London Capital & Finance was an FCA-regulated investment firm which collapsed in February 2019 following one of the UK’s largest alleged frauds against retail investors. Some 11,600 investors invested £237m in LC&F bonds before its failure.
The Financial Services Compensation Scheme denied that LC&F bonds were regulated investments or, as such, covered by the FSCS compensation regime. This was because the bonds contained prohibitions against transfer and, as such, were not “transferable securities” protected by the FSCS scheme. A limited number of investors received compensation where they could show that LC&F had engaged in “arranging” or “advising” on investments, these being “regulated activities” benefiting from FSCS protection.
The majority of investors, many of whom were elderly, were left uncompensated, in many cases seeing their life savings wiped out.
Four LC&F bondholders brought a judicial review claim against the FSCS’s decision in April 2020. Following a three day hearing, Mr Justice Bourne found that the non-transfer provisions were “unfair” under the Consumer Rights Act 2015, having been imposed contrary to good faith, since their apparent purpose and practical effect were to relieve LC&F of regulatory obligations towards investors. This is believed to be the first case in which a finding of statutory unfairness has been made on the basis that terms in a financial instrument have contracted out of a regulatory regime. Bourne J. commended “the force, lucidity and skill” with which investors’ case had been advanced.
Section 62(1) of the CRA 2015 provides that “An unfair term of a consumer contract is not binding on the consumer.” Nevertheless, Mr Justice Bourne did not find that the ineffectiveness of the non-transfer provisions automatically rendered the bonds transferable securities or, as such, compensatable investments. However, three weeks following Mr Justice Bourne’s finding of statutory unfairness, and having previously stated that it would “assess whether there [was] justification for further one-off compensation payment in certain circumstances for some LCF bondholders”, HM Treasury announced that it would pay out to all uncompensated investors, paying 80% of their original investments up to a maximum of £68,000. Details of the scheme are available here. The scheme represents 80% of the compensation which would have been available had investors not been (as Bourne J found) unfairly deprived of FSCS protection. The Treasury acknowledged that the circumstances were “unique and exceptional”.
The Judgment is here.
James McClelland QC, Tim Johnston and Charlotte Thomas acted for the claimant bondholders, instructed by Shearman & Sterling LLP.