Some 11,625 investors lost savings worth a total of £237m when LCF, a mini-bond provider, collapsed.

The majority faced heavy losses until the government stepped in last year to provide compensation after a campaign to expose regulatory failings. The government has so far paid out over £91m to LCF investors.

The Treasury said this week in a consultation response document that it would support full regulation of the non-transferable debt securities (NTDS) used in many mini-bonds, including those sold by LCF.

The Treasury outlined its position on its regulatory plans for mini-bonds in its consultation summary document: ‘Regulation of non-transferable debt securities (mini-bonds).' The paper reviews responses to the Treasury's consultation on regulating non-transferable debt securities (NTDS).

LCF sold mini-bonds to investors who thought they were buying FCA-regulated bonds offering a fixed return. However, the bonds were actually invested in unregulated, or poorly regulated, property shares or property loans. LCF was able to use a loophole in regulation to push its unregulated investments on unsuspecting investors who believed they were protected by regulation.

LCF itself was only partly FCA regulated, mainly for marketing purposes.

The Treasury says it favours making dealing in non-transferable debt securities a fully regulated activity in future which should help prevent a repeat of the LCF saga.

In its response to the consultation the Treasury says: “The government’s preference at this stage is to include non-transferable securities within the scope of the new public offerings regime and to proceed with this option. 

“However, there is still further work to develop this proposal to ensure it allows businesses to raise finance through the issuing of securities while ensuring appropriate consumer protection.”

The Treasury will look at adding NTDS issuance to FCA regulation but says if issues were to be found it would find an alternative route to regulate the securities.

An independent investigation conducted by Dame Elizabeth Gloster into the FCA’s regulation of LCF found that the FCA failed to adequately regulate the firm.

Her report recommended that the Treasury should consider bringing non-transferable debt securities (NTDS) within the scope of regulation, setting out two potential options: making the issuance of non-transferable securities a regulated activity or extending the scope of s85 of the FSMA (Financial Services and Markets Act) to cover non-transferable securities, so that public offers of non-transferable securities would require an FCA approved prospectus.

Following the publication at the end of 2020 of the Gloster Report, the FCA said it would introduce nine major reforms to try to prevent a repeat of the collapse of mini-bond provider LCF.

The FCA has apologised for the failings.