LCF bondholders considering crowdfunding to rescue FSCS case

by Jonathan Adams

However, the bondholders have said it looks unlikely that they will be able to take forward the appeal due to the FSCS’s refusal to extend an existing costs agreement to any appeal

London Capital & Finance (LCF) bondholders are looking at whether crowdfunding could be used to rescue their case against the Financial Services Compensation Scheme (FSCS) for more compensation.

Four of the LCF bondholders who are themselves representing the rest of the mini-bond provider’s investors, have won permission to take their case to the Court of Appeal following a High Court ruling against the bondholders.

However, the bondholders have said it looks unlikely, as things stand, that they will be able to take forward the appeal, due to the FSCS’s refusal to extend an existing costs agreement to any appeal.

The bondholder’s lawyers, at Shearman & Sterling LLP and Brick Court Chambers, are acting for free on a pro bono basis while FSCS’s lawyers, at Dentons and Fountain Court Chambers, are not.

The bondholders said by refusing to agree not to pursue costs against the four of them personally if an appeal is unsuccessful, the FSCS knows it is stifling the possibility of the appeal going ahead. This is because if the case proceeds as matters stand, the four bondholders would be personally exposed to paying all FSCS’s legal costs they lose.

They said if the appeal is successful, it’s likely to be worth approximately £25m in the aggregate to LCF investors and around £70m to the taxpayer.

The bondholders are seeking funding routes to fund the FSCS’s costs and said it’s attractive for third parties given that the judge has concluded that the appeal is arguable.

Crowdfunding is their preferred option after they were unable to find litigation funding due to the logistical and timing difficulties that would arise in assigning interest in the claims of many thousands of bondholders individually.

The four investors said that crowdfunding would mean that LCF bondholders as a whole would fund the risk of FSCS’s costs, whilst also benefiting in full from any successful appeal.

The bondholders said a Facebook poll they conducted indicated that around half of the LCF investors would support funding an appeal in this way.

However, the bondholders said that the FSCS has refused to provide them with a target that they could crowdfund towards.

We are therefore faced with a situation that means that, unless the FSCS provides information on its own costs position, bondholders will not be given the opportunity to consider whether and how to fund this case, since we cannot even set a crowd-funding target, the four bondholders said.

The judge for himself has in effect recognised that an appeal has merit and in those circumstances, it is manifestly unjust for bondholders if the appeal does not now proceed simply because there is a risk that our clients would have to bear the FSCS’s costs.

We call on the FSCS to reconsider its position on costs and to engage with us properly on the topic, they said.

We are very pleased that the court has granted our clients permission to appeal, said Jonathan Swil, a litigation partner at Shearman & Sterling. This vindicates the strength of their case under the Consumer Rights Act, and we very much hope it means the appeal will proceed.

LCF had claimed not to be regulated for issuing bonds, because the bonds it issued were stated to be “non-transferable”.

At the end of March, the High Court judge declined to find that the bonds were regulated as a result, and thus declined to set aside the FSCS’s decision not to compensate bondholders.

Shearman & Sterling appealed and Mr Justice Bourne granted this and agreed that the LCF non-transfer clauses were invalid and unenforceable.

This article is for information purposes only.
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