London Capital & Finance bondholders challenge UK compensation system

By Huw Jones

LONDON (Reuters) - Bondholders suffering losses from the collapse of London Capital & Finance (LCF) said on Friday they were seeking a judicial review of how their claims for compensation have been largely rejected.

LCF went into administration in early 2019 with losses of up to 237 million pounds after the Financial Conduct Authority (FCA) directed the firm to withdraw promotional material for so-called "mini bonds".

"We are delighted to have been able to commence this case and thank the Administrative Court for its cooperation," said Thomas Donegan, a partner at law firm Shearman & Sterling who is acting on behalf of the bondholders.

Britain's Financial Services Compensation Scheme has said it could only help 159 of 11,600 investors holding bonds issued by LCF.

"We are also grateful to the Financial Services Compensation Scheme (FSCS) for their agreement to bear their own costs of the matter," Donegan said.

"The FSCS has itself repeatedly recognised the complexities involved and we now look forward to these issues being considered by the judiciary," Donegan added.

The FSCS has said it will protect 159 bondholders who switched from stocks and shares to the unregulated LCF bonds, which were issued to raise funds for small firms.

The claimants allege that the FSCS ruling contained errors in law and fact and is "irrational", while the FSCS has said it was following the rules.

"We appreciate LCF is a complex and sensitive case affecting a large number of investors who are keen to understand our decisions," FSCS General Counsel James Darbyshire said in a statement on its website.

FSCS said it has undertaken a thorough and wide-ranging investigation to determine whether LCF carried out any regulated activities that it might be able to compensate for.

"FSCS reviews each claim on its individual merits according to the requirements under the rules, which FSCS is legally required to follow," Darbyshire said.

The FSCS has said it could not compensate those who transferred from external cash accounts or came in directly through online advertising or price comparison websites.

Elizabeth Gloster is heading an independent inquiry into the Financial Conduct Authority's handling of LCF and is due to complete her report by July.

At a hearing with bondholders in January, Gloster said her remit does not cover whether bondholders should be compensated but her conclusions will inform the government about whether compensation should be paid.

(Reporting by Huw Jones; Editing by Jason Neely and Hugh Lawson)