Summary note on the basis for protected claims against London Capital & Finance plc

LCF summary note.


London Capital & Finance plc (“LCF”) was originally set up in July 2012 as a commercial finance provider to UK companies.  From September 2013, LCF sold mini-bonds, with trading significantly increasing from 2015 onwards.  Whilst it previously had an interim consumer credit permission, LCF only became fully authorised on 7 June 2016.  FSCS protection can only apply in relation to regulated activity carried out after this date.

On 10 December 2018, the FCA issued a Supervisory Notice directing LCF to immediately withdraw its promotional material, on the basis that the manner in which LCF was marketing its bonds was ‘misleading, unfair and unclear’.  Smith & Williamson LLP were appointed joint administrators of LCF on 30 January 2019 by LCF’s directors, with the consent of the FCA.  The administrators’ report dated 25 March 2019 included the following preliminary findings:


  • As at December 2018, there were some 16,706 LCF mini-bonds in issue, totaling £237,207,497, across 11,625 investors.

  • There were a number of highly suspicious transactions involving a small group of connected people which have led to large sums of the LCF clients’ money ending up in their personal possession or control.

  • The vast majority of LCF’s assets were the loans made to a number of borrowers. As at 31 January 2019, the outstanding total loan book balance was calculated to be £237m.
  • A large number of LCF’s borrowers do not appear to have sufficient assets with which to repay LCF.

  • The estimated return to LCF’s clients from the assets is as low as 20% of their investment.

  • The FCA, in conjunction with the Serious Fraud Office, are investigating LCF.

  • LCF representatives may have provided investment advice to customers, which might lead to customers being able to make claims to the FSCS.


Protected claims

The issuing of the mini-bonds by LCF was not itself a regulated activity (see below), and on this basis, the mini-bonds had not been marketed to investors as being FSCS-protected [1]. However, following a number of allegations against the firm, including in the administrators’ report, FSCS determined to investigate whether regulated activity[2] had been carried out (after 7 June 2016) that could give rise to compensatable claims. A number of possible bases of claim were considered internally, with the FCA, and with external legal advisers.  We also worked closely with LCF’s administrators. 

As we confirmed in our update on 28 June 2019, our investigation into LCF leads FSCS to believe that some investors are likely to have compensatable claims. FSCS can pay compensation when a firm in default owes an eligible claimant a civil liability in connection with a regulated activity. 

FSCS considered but rejected a number of regulated activities that would have resulted in all or the majority of investors having protected claims.

For example, we are satisfied that LCF’s issuing of the mini-bonds did not constitute the regulated activity of dealing as principal under Article 14 of the RAO. This is because of an exception under Article 18 RAO that applies to firms that are issuing their own bonds. Whilst it was argued by some representatives that MiFID II disapplied this exclusion[3], FSCS considers that the relevant change is only applicable to securities that are transferable, which LCF mini-bonds issued in the UK were not. Further, the MiFID change would only be applicable to bonds issued after 3 January 2018, when the relevant MiFID II change was implemented in the UK.

We also considered whether LCF was operating a collective investment scheme falling within section 235 of the Financial Services and Markets Act 2000 (“FSMA”). However, this is not possible because the mini-bonds constitute ‘instruments creating or acknowledging indebtedness’ under Article 77 of the RAO, and are thus excluded from being a collective investment scheme by paragraph 5 of the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001.  Whether or not LCF was involved in fraudulent activities, as has been alleged, does not appear to us to affect this legal analysis.  

However, FSCS’s investigation did identify evidence of regulated activity where we believe LCF has liability.  Following a review of call recordings and emails to investors, we believe that Surge Financial Ltd (“Surge”), acting on behalf of LCF, provided a number of LCF clients with misleading advice, in both telephone calls and emails.  The administrators’ report states:

Role of Surge Financial Limited, otherwise known as “SURGE”

SURGE is an online marketing company, which, as it has been explained to us, facilitated information and application details received from prospective Bondholders (and re-investors), prior to the receipt of monies from an investor. The joint administrators were informed by SURGE that John Russell Murphy introduced SURGE to LCF via Spencer Golding.

SURGE employed approximately 40 staff who worked exclusively as agents for LCF, using LCF domain email addresses and contact details. These staff would deal with all applications, whether originating online, by telephone or by post. All applications were checked by SURGE for reasonableness/errors/signatures, before sending to LCF. Client queries were also dealt with by SURGE.

SURGE was responsible for the design and maintenance of the Company’s website, investor portal and for the advertising and publication of the LCF financial products, via website comparison sites, internet search facilities and general press articles”.

Our review identified a number of cases where Surge went beyond providing information to investors and made comments and value judgements that involved a significant element of evaluation and/or persuasion, i.e. they gave advice.  Although the definition of advising has been narrowed for Part 4A permission purposes from 3 January 2018, the scope of FSCS protection was not affected and we are still able to protect advice without a personal recommendation. [4]  There was also misrepresentation of the security/risk of the mini-bonds and their ISA status.

Although Surge is not itself regulated, because it was acting on behalf of LCF and under its control, we are satisfied that LCF has liability for the advising carried out by Surge. Surge was not an appointed representative, but we are satisfied that LCF is liable for Surge in this regard, as Surge was its agent acting with actual or ostensible authority and LCF is vicariously liable for Surge’s actions. LCF had few employees/staff, and all direct contacts with investors were via Surge, which is understood to have had approximately 40 staff who worked exclusively for LCF. Surge always held itself out as LCF when communicating with investors, e.g. by telephone and email. Sales were routed through Surge to LCF, such that investors would not have known that they were not dealing with LCF.

Only advising that happened after LCF became fully authorised on 7 June 2016 can be protected.  We understand that approximately 95% of current bondholders invested after this date.  Further, in order to pay compensation, FSCS will have to be satisfied that a particular claimant received advice, relied on this when investing, and suffered financial loss as a result. Claims will also have to meet the usual requirements under FSCS’s COMP rules, e.g. as to eligibility.    


Next steps

We are in the process of designing our claims process in this regard and may obtain access to further investor communications from LCF’s administrators.  FSCS has also requested LCF investors to complete a pre-application questionnaire in order to assist us in building a better picture of the extent of advising.  LCF has not yet been declared in default and FSCS is not yet accepting applications for compensation.    

It is not possible at this time to estimate the number or value of potential advising claims.

Claims in relation to advising will fall to the investment intermediation levy class (Class 2), for which the annual class levy limit is £330 million (including a provider contribution of £90 million) [5]  If the levies on an FCA funding class would exceed the annual limit for that class, the excess is levied more widely on the other FCA classes as part of the retail pool. Further information is available on our website [6]

Ongoing investigations could provide evidence that LCF has liability in connection with other regulated activities.   



[1] Statements in promotional materials that there is no FSCS protection are not, however, relevant to whether FSCS protection is applicable in practice, which is determined by our rules.

[2] By reference to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”).

[3] By making the exception in Article 18 RAO subject to Article 4(4) RAO

[4] See COMP rule 5.5.4

[5] For defaults occurring on or after 1 April 2019, product providers are required to contribute approximately 25% of the levies falling to the FCA intermediation classes, from the first pound