8800 investors who looked like they had lost all of their money after investing in an unregulated minibond scheme run by the now-defunct firm London Capital and Finance are to receive an 80% refund. Taxpayers will foot the £120 million bill that will see the burnt investors receive up to £68,000 of their original capital investment back. The decision was made after an inquiry into the scandal found the Financial Conduct Authority (FCA) had failed to suitably protect them.

The refund was announced by John Glen, economic secretary to the Treasury. He was acting on a damning conclusion by the independent report into the minibonds scandal that was commissioned last year. The FCA was heavily criticised, as was its then chief executive Andrew Bailey who has since graduated to the governorship of the Bank of England.

The crux of the criticism aimed at the FCA was that while minibonds themselves are not regulated financial products, the issuer, London Capital and Finance was. Despite the fact all of the company’s revenues were derived from unregulated minibonds. Savers, concluded the report, were not fully aware of the fact their investments were not covered by the FCA’s protection due to the fact they were investing through a regulated company.

Minibonds are, on the surface, structured in a similar way to investment-grade debt investments. Investors lend issuers their money in exchange for an interest rate and the return of their original capital at the end of the bond’s term. But because minibonds are typically issued by smaller companies that are not covered by credit ratings agencies they are much higher risk than even junk bonds.

Interest rates of up to 10% or even more are offered to attract investors into unregulated minibonds, to compensate for the risk capital is exposed to. The problem is these products were marketed directly to retail investors unqualified to suitably assess the level of risk they were taking on.

London Capital and Finance raised a total of £238 million through the sale of minibonds to a total of 11,625 investors, many of whom put their life savings into the scheme. The company fell into administration in January 2019.

So far the Financial Services Compensation Scheme, which protects regulated investments, has paid out over £57 million to approximately 2800 investors in the London Capital and Finance scheme. The new Treasury compensation programme will now cover reimbursements to the other 8800 investors. The FCA protects up to £85,000, which means the new agreement will mean 97% of investors in the minibond scheme will be reimbursed on at least 80% of their original investment.

Mr Glen commented:

“This has been a difficult time for LCF bondholders, many of whom are elderly and have lost their hard-earned savings. However, the situation is unique and exceptional and the government has decided to establish a compensation scheme for LCF bondholders in this instance.”

The FCA yesterday issued an apology for its failure to properly regulate London Capital and Finance and another scandal involving collective investment scheme company Connaught. It admitted the identification of incorrect information given to some investors that led them to the conclusion their investments were less risky than they really were.