The hopes of most victims of FCA-authorised Ponzi scheme London Capital & Finance were dashed last week when the FSCS announced it would not compensate them on the basis of having received misleading advice.
It said that investors had merely been given incorrect information, which doesn’t generate a liability that is covered by the FSCS’ “protected business” rules.
That the FSCS has eventually taken this decision is disappointing for investors but ultimately not surprising. London Capital Finance was not authorised to give advice to retail investors, employed no qualified financial advisers, and its call centre staff were generally trained to avoid crossing the line from information to advice – as in any other non-advisory finance company. (Although some went off-piste and crossed the line into the “I’d tell my own mother to invest in this” school of advice.)
The surprising part is that the idea was floated by the FSCS and allowed to give false hope to tens of thousands for months.
That a suggestion that investors might be compensated on the basis of bad advice was even contemplated says a lot about how the industry and the public have been conditioned to accept the idea that the general public is liable for the losses of investors in high-profile scandals.
The unwritten rule in force in the UK is that if enough people believe an investment is risk-free, the Government has to spend everyone else’s money to make it so. This principle resulted in the bailout of defined benefit pension schemes, Equitable Life, Barlow Clowes, IceSave and Northern Rock.
London Capital and Finance has not yet crossed that threshold but investors are unlikely to give up here.
Stocks & shares ISA investors compensated
A sliver of LCF investors – 159 in total – will be compensated by the FSCS due to the fact that they transferred stocks & shares ISAs to London Capital & Finance. LCF claimed to offer ISAs but in reality their ISAs were invalid as the LCF bonds they invested in were non-transferable.
Those who transferred cash ISAs to LCF are however not eligible for compensation.
The fact that stocks and shares ISA investors get bailed out but those who transferred cash ISAs don’t merely highlights the arbitrariness of the FSCS’ decision.
Why the grounds on which stocks & shares ISA investors get compensated don’t apply to cash ISA investors is something I’m struggling to understand. I can only imagine it has something to do with the fact that advising on cash ISAs is not a regulated activity whereas advising on stocks & shares ISAs each, but LCF didn’t give advice, so… anyway, if I don’t understand it you certainly can’t expect the average LCF investor to.
A financial compensation scheme needs to accomplish two aims: it needs to give the person in the street confidence to put their money into the regulated financial system instead of under the mattress, so it can be put to best use. And it needs to make sure they know that if they go outside the regulated financial system, they’re on their own, because the unregulated financial system tends to piss money down the drain unless investors know exactly what they’re doing.
At the moment the FSCS is failing at both.
As it enters 2020 the UK’s financial system is overseen by a leaderless FCA that refuses to enforce existing rules and backed by a compensation scheme that makes up the rules as it goes along. Still, it’s not like the UK should be particularly worried about investor confidence right now.