Customers who lost money in the collapse of minibond company London Capital & Finance will receive up to £68,000 each, as the Treasury announced a new £120m compensation scheme for victims of the investment scandal.

Some 11,600 bondholders — many of whom were first-time investors or retirees — lost their savings when they bought unregulated minibonds from LCF, which fell into administration in January 2019.

LCF was authorised by the UK financial regulator but the products it sold were high-risk and unregulated meaning the bulk of customers, who invested £237m in total, were unable to seek compensation from the UK’s lifeboat fund, the Financial Services Compensation Scheme.

John Glen, economic secretary to the Treasury, said on Monday that investors who had not already received compensation from the FSCS could claim up to 80 per cent of their initial investment in LCF, up to a maximum of £68,000 each.

Customers who have received interest payments from LCF or its administrators will be able to claim compensation less that amount.

In total, the government expects to pay out some £120m and will attempt to compensate all bondholders within six months of securing new legislation, which will be introduced when parliamentary time allows.

“The government’s establishment of a taxpayer-funded compensation scheme for LCF investors is a rare recognition of serious regulatory failure,” said Simon Morris, a financial services partner with law firm CMS.

“Using public money to cover investor losses not only puts LCF in the same league as Equitable Life, but also amounts to awarding the Financial Conduct Authority a costly wooden spoon prize for inept regulation,” he said.

So far around 2,800 individuals have been able to claim £57m from the FSCS, but most customers do not qualify because they did not receive financial advice from the firm or switch out of a stocks and shares Isa into its minibonds — both regulated activities.

LCF’s collapse triggered a criminal and regulatory probe as well as an independent investigation led by former Court of Appeal judge Dame Elizabeth Gloster into the Financial Conduct Authority’s failures.

On Monday the FCA set out its own complaints scheme for individuals seeking redress as a result of the watchdog’s handling of LCF and the Connaught Income Fund, which went bust in 2012.

The regulator said it had identified a number of investors who were given incorrect information in direct communications with the FCA, which “may have led them to conclude their investment would be safer than it was”. As a result, a small number of investors not already compensated by the FSCS will be in line for payments.

The regulator said it would apologise to the majority of complainants and offer an explanation for its errors.

In relation to the collapse of Connaught, the watchdog said it would apologise to those who had complained, having already considered appropriate remedies following the publication of an independent review into the fund failure by barrister Raj Parker.