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Editor’s Column: Has the compensation genie been unleashed?

The rules of financial regulation were effectively torn up and rewritten this week after the Government stepped in and launched a £120m compensation fund for victims of the London Capital & Finance collapse.

I’ve written several columns about this fiasco, which saw more than 11,600 investors cheated out of £237m of their savings by the mini-bond provider which failed in 2019.

After a huge amount of deliberation the Financial Services Compensation Scheme has compensated about 1 in 4 investors but it was looking increasingly likely the FSCS would reject the rest of the claims because they fell outside the ‘regulatory perimeter’ as the FCA would put.

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The regulatory perimeter is a critical concept which I’ll return to later but first: what prompted the U-turn by the Government?

Was it the fear of huge swathes of criticism for leaving thousands of LCF investors adrift, followed by years of litigation? Was it an acceptance that the blunders by the FCA, which apologised again this week, were not defensible? Was it just an acceptance that the whole thing was a giant cock-up and it was the Government’s duty to step in?

We’ll never know for certain but prompted to act the Government certainly was and in an, almost, unprecedented fashion.

For those of us who remember past failures of regulation, such as Equitable Life (and I’m one of the still out of pocket victims myself), the Government’s move to compensatte the LCF victims so relatively generously was unexpected and I suspect is far more significant than many realise.

One of the principles of financial regulation, as long as I’ve covered it, is that there are regulated and unregulated products and services. If you are investing in the regulated sector you have a right to expect appropriate regulation, an Ombudsman scheme and a compensation scheme. In other words a safety-net if it all goes wrong.

If you invest in unregulated investments, say Martian crypto-currency bonds, you deserve everything coming to you if it all goes wrong which it most likely will. It’s very difficult to protect the stupid.

In this case, the Government could have chosen to continue opposing compensation for LCF investors but it did not. I’m please for the investors, many of whom lost a chunk of their nest-eggs and were taken in by slick and pushy LCF marketing online and elsewhere. It’s clear many thought they were investing in regulated products when they were not.

So what of the regulatory perimeter now? Well it turns out it’s a little more flexible than we all though and that is both a good thing and bad. Good for investors because many will now have more chance of getting their money back if it all goes horribly wrong, whether they were invested inside the perimeter or not. The bad news is that taxpayers, and that includes Financial Planners, will have to fork out to pay for the Government’s largesse.

The Government insists the LCF bale-out is a one off. I suspect not. The genie is out of the bottle and it will be hard to put it back in.

Whether it leads to a wholesale revamp of the financial compensation schemes it is too early to say but I would not bet against it.

Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with 30 years experience. This topical comment on the Financial Planning news appears most weeks. Follow @FPT_Kevin 

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