Law firm Shearman & Sterling, who represent eight LCF investors, have submitted a “wide-ranging” complaint about the regulator’s “avoidance of compensation claims for victims of financial crime” to the Financial Regulators Complaints Commissioner.

The 37-page long complaint was submitted to the commissioner on Friday.

According to the law firm: “Over 1,000 LC&F investors have complained to the FCA concerning its conduct in failing to supervise LCF. This has resulted in a volume of complaints that the FCA has confirmed are "over 50% higher than the historic norm". The matter was on Friday escalated to the Financial Regulators Complaints Commissioner, with a total amount of up to £50m in aggregate being claimed. 

“This is considered to be one of the most significant complaints processes against a UK financial services regulator, in terms of the number of affected persons and the amounts at stake.”

In a paper last year, the FCA sought to introduce a test of causation. Due to criticism from the chair of the Treasury Select Committee, Dame Gloster and LCF investors, the FCA publicly postponed introducing the new rules. However, Shearman & Sterling say the FCA has “ploughed on as if it had introduced the "solely or primarily responsible" causation test on a retrospective basis into the Scheme Rules.”

According to the new complaint, this test of causation has no basis as it is not found in the Financial Services Act 2012, the Financial Services and Markets Act 2000, the Scheme Rules or any FCA rule or guidance. 

The law firm said that the established test of causation for investor claims is whether the FCA "contributed to" investor losses. It said that the independent Complaints Commissioner has repeatedly referred to the "contributed to" causation test, including as reflecting Parliament's intention in establishing the regulatory complaints regime.  This causation test has been applied consistently by Complaints Commissioners for over a decade.

The law firm also said that in its handling of the collapse of LCF, the FCA has also failed to meet its statutory objectives to protect consumers. It added that it has also failed to further its integrity objective “instead diminishing the standing of the UK regulatory system and its regulators by abandoning basic principles of fairness.”

In April the regulator apologised for its handling of the collapse of LCF and set out its approach to assessing related complaints. The regulator said that LCF investors who were given incorrect information by the FCA will be offered ex-gratia payments, if they have not already been compensated by the FSCS. 

Since then, the FCA has written to many LCF investors with pro forma rejections of compensation.

The new complaint filed to the complaints commission said the FCA “must now recognise the legal regime under which it operates remains unchanged and step up to its responsibilities.”  

The FCA was roundly criticised for its handling of the LCF fiasco by the Dame Gloster Report into the collapse.

According to the new complaint, the LCF investors represented by Shearman & Sterling now consider the FCA to have “resiled from its acceptance of the Gloster Report, on the topic of its own responsibility to compensate investors, a matter in which it has a clear self-interest.”

The law firm said the FCA has been found to have contributed to LC&F investor losses for the reasons set out in detail in the Gloster Report, under the applicable causation test and it must therefore offer an appropriate amount of compensation.

Some 11,625 investors lost savings worth a total of £237m when LCF collapsed with the majority so far not compensated by the FSCS due to questions about whether their investments were regulated or not.

Around 97% of all LCF bondholders invested less than £85,000 and therefore will not reach the compensation cap under either the government compensation scheme or the FSCS.

The government expects to pay out around £120m compensation to around 8,800 people in total.