The Government has launched a new compensation scheme for those customers of a failed mini-bond provider who were not eligible for redress from the Financial Services Compensation Scheme. However, these customers will not receive full compensation, as they might have been hoping to get from the FSCS. Instead, they can expect to be compensated for 80% of their initial investment, up to a maximum of £68,000.

Where bondholders have already received interest payments from the firm and/or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation payable. The £68,000 cap is unlikely to mean much in practice, as only 3% of the firm’s customers invested more than £85,000.

The firm in question collapsed in January 2019, leaving 11,600 investors out of pocket to the tune of £237 million. Only around one-fifth of these customers received compensation from the FSCS, with the main reason for this being that only those who received regulated advice to take out the product were covered. Giving regulated advice is covered by the FSCS regime, but mini-bonds as a product are not covered.

The Government will now table legislation to enable the new compensation scheme to proceed, with payouts expected to be completed within six months of the legislation being passed.

John Glen MP, Economic Secretary to the Treasury, warned that this announcement would not set a precedent and that the Government was unlikely to routinely make similar interventions in the future. Mr Glen said:

“In these extraordinary circumstances, the government has decided to establish a compensation scheme. However, it is imperative to avoid creating the misconception that government will stand behind bad investments in future, even where FSCS protection does not apply. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking the government will provide compensation if things go wrong. The ultimate responsibility for choosing suitable investments must remain with individuals.”