Have your say on the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill

Aims of the Bill

London Capital & Finance (LC&F) was a financial services firm that failed in January 2019. While LC&F was regulated by the Financial Conduct Authority (FCA), the ‘mini-bonds’ it sold were not.

In March 2019, the administrators reported that 11,625 bondholders had invested over £237 million in LC&F’s products. They estimated that bondholders would be likely to receive as little as 20% of their initial investment.

In addition, as the mini-bonds themselves were not regulated, the majority of bondholders were not covered by the Financial Services Compensation Scheme (FSCS). By April 2021 the FSCS had paid out £57.6m to 2,871 bondholders who held 3,900 LCF bonds.

Dame Elizabeth Gloster’s report into the FCA’s regulatory supervision of LC&F was strongly critical of the regulator’s actions. Although her remit explicitly excluded the question of compensation, John Glen, the Economic Secretary, announced in December 2020 that the exceptional circumstances of the case warranted the establishment of a compensation fund.

The Government said the compensation scheme would cap individual entitlements at £68,000 (80% of the £85,000 FSCS compensation limit) and estimates that the total cost of payouts would be about £120 million.

Clause 1 of the Bill would allow the Treasury to finance the compensation fund and for the Financial Services Compensation Fund to administer it.

Fraud Compensation Fund

The Fraud Compensation Fund (FCF) is a compensation scheme that can pay compensation where an occupational pension scheme has had its assets reduced as a consequence of an offence involving dishonesty and where the scheme employer is insolvent and unable to make good the shortfall caused by the offence. It was set up under the Pensions Act 2004 (ch 4) and is run by the Board of the Pension Protection Fund. It is funded by a levy on occupational pension schemes.

Historically, claims on the FCF have been low. However, in November 2020, the High Court ruled in Board of the PPF v Dalriada that “pension liberation” schemes were eligible to apply to the FCF for compensation. These are schemes that have been set up with the aim of persuading people to transfer their pension savings from legitimate schemes to fraudulent schemes with promises of high investment returns.

In years when the FCF needs increased funding, the Secretary of State may impose a fraud compensation levy on occupational pension schemes. This is subject to a statutory maximum (PA 04 s189; SI 2006/558).

The PPF has estimated that compensation payments claimed as a result of the High Court judgment, will be in the region of £350 million. At the time of the judgement, the FCF had assets of £26.2m. Even with future levy income, the expectation was that there would be unfunded liabilities in the region of £200m to £250m (Bill 9 – EN, para 8-9).

Clause 2 of the Bill would give the Secretary of State the power to make a loan to the Board of the PPF to enable the payment of compensation to eligible occupational pension schemes following the High Court in judgment. The loan would be repaid by the FCF levy over a period currently estimated to be between 10 and 15 years. The FCF levy rates and repayment period will be subject to formal consultation, timetabled for the autumn (Bill 9 – EN, para 36).

Follow the progress of the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill

The Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill 2021–22 was introduced to the House of Commons on 12 May 2021. This Bill was debated at second reading on Tuesday 8 June 2021 and has now been sent to a Public Bill Committee which will scrutinise the Bill line by line and is expected to report to the House by Thursday 17 June 2021.

• Bills before Parliament: Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill 2021–22
• Read Explanatory Notes: Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill 2021–22
• House of Commons Library Briefing Paper

Oral evidence sessions are expected to be held on the morning of Tuesday 15 June.

Guidance on submitting written evidence

Deadline for written evidence submissions

The first sitting of the Public Bill Committee is expected to be on Tuesday 15 June. Written evidence can now be sent in to the Public Bill Committee. The sooner you send in your submission, the more time the Committee will have to take it into consideration and possibly reflect it in an amendment. The order in which amendments are taken in Committee will be available in due course under Selection of Amendments on the Bill documents pages. Once the Committee has dealt with an amendment it will not revisit it.

The first sitting of the Public Bill Committee is expected to be Tuesday 15 June and the Committee is scheduled to report by 1.00pm on Thursday 17 June. However, please note that when the Committee concludes its consideration of the Bill it is no longer able to receive written evidence and it can conclude earlier than the expected deadline of 1.00pm on Thursday 17 June. You are strongly advised to submit your written evidence as soon as possible.

Your submission should be emailed to scrutiny@parliament.uk

Further guidance on submitting written evidence can be found here.

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