WIREDGOV

Over the past two years, we have delivered two compensation schemes for LCF customers – one for those eligible for FSCS protection, and another one-off scheme on behalf of HM Treasury. In this article, Sarah Marin talks through the story of our work on LCF.

We got the first indications that something was wrong with London Capital & Finance plc (LCF) when the Financial Conduct Authority (FCA) issued the first of two supervisory notices against the firm.

LCF was an issuer of mini-bonds, which it stated it used to make loans to corporate borrowers to provide capital for further investment. The FCA’s first supervisory notice raised serious concerns about the company’s promotion and marketing of these bonds to retail investors. Following the FCA’s second notice, LCF soon entered administration on 30 January 2019.

The effect on bondholders, many of whom were elderly customers on fixed incomes seeking better returns on their investments, was catastrophic. 11,625 customers, who had invested a combined £237m, lost huge amounts of their life savings.

Understanding who was eligible for FSCS protection

Since we only deal with failed firms, it was only once LCF entered administration that our work began. Our first task was to understand if FSCS protection could apply to bondholders.

Given the scale of the failure, and the sheer amount of money bondholders had lost, we needed to explore every avenue possible to reach a definitive view on FSCS claim eligibility.

FSCS can only protect where a firm was carrying out a regulated activity for its customers. As FSCS was not able to protect the mere issuing of the mini-bonds by LCF, we had to determine if any of the related activities that LCF carried out for bondholders were regulated, as this was the only way its customers could be eligible for our protection.

We carried out an extensive and complex investigation into how LCF operated. In the meantime, an independent investigation into the regulation of LCF by Dame Elizabeth Gloster was announced in May 2019. This report would later pave the way for the remainder of our work on LCF.

By July 2019, we were able to conclude that FSCS protection could apply in relation to two regulated activities, arranging and advising, but LCF had only carried out these activities for some of the bondholders.

Analysing the evidence

With arranging, we knew that we could protect a small population of bondholders where LCF had helped to arrange the transfer of their stocks and shares ISAs into LCF.

But it was advice that surfaced as a key reason that customers may be eligible for compensation.

Early on in our investigation, we had obtained a number of data sets consisting of emails and call recordings. From our analysis, it became clear that some of the things bondholders were being told by LCF strayed into the territory of giving regulated advice. This included making comments and value judgements that underplayed the risks associated with investing and influenced customers to invest.

In August 2019, we began taking on as much data as possible. By February the following year, we had taken on over 2 million individual pieces of evidence, including 700,000 call recordings and 1 million emails. We used technology to help us analyse this evidence, with artificial intelligence (AI) turning call recordings into searchable text that could be scanned for keywords and phrases that suggested advice had been given.

We started paying our first claims in relation to misleading advice in June 2020. Most customers didn’t have to come to us to claim – we were able to do this proactively thanks to the evidence we had gathered.

This approach saved over £4.5 million in claims-handling costs, and through our use of automation, we were able to process two years’ worth of claims in six months. Without the use of technology, we believe it would have taken well beyond 2022 to complete this work.

By April 2021, we had paid over £57.6m to 2,871 bondholders who were eligible for FSCS compensation under our rules.

Announcement of a one-off compensation scheme

Although we were pleased that we were able to help these customers, there was still a large number of bondholders who hadn’t received any money back at all - people that FSCS couldn’t compensate because they weren’t eligible under our rules.

Back in November 2020, Dame Elizabeth Gloster’s independent report into the operation and regulation of LCF was published. Having recognised the unique and extraordinary circumstances surrounding LCF and its collapse, the report recommended that the government establish a one-off compensation scheme for eligible bondholders who FSCS hadn’t been able to compensate.

Soon after, we began working closely with HM Treasury (HMT), who were keen for us to deliver this one-off compensation scheme in the light of the work we had delivered on LCF so far and the data we had been able to access.

We quickly mobilised a new project team to work with the FCA and HMT to put this redress scheme in place. This involved a lot of teamwork and collaboration across all parties to get this scheme up and running, and once again was a largely data-led exercise.

Before we could start paying compensation, legislation had to pass through Parliament to allow the scheme to go ahead. In October 2021, the bill was given Royal Assent, confirming that the taxpayer would fund the LCF government compensation scheme.

We were appointed to deliver the scheme on behalf of the government and compensate all eligible bondholders by 20 April 2022.

Paying compensation to eligible bondholders

Our previous use of AI and automation meant that we were able to significantly accelerate the return of compensation to bondholders that fell under the HMT scheme. Within days of Royal Assent, we were able to automate payments to 70% of bondholders.

As of June 2022, we have now paid compensation for 12,421 bonds under the government scheme, totalling over £115m. We were able to hit the 20 April deadline for all customers that we had satisfactory evidence for, with less than 50 outstanding cases (where we have requested documents that have not yet been provided).

We understand and completely empathise with how distressing this situation will have been for LCF bondholders over the past four years. We hope that our work in compensating customers through both schemes has helped to make an extremely difficult and emotional situation just that bit easier.