The Administrative Court has today handed down a much-anticipated judgment in a claim for judicial review brought against the Financial Services Compensation Scheme (“FSCS”) by investors in London & Capital Finance Plc (“LC&F”): R (Donegan) v Financial Services Compensation Scheme Limited  EWHC 760 (Admin). The claim was brought following LC&F’s high-profile collapse in January 2019.
FSCS protects customers of financial services firms that have failed, and can pay compensation (subject to certain limits) when a customer of a failed financial services firm makes a claim that is within the scope of the scheme’s rules. The judicial review concerned the decision made by FSCS that the Claimants were not entitled to compensation under the scheme because LC&F’s issue of the mini-bonds in which the Claimants had invested was not a regulated activity within the meaning of the relevant scheme legislation. In particular, FSCS determined that the mini-bonds in question were not “transferable securities” in circumstances where the bond documents expressly prohibited their transfer.
The Claimants challenged the decision of FSCS on three grounds: (i) that the relevant mini-bonds were, on a proper interpretation of the relevant statutory provisions, “transferable securities”; alternatively, (ii) that the terms prohibiting transfer were unfair under the Consumer Rights Act 2015 and hence unenforceable against consumers who had purchased the mini-bonds, it being contended that the result of such unfairness was that the mini-bonds would become transferable and by that route come within the definition of “transferable securities”; and/or (iii) that by entering into subscription agreements with investors, LC&F agreed to deal in transferable securities even if the mini-bonds actually issued were not transferable.
The Court (Mr Justice Bourne) has dismissed the Claimants’ claims, rejecting each of the three grounds of challenge. The Court held that a non-transferable bond is not a “transferable security” within the meaning of the relevant statutory provisions. Further, whilst the Court was persuaded that the non-transfer provisions in the mini-bonds were unfair under the Consumer Rights Act 2015, the effect of this was not to turn non-transferable bonds into “transferable securities”. The Court referred in particular to the importance of legal certainty when considering whether a finding of unfairness under the Consumer Rights Act 2015 could change the regulatory status of a financial instrument.
A copy of the judgment can be found here.