The UK government has established a compensation scheme for investors who lost money after the collapse of London Capital & Finance (LCF) in 2019.
The government-funded scheme will provide 80% of LCF bondholders' initial investment up to a maximum of £68,000 and will be available to all LCF bondholders who have not already received compensation from the Financial Services Compensation Scheme (FSCS).
John Glen (pictured), economic secretary to the Treasury, said: "It is an important point of principle that government does not step in to pay compensation in respect of failed financial services firms that fall outside the FSCS.
Bondholders have been badly let down by LCF, but they have also been let down by the regulatory system that is designed to protect them."
"However, the situation regarding LCF is unique and exceptional."
He added that LCF's business model had been "highly unusual", given that it was regulated by the Financial Conduct Authority (FCA) "despite receiving no income from regulated activities", allowing it to sell unregulated mini-bonds to investors.
LCF fell into administration in January 2019, after collecting £237m from 11,600 investors.
Last year, the FSCS made the decision to award compensation to only a fifth of customers after it ruled that LCF had offered mini-bonds on a non-advised basis.
The government's compensation scheme represents 80% of the compensation LCF customers would have received had they been eligible for FSCS protection.
Glen said that "regulatory failings", while not the primary cause of investor losses, were a factor in the government's decision to launch the LCF Compensation Scheme.
"Bondholders have been badly let down by LCF, but they have also been let down by the regulatory system that is designed to protect them," Glen said.
"The independent investigation led by Dame Elizabeth Gloster, which the government published at the end of last year, concluded that the FCA did not discharge its functions in respect of LCF in a manner which enabled it to effectively fulfil its statutory objectives during the relevant period."
The government said that any mini-bond holders who have received interest payments from LCF or distributions from the administrators, Smith & Williamson, will have these deducted from the amount of compensation payable.
It has told bondholders that further information about how the scheme will operate will be published in due course but that, in the meantime, all bondholders should "be vigilant to the risk of scammers posing as services to help them claim".
First published by our sister title Investment Week