman & Sterling on Thursday wrote to the FSCS and FCA putting forwards further legal arguments as to why LC&F investors should get compensation. They separately wrote to the Treasury asking them to enact legislation to reinstate any built up ISA allowances.

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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