When will the Government put LCF investors and levy-payers out of their misery?

The interminable saga of London Capital and Finance returned to the newspapers this week when John Glen, secretary to the Treasury, provided an update to the Sunday Telegraph on the announcement that the Treasury would set up an ad-hoc compensation scheme to compensate LCF investors who have so far missed out.

The update, three months after the compensation scheme was announced at the cig-end of 2020, is that there is no update at all.

John Glen, economic secretary to the Treasury, told the Sunday Telegraph that the compensation scheme is at the top of his agenda.

“I want to do it as soon as I can,” he said.

“Clearly, it’s been three months since I put down a written ministerial statement, that’s a significant amount of time. 

“I want to move it forward, and I will do so as soon as I possibly can. But I can’t give a categorical assurance on a date today.”

City A.M.

This is not a decision that requires a lot of head scratching, nor can the Treasury claim it is waiting for more information, two years since the FCA-authorised Ponzi scheme collapsed.

From the moment LCF collapsed, the options available to the Government have always been:

  • refuse to pay compensation (as the Government usually does when unregulated and pseudo-regulated investment schemes collapse – albeit mostly because they don’t often take in £240m and make the national press)
  • find a novel interpretation of the rulebook that allows compensation to be paid while claiming this is how it’s supposed to work (the Independent Portfolio Managers option)
  • admit the system has failed and form an ad-hoc compensation scheme (the Allied Steel, Barlow Clowes, Equitable Life etc etc option)

So far the Government has preferred an awkward halfway house where people have been compensated essentially at random. Or for reasons so arcane that they are indistinguishable from random.

This has become increasingly untenable the more compensation has been paid out, at the expense of those who pay levies to the Financial Services Compensation Scheme, i.e. everyone who uses financial services, i.e. you and I.

The latest figures suggest that £3 of every £4 invested in LCF is being bailed out (albeit from a sample size of only 25% of funds invested, so this could change dramatically). If that holds, the concept of moral hazard has already been thrown out the window.

So what is preventing the Treasury from making a decision? “We’re busy” isn’t an explanation, as delaying a decision that the Secretary of the Treasury has already announced creates more work, not less, as you still have to make the decision eventually but you also have to issue explanations for the delay on top.

Unless the Treasury is hoping that London Capital and Finance’s stable of duff investments manages to find a deposit of unicorn dust in the North Sea which magically pays out all investments, delaying a decision for three months achieves nothing.

The ideal scenario for all of us is if compensation for LCF investors was announced alongside a comprehensive overhaul of UK securities laws to require all investments offered to the UK public to be registered with the Financial Conduct Authority – as has been the case in the USA for almost 90 years.

The prospect of bailing out yet another collapsed unregulated scheme would be a less bitter pill for the regulated financial sector (and by extension the general public which banks, saves and insures itself with it) if it had a genuine reason to believe that it would be less likely to happen again, and result in a smaller bill when it inevitably does.

Such an undertaking would require a lot of work behind the scenes and could not be announced at the drop of a hat. It could also not be more timely as the UK plots its recovery from the pandemic, a recovery that would be significantly stronger if the UK sloughed off its reputation as the scamming capital of the developed world.

Alternatively, the Treasury could announce that it’s time to move on, lessons have been learned, and the UK will recover from the pandemic by having National Savings and Investments offer Covid bonds at 2% per year (maximum investment £5,000 per person).

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