Statement of LC&F bondholder representatives.

London Capital & Finance plc bondholders withdraw their judicial review appeal

Introduction

This statement is issued by Emmet Donegan, Joanne Ellis-Clarke, Nathan Brown and Alan Considine, who were elected to represent the creditors of LC&F on the creditors' committee in its administration. LC&F was a Financial Conduct Authority (FCA) authorised and regulated investment firm, which was registered with HM Revenue & Customs as an Investment Savings Account (ISA) provider.  It issued investment products in the form of bonds, which were marketed via search engines, price comparison websites and mainstream newspaper advertising to mostly retail investors.  Ultimately, it raised £237 million from savers. Of this amount, it appears that LC&F's directors and other associated persons appropriated over £190m.  LC&F went into administration in January 2019.  We brought a judicial review (JR) case in respect of the Financial Services Compensation Scheme's decision not to compensate more investors who lost out in the LC&F scandal.  We brought the case and make this statement only in our personal capacities and not as part of the administration or creditors' committee work. 

In May 2019, the FSCS initially refused to pay any compensation to any LC&F investors, apparently the first (and hopefully the last) time it has done so for products sold as ISA investments or investments in an FCA-regulated firm on such a significant scale.  However, from mid-2019 onwards the FSCS compensated some claims based on regulated investment advice investors received from LC&F, paying out around a quarter of investments.  Our judicial review challenged the FSCS's decision not to offer wider compensation on the basis that the issuance of the bonds themselves was a regulated activity.

In particular, the JR concerned the decision by the FSCS not to compensate the LC&F bondholder group in its entirety for investments made on or after 3 January 2018, on the basis that this amounted to the regulated activity of "dealing in investments as principal".  The JR hearing took place in January 2021 and the judge's decision was delivered on 29 March 2021.

Judicial Review Appeal

In March 2021, Mr Justice Bourne accepted certain of our submissions (which the FSCS had disputed), in particular that the non-transfer clauses in LC&F's documentation were unfair and unenforceable.  However, he considered that this was insufficient to result in the bonds being "transferable" for regulatory purposes.  He therefore concluded that the bonds were not regulated and that FSCS was not required to pay additional compensation to bondholders.  The first instance decision is available at this link: https://www.bailii.org/ew/cases/EWHC/Admin/2021/760.html   As a result of these conclusions, we therefore lost the JR at first instance.  We were however given permission by the judge to appeal to the Court of Appeal, who in doing so recognised that our appeal had a real prospect of success.  We filed our appeal on 10 June 2021.  The FSCS allowed us to file our appeal whilst discussions on our liability for the FSCS's legal costs took place. 

The government's ad hoc compensation scheme

Since the judicial review decision was handed down, the government announced an ad hoc compensation scheme for LC&F investors, paying out 80% of investments up to a £68,000 cap (compared to the FSCS, which compensates at 100% up to £85,000).  The relevant legislation to establish this scheme (the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill) is now on its third reading in the House of Commons.  Further details are available here: https://bills.parliament.uk/bills/2863. At the time we filed the JR case, the outcome for LC&F investors would have been binary – either a 2.5% recovery (with an unsure prospect of up to 25%, perhaps by 2025) via the LC&F administration process, or full compensation up to a maximum of £85,000 through FSCS if our case succeeded.  The introduction of the government's ad hoc scheme has meant that the judicial review case has lost much of its import, being now "worth" approximately £2,000 for a typical investor who placed £10,000 in an LC&F ISA from January 2018 or £20 million in aggregate across all LC&F bondholders.  The case is also worth potentially £60-70 million to the taxpayer, since it would if successful have reduced significantly the amount that would otherwise be paid out under the government scheme. 

Costs of the Appeal

Our own lawyers, at Shearman & Sterling (London) LLP and Brick Court Chambers, have at all times acted for free – on a pro bono basis – and agreed to continue to do so for any appeals. 

The FSCS agreed at the outset of the JR not to seek to recover its legal costs of the judicial review case (as the winner of a case would usually be entitled to do).  However, the FSCS has refused to extend the same agreement to the appeal.  This means that, if our appeal were to fail, the four of us claimants would stand to be personally liable for all of the FSCS's legal costs. We four bondholders bringing the case (and no one else) would be putting at serious risk what remains of our life savings and even our homes, for a case that would only benefit us each personally in a modest way, while benefitting approximately 6,200 other people, who would bear no such costs risk at all. This cost risk stands in addition to the time commitment and stress that is inevitably involved in major litigation such as this. Despite the merits and importance of the case, we do not consider that it would be reasonable for us to continue with the case while bearing this financial risk personally.

We have engaged in negotiations with FSCS over the costs of the appeal for several weeks, which negotiations were ended by the FSCS on Friday 6 August 2021.  The end of the negotiation triggered a 14-day period (ending on 20 August 2021) for us to carry on with the appeal and be at risk on costs or withdraw it.  During the negotiations, the FSCS has clarified its position on several points, including by agreeing to cap the amount it would claim from us if we lost the appeal to £300,000 for the Court of Appeal proceedings and a further £300,000 for any Supreme Court proceedings, resulting in a total of £600,000 (including VAT) personal costs exposure for the four of us claimants.  We thank the FSCS for their time and for reconsidering their position during these negotiations. 

However, following these negotiations and a study of the costs of the appeal, we have concluded that the potential personal financial losses of taking the case further are not warranted. In coming to this decision, we note the following: 

Crowdfunding of FSCS fees has been our preferred option, since it would more fairly align the costs of the judicial review appeal case with the group of people who stand to benefit from it, i.e. LC&F investors as a whole, not just the four of us.  We carried out a poll on a Facebook group for LC&F investors, which indicated that around half of LC&F bondholders would be prepared to fund an appeal, but only about 25% of bondholders would be prepared to make contributions that would be sufficient to fund the FSCS's costs.  (Note that if we were to win, these amounts would have been returned to investors, since in that situation the FSCS would not be able to recover its costs from us and our lawyers are acting free of charge.) 

We believe that, if we had a mechanism to contact all investors, we might be able to raise the required amount of funds.  However, the FSCS has refused to contact interested investors on our behalf for this purpose.  

Another party able to contact LC&F investors to alert them to the proposed crowdfunding would be the administrators of LC&F, who are insolvency officials working at Smith & Williamson.  After several communications with them on this topic, we have been unable to secure their support for such a communication. 

We are able to contact around 2,000 bondholders, around half of which are likely to be financially interested in the appeal, via Facebook groups.  We note that these groups were set up by us as support and information-sharing groups and not in order to seek funding for litigation.  We believe, based upon polling of investors in these groups, that these channels are unlikely to result in the funding of an amount approaching anywhere near the £600,000 requested by the FSCS to fund its legal costs of the appeal. 

The claimants have explored other options for funding the case, but these have been unsuccessful.  For example, HM Treasury (HMT) has declined to finance the FSCS's legal costs of the appeal.  Separately, we have explored obtaining litigation funding from third parties, but these have not been successful, partly due to the legal and logistical challenges in identifying, contacting and signing up approximately 6,000 bondholders to a funding agreement within a very tight timeframe.

We would have been able to apply to the Court of Appeal for a so-called "cost capping order", which would limit our liability to pay the FSCS's fees, at either zero or some other limited amount.  We believe we would have good arguments for obtaining such an order.  The FSCS agreed to cap its costs of such a cost capping process at £54,000 and we believe that we would have been able to raise that amount in crowdfunding.  Unfortunately, a cost capping order would only apply to Court of Appeal proceedings.  The FSCS confirmed to us that even if the Court of Appeal were to grant us a cost capping order, the FSCS would not agree to apply the same cap to any further Supreme Court proceedings.  The FSCS has said that it would instead seek to recover all its Supreme Court costs of up to £300,000 from us in any further appeal to the Supreme Court at its election, even if we obtained a cost capping order from the Court of Appeal.  This means that a cost-capping order would not have resolved the costs risk of proceeding with the appeal, since we would still be personally liable for £300,000 Supreme Court costs, plus any amount of cap applied by the Court of Appeal. 

Overall, the lack of any route via the FSCS, the administrators or otherwise to identify or contact all (or even most of) the affected investors, a certain amount of bondholder fatigue, the diminishing returns for bondholders from the judicial review case following the announcement of the government's ad hoc compensation scheme and the ineffectiveness of the cost-capping order process to address all the costs of appeals, mean that our judicial review appeal will sadly now have to be withdrawn.  We remain of the view that the appeal is meritorious, as can be seen from our skeleton arguments for permission to appeal, which are being made available today at: https://shearman.sharefile.com/d-s41a3b0753e1148fe970b9d02899eff8c.  The appeal is being withdrawn only due to the unmitigated, unreasonable and substantial personal costs risk that it would involve.

In our view, a case of this importance and against a well-funded statutory authority would best end and be determined on its merits and in accordance with Court procedures, including having exhausted all avenues for appeal, not simply as a result of issues over costs.  However, unfortunately that has not come to pass in this case.

That all said, we remain grateful to the FSCS for allowing the first instance case to proceed on the basis that each side would pay their own costs and for agreeing to allow our appeal to be filed whilst costs were negotiated.  We now must accept the outcome. 

Clarification on Other Ongoing Actions and Investigations

To date, there have been several investigations into the operation of LC&F and its attendant investor losses of up to £237m, including the following:

The administration of LC&F by Smith & Williamson.  Administration is a process for the external and independent management of a company's affairs where the company is or is likely to become insolvent, with a view to maximising returns for creditors.  The administrators have to date distributed 2.5% to creditors and expect in due course that this may reach 25%.  However, this will take many years, whilst legal proceedings are brought against those responsible.

The Serious Fraud Office, who are responsible for prosecuting serious financial wrongdoing in the criminal courts and are investigating those responsible.

The Gloster Report, published by Dame Elizabeth Gloster, which considered whether the FCA had engaged in regulatory failures concerning its authorisation or supervision of LC&F.  On 22 May 2020, Dame Elizabeth Gloster's enquiry was sanctioned by HMT.  The enquiry considered the role of the FCA in the authorisation and supervision of LC&F.  In December 2020, Dame Elizabeth's report was published by HMT and its findings (https://london-capital-and-finance-investigation.org.uk/what-investigation) suggested multiple serious regulatory failures on the part of the FCA. 

The government's response to the Gloster Review, including in the form of the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill, which proposes an ad hoc compensation scheme with an 80% return capped at £68,000.  Please note that given the amounts involved and the likely substitution of the Treasury for bondholders in the administration (see point 1) additional amounts are unlikely to return to most bondholders, except perhaps those with the very largest losses (i.e. for those where the cap of £68,000 results in recovery of less than 25% of their much larger losses).

The Financial Services Compensation Scheme, which has determined that a small number of LC&F investors are eligible for compensation based upon investment advice given by LC&F, and whose decision not to compensate more broadly was under challenge in the judicial review.  These claims are capped at £85,000 and have now largely all been determined, although a small number of individual claims are now subject to appeals.

The JR was not an investigation or process related to any of the above proceedings or reports: it is a review by the High Court of the legality of the decision by the FSCS not to compensate more LC&F bondholders.

Further background on the judicial review case

The first instance judicial review case was heard in January 2021. We argued at the hearing that:

(i) LC&F was an FCA-authorised investment firm which issued investment products to the general public, and so should be treated as having engaged in "regulated activities", which trigger FSCS protection, from 3 January 2018 (since, on this date, a change in law came into effect which our case relies upon);

(ii) non-transfer clauses in the LC&F bonds were unfair and unenforceable under the Consumer Rights Act 2015, and should be disregarded, resulting in the bonds being a transferable instrument, which means they are regulated; and

(iii) LC&F, in any event, agreed to issue regulated bonds, such as ISA-eligible bonds, to investors – "agreeing" to conduct a regulated activity is itself a separate regulated activity.

Mr Justice Bourne handed down his judgment in March 2021, finding in our favour that the non-transfer clauses, which LC&F used to avoid regulation (and which the FSCS principally relied upon to avoid compensating investors) were unfair and unenforceable. However, the Judge decided not to overturn the FSCS's decision, on the basis that the court could not “change” the regulatory status of the bonds in this way and so create a remedy against the FSCS. On 20 May 2021, the judge gave permission for an appeal to be heard in the Court of Appeal.    The judgment is available at this link https://www.bailii.org/ew/cases/EWHC/Admin/2021/760.html.

Our appeal was filed on 10 June 2021, following a standstill agreement on fees that we reached with the FSCS.  The skeleton arguments for the appeal, setting out our legal position, are available here: https://shearman.sharefile.com/d-s41a3b0753e1148fe970b9d02899eff8c. We argued that the Judge's initial decision was incorrect in several respects. In particular, if the bonds were indeed capable of transfer (as the Judge found), regulatory guidance and case law consistently indicate that this suffices for bonds to be "transferable securities" – whether or not the bonds were (or were likely to be) transferred in practice. 

The Court of Appeal granted permission to appeal on 20 May 2021 and issued an order concerning the appeal on 22 June 2021, including that the proceedings would be stayed until at latest October 2021 whilst negotiations on fees took place, but that if negotiations ended, the appeal would need to be withdrawn within 14 days (or otherwise that we would start to incur risk on the FSCS's legal costs). The Orders are available here: https://shearman.sharefile.com/d-s41a3b0753e1148fe970b9d02899eff8c. That 14 day period expires on 20 August 2021.  This is because the relevant negotiations ended and did not result in a significant enough reduction in the FSCS's fees or change in their position otherwise (e.g. to accept the effect of any cost capping order by the Court of Appeal in any Supreme Court proceedings) that we believe leaves any realistic prospect of crowd-funding the required legal fees of the FSCS.

We have therefore now applied to the Court for the appeal to be withdrawn and the case dismissed.  As described in more detail above, the only reason for this is because we are unwilling personally to take the risk of a £600,000 legal bill and have concluded that raising this amount from bondholders in the current circumstances is unrealistic.  We stand by the arguments made in our appeal and our position that the FSCS has fallen short in its compensation to LC&F bondholders.  Our withdrawal of the appeal is no reflection on the merits of these points.

We will continue to strive to promote the interests of LC&F bondholders. We would like to thank bondholders for the support they have shown so far, and each and every member of our legal team who have dedicated two years of their time to the LC&F case. Their devotion and passion for our cause goes beyond all expectations and we would like to thank them for the immeasurably valuable work they have done.

Emmet Donegan

Joanne Ellis-Clarke

Nathan Brown

Alan Considine

20 August 2021

Update : Sept 6th 2020 

The case that we (the four LCF bondholders on the creditors' committee) are bringing against the Financial Services Compensation Scheme (FSCS) has been initially assessed by a judge who works in the Administrative Court in London.  This preliminary examination for "permission" to proceed occurs on all judicial review (JR) claims.  In this case, it was necessary for the judge to answer a challenge from the legal team working for the FSCS who asked for the case to be dismissed at this stage.  The challenge made by them was essentially that "there is no case to answer", which normally arises when the claim is a weak one.

The Judge, Mr Justice Murray has made his decision that the dispute between the LCF bondholders and the FSCS should be examined in court.

The date of the JR court hearing is not set, and to the best of our knowledge we would expect it to happen between Autumn 2020 and Spring 2021.  Covid-19 restrictions means that the courts are not quite as predictable as they were before the pandemic struck.  The court is not active for trials until October 2020.  In the meantime, various documents will be provided to the court by the parties.

The decision to allow the case to go forward was  commented upon in many newspapers on or around 8 September 2020.

The great news is that we have reached and now even exceeded the limit of £7000 of funding.  Thanks for all the contributions.  There have been over 300 individual pledges received.  We have read your messages with the donations, these were lovely.  We have been gladdened to see that many of those who may be ineligible (by dates) to receive compensation in this Judicial Review have been generous to give us some funding.  This unselfish gesture encapsulates the community spirit of the bondholders.

At this time there is no need to add further to the fund, and it is closed.  We have agreed the sum of £7000 and so are not able  to allocate more than this amount to the existing and known expenses account.  

Please do not add any more money to the fund.  I am in contact with the Crowd-funding people and I am sure that they will be able to halt the funding pledges today.

When the funding is halted the draw down of funds from your "plastic" cards will start.  This will probably last two full working days so you will see your bank accounts will start to show payments in hte next 48 hrs.  However individual payments may not show up until the middle of next week, depending on the bank involved.

WHAT YOUR FUNDING IS DOING

This crowd-funding system has sought to collect £7000 to pay for the court fees and the expenses arising from printing and distributing the communications to the court and to the FSCS legal team.  

These costs are handled solely by the solicitors, and the sum £7000 has been stated in a letter passed to the solicitors acting for the FSCS.  

Your kind donations are helping Emmet, Nathan, Joanne and Alan pay the 'expenses' section of court action.  This is a 'gift' but you are not entering into an agreement with either Shearman and Sterling (acting as solicitors on this case)  or their barristers.  That was signed off by the named individuals some time ago.  

However, and as previously stated, the verdict handed down on the Judicial Review is concerned with all the eligible bondholders.

UPDATE ON REPORTING

Following some poor reporting of this crowd-funding in the press, I must stress that the team of barristers has not been involved with the call for crowd funding and indeed they have not mentioned any such requests through contact with the solicitors.  It clearly follows that your funds raised will only meet amounts incurred by the claimants’ solicitors but not any costs or expenses of the barristers.

The wording and details of this message and the original web-page has been made by Emmet Donegan acting on advice from other members of the elected creditor's committee of the London C&F administration, and supported by the professional team at Crowd Justice. Items listed as "Note from the legal team" or similar are based upon emails, telephone messages or similar prompted by lawyers working on the case following publication, as they have not prepared this document lodged with crowd justice.

The general terms and conditions of the funding process is described by Crowd Justice on supplementary pages published along with these FSCS JR fund notes.

NOTE FROM THE LEGAL TEAM

Shearman and Sterling and the barristers at Brick Court are acting only for their named clients and make no assumption of responsibility towards any bondholders other than their named clients.  We are unable to answer any queries or deal with matters raised by individuals who have funded the expenses account through this campaign.  No donation or backing made through this crowd-funding campaign creates a client relationship between the donors and Shearman and Sterling nor any  barrister acting on this case.

The three barristers have been instructed to act for the four named claimants in the proceedings (Emmet Donegan, Joanne Ellis-Clarke, Nathan Brown, Alan Considine) and are not, and will not, be acting for any other persons (including other bondholders), nor are they making any assumption of responsibility towards them.

The contents of this website have been produced by the claimants and have not been approved by either Shearman & Sterling or the barristers acting on the case and contain no representations by them.