Don’ t expect a safety net! The Government has warned investors chasing high returns with unregulated businesses that they will not be bailed out if the firm they give their money to goes bust. The warning came as it announced a unique rescue package for 8,754 people who gave their money to London Capital & Finance. LCF tempted them with promises of eight per cent returns on its “minibonds”. (A minibond is a loan to the provider, who then lends the money out to other businesses hoping to make enough profit to pay the promised return. They almost never do.) In January 2019 the firm went out of business, and the administrators say there is little left of the £237 million invested by 11,625 individuals.
Typically, when a regulated firm goes bust, losses are refunded by the Financial Services Compensation Scheme (FSCS). But the minibonds
LCF sold were not regulated, and the FSCS initially said it would not pay compensation. Later it emerged that many customers were given what was in effect advice by people working for LCF. That allowed the FSCS to compensate 2,871 people in full – up to a cap of £85,000.
A blistering report by judge Dame Elizabeth Gloster accused the Financial Conduct Authority of failing in its duties. As a result the Treasury compensation scheme will give the remaining customers 80 per cent of their initial investment, up to £65,000.
But John Glen, the Treasury Minister, told Parliament these were extraordinary circumstances and the scheme was not a precedent: “It is imperative to avoid creating the misconception that Government will stand behind bad investments in future, even where FSCS protection does not apply.”
Many minibonds are still advertised, offering high fixed returns. They’re not regulated, nor are the firms that sell them. John Glen’s warning should be read as saying: do not be tempted. No one will help when you lose all your money.
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Paul Lewis presents Money Box on Radio 4.