Collateral investors face new legal hurdles to FCA compensation
Investors in defunct peer-to-peer lending platform Collateral are facing new legal hurdles in their ongoing battle to get compensation from the regulator.
Despite opening compensation proceedings on behalf of investors earlier this year, the Financial Conduct Authority (FCA) is believed to be relying on a legal argument which requires investors to prove that the regulator was the “sole or primary cause” of Collateral’s collapse before making any payouts.
However, legal representatives have fought back, arguing that there is no evidence of this practice being used or referred to in any materials prior to June 2020.
Collateral went into administration in February 2018, leaving its investors with losses of up to £18m.
Earlier this summer, brothers Andrew and Peter Currie, who were directors of Collateral, were sentenced to 2.5 years’ and 5.5 years’ imprisonment respectively for fraud and money laundering, following prosecution by the FCA. The FCA then began compensation proceedings to recover investor funds, but warned that almost two thirds of the outstanding loan book cannot be recovered.
However, investors are now concerned that the FCA’s “sole and primary cause” rule could supersede any legitimate compensation claim.
“Facing the prospect of numerous high-value investment scandals where traditional investor compensation frameworks would not apply, such as in the £237m London Capital and Finance (LCF) scandal, as well as smaller scams such as Collateral, Premier FX and Lendy, the FCA sought to introduce changes to the rules governing the complaints and Financial Regulators Complaints Commissioner (FRCC) process,” said a legal representative for the Collateral investors. “In particular, the FCA sought to cap complaints’ awards for financial loss at £10,000, and to refuse all pay-outs unless the FCA was the “sole or primary” cause of the loss. The cap was eventually abandoned but the “solely or primarily responsible” test was introduced last month as a new rule.”
The FCA is believed to have delayed the proposed changes due to public outcry whilst so many high-profile cases were in progress.
Following a legal challenge from LCF investors, the ”sole or primary cause” rule was deemed to be invalid. The regulator went on to scrap the £10,000 cap on compensation, as part of a “clearer, more transparent” complaints scheme.
However, the “sole or primary” phrase remains a part of the FCA’s official rulebook, and Collateral investors face the prospect of proving that the FCA was a key cause of Collateral’s losses before making their compensation claims.
The legal representatives of the Collateral investors claim that the FCA should take financial responsibility for the losses, given that Collateral appeared on the FCA register, despite not holding the correct permissions.
Read more: Collateral damage: A timeline of the administration
Thomas Donegan, a partner at Shearman & Sterling who represented the LCF investors in their FCA complaints process and successful quest for government compensation, said that: “The issue of ‘regulatory accountability’ became a key point of controversy in the passing of the new Financial Services and Markets Act 2023, and the FRCC now has a bolstered role.
“If the FCA refuses compensation in the Collateral case, as it did for LCF investors, then it will be interesting to see how the FRCC handles the matter. The FRCC has already found the FCA’s existing rulemaking on this topic to have been unlawfully introduced and that its related decisions in the LCF case were vitiated by legal error.”
Although UK government bodies and regulators are generally exempt from damages claims, they can be subject to judicial review or to complaints. Under the Financial Services Act 2012, the FRCC is entitled to consider complaints against regulators and recommend awards of damages.
Meanwhile, the Financial Services and Markets Act has bolstered the powers and status of the FRCC, and so Collateral investors have taken their complaint directly to the FRCC.
“If the FCA is itself implicated in the Collateral scandal, as alleged by investors (e.g. including Collateral in the FCA register as an FCA-regulated firm when it was not), then it would be difficult for the FCA to take the position that it was not responsible,” added Donegan. “This is particularly the case given the FCA’s public advertising campaigns on the importance of investors checking the FCA register to check out legitimate firms.
“If the FCA now purports to avoid liability to Collateral investors by claiming that it was not “solely or primarily responsible”, well, the FRCC has already made clear that to do so would be incompatible with the Financial Services Act 2012. In the LCF case, the government’s compensation scheme rendered the FCA’s position unimportant. However, for Collateral, where no other recourse exists for investors, the FCA should take heed of the FRCC’s previous decisions on this topic.”
The FCA said: “Complaints are a valuable source of feedback that inform changes and improvements across the regulators. We take all complaints seriously and welcome the transparency and accountability that the scheme provides.
Read more: London Capital & Finance compensation scheme comes to a close
“We consulted on changes to improve the Complaints Scheme, including to clarify our approach to compensatory payments, which were finalised in July.
“Any complaints we received before the implementation of the revised scheme in November will be assessed under the previous complaints scheme. That includes all the complaints we received related to Collateral. We were unable to respond to these while we prosecuted two men for charges covering the fraudulent changing of the FCA’s Register and removal of large sums of cash from the Collateral accounts. Following convictions they were sentenced to a total of eight years imprisonment in July. Now that the prosecution has ended, we are progressing the complaints.”