The Financial Conduct Authority (FCA) has told a company which offered returns to people who funded investment mis-selling claims to pay back its investors.
However, the company's liquidator has cautioned that those who put money in are unlikely to receive it back in full.
Equitable Law Capital went in to liquidation in October because it was unable to pay its debts, according to a report by liquidator Begbie Traynor.
The company intended to fund the ‘procurement and processing of investment mis-selling claims.’ Investors were told they 'would likely achieve' returns of between 5.6% and 8.5%.
A creditor's report filed at Companies House suggested around £2.7 million was invested into the company.
According to the liquidator's report, the company began to face problems in 2015 when it was contacted by the FCA's unauthorised business enforcement division.
The regulator was concerned that the company was a collective investment scheme, meaning it needed to be regulated. Equitable Law turned to the Queen's Counsel, which supported its claim that it did not need to be regulated.
However, the FCA challenged this opinion, leading to Equitable Law facing £60,000 in legal costs.
According to the liquidator's report, the company also faced problems when it emerged that the claims management company it was using was not processing the forecast amount of claims or the level of redress payments that was expected.
In November 2015, it emerged the claims management company was also 'spending the funding provided by the company on alternative types of mis-selling cases to those that were agreed'. This meant that instead of funding investment or bond mis-selling claims, the money was being used to fund lower value claims including PPI.
The FCA then blocked the company from taking new investments. It has now told Equitable Law to write to investors to offer their fund back.
However, the report by Begbie Traynor said this was unlikely.
‘Should it be held that the company would be required to refund the capital investments sums of even the small percentage of investors, it had insufficient assets from which to do so,' it said.
‘Due to the lack of liquid assets, the company is unable to make repayment to all investors.’
The report states Equitable Law used an introducer called Funding Co. to which it paid a fee of 20% of each creditor’s investment.
Equitable Law Capital could not be reached for comment. The FCA declined to comment.