Mini-Bonds: Can You Get Your Money Back?

Investors in collapsed mini-bond firm LC&F to receive 80% of their money back under Government scheme

James Gard 19 April, 2021 | 5:01PM
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Money

The Government has confirmed details of compensation for investors in collapsed mini-bond firm London Capital & Finance (LC&F) for those outside the safety net provided by the Financial Services Compensation Scheme (FSCS).

Bondholders will be able to claim up to 80% of the money lost when LC&F went under, up to a maximum of £68,000. John Glen MP, the Economic Secretary to the Treasury, said that UK Government would not usually provide a bailout for losses outside the FSCS but the collapse of LC&F was "unique and exceptional".

"The scheme I am announcing today appropriately balances the interests of both bondholders and the taxpayer and will ensure that all LCF bondholders receive a fair level of compensation in respect of the financial loss they have suffered," he said.

The FSCS has already paid out £57 million to around 2,800 bondholders, and this Government scheme, announced in December 2020, is likely to compensate bondholders around £120 million. The Government hopes to have paid the remaining compensation within six months of passing the bill into law, subject to the parliamentary timetable. Any money already received from administrators Smith & Williamson, or interest payments from LC&F itself, will be deducted from the overall total owed to bondholders.

What Should I Do Now?

If you were a bondholder in LC&F and have not already been contacted by the FSCS, the Government's advice is to sit tight and wait for further details on how you can claim. You don't need to use a claims company, and you should be on the alert for criminals offering to help you claim.

"Bondholders do not need to do anything at this stage and government will provide further details on how the scheme will operate in due course. The scheme will be simple and straightforward to navigate. Bondholders will not need to use a claims management company, solicitor or any other organisation to help them claim," Glen said.

He also urged bondholders to be vigilant because scammers will be on the lookout for ways to con victims of LC&F eager to get hold of their compensation.

"I hope the compensation offered by the government scheme will offer some relief to the distress and hardship suffered and provide closure on this difficult matter," Glen added.

What Happened to LC&F

London Capital & Finance went into administration at the end of January 2019, with 11,625 investors holding mini-bonds worth £237 million. LC&F was the highest profile mini-bond firm to go under, but many smaller firms also went bust in 2019. The Serious Fraud Office arrested a number of people connected with LC&F and investigations are ongoing.

The firm marketed and sold high-interest bonds that were not covered by the Financial Services Compensation Scheme (FSCS), which protects all UK-regulated cash up to £85,000 per person per institution. Cash Isas are included in this protection, for example. The FSCS is a lifeboat scheme, aimed at compensating investors who have lost out financially when, say, their bank collapses or they have been missold an investment. But it does not cover every eventuality. 

Many bondholders thought incorrectly that their capital in LC&F was protected because the firm was authorised in 2016 by the FCA to conduct financial services. It advertised bonds offering an 8% yield and above and many investors thought that these were cash-like investments rather than securities that go up and down in price. Its mini-bonds were unregulated, so would be unlikely to have been recommended by IFAs.

How to Avoid an Inappropriate Investment 

Situations such as the collapse of LC&F highlight the importance of choosing the right investments in the first place. Here are some of the key steps you should take when considering any investment: 

Check it's Authorised - Look on the FCA's register to check the business is actually authorised to conduct financial services businesses. Do an internet search for reviews of the company to find out more about what its customers are saying about it too. 

Understand the Risks - Be certain what the product is and where your money is going. Be wary of any product promising "guaranteed" or "government-backed" returns or too-good-to-be-true interest rates. If it's an investment, your money is always at risk. 

Take Advice - If in doubt, seek help from a professional. Many people are reluctant to take financial advice because it seems expensive or they don't want to discuss their finances, but as with any area of life it pays to speak to an expert if you lack the knowledge or confidence. 

Don't be Pressured - You should never rush any financial decision and if anyone is pressuring you to make a quick choice, say no - it could be a scam. Any reputable company should be more than happy for you to take time to do your research and think about whether you want to invest or not. 

  • This article was updated on April 19, 2021 after the UK Government confirmed details of compensation for LCF bondholders

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

James Gard  is content editor for Morningstar.co.uk