The recent collapse of London Capital & Finance (LCF) acts as a sharp reminder that, where investments are concerned, there needs to be absolute clarity as to the nature of what is being sold as well as who the provider is.
Of course, the fact the Serious Fraud Office is now involved suggests that LCF did far more than confuse investors with misleading promotions. But there are also set to be implications for the FCA. Namely, should there be tighter rules and better information around authorized providers selling unauthorized products?
Indeed, one distraught investor was quoted as saying:
“But the fatal thing, as with so many others, was seeing the FCA mark.”
LCF went into administration in January, after some 11,500 investors had placed around £236 million into the company to purchase mini-bonds– it remains uncertain as to whether they will receive any of their money back.
These were far from all being sophisticated investors. Many will have been tempted by LCF’s advertising, which said that the mini-bonds paid up to 8% interest but also that their money would be safe, since this was a reputable FCA-regulated provider. It was also suggested in some advertising that these products had ISA status, something that HMRC has since confirmed was not the case.
The mini-bonds were used to fund small businesses and as the full picture starts to emerge, it appears that the investors’ funds were being used to support entities with connections to the four senior individuals in charge at LCF. Lurid stories of high spending are also now coming out, with the individuals allegedly buying helicopters, a stud farm, a holiday village in Cornwall and undeveloped resorts in Cape Verde and the Dominican Republic. Four arrests have been made since these revelations with were made, with them now being released pending further investigations.
Meanwhile, it was purported in LCF’s marketing that funds – and therefore the risk – would be spread across hundreds of small firms, yet Companies House records have shown this was not the case and that loans were only made to around 12 businesses. These are complex to unravel owing to numerous limited liability partnerships and cross-ownerships, which suggest that the borrowers nearly all had connections to the four individuals.
Further, questions are being asked of an agency called Surge Financial which ran the marketing campaigns and is alleged to have pocketed around £60 million in commission. There is no doubt that there is lot more to come out and the regulator too has been in for some criticism. Chair of the Treasury select committee, Nicky Morgan, wrote to FCA chair Charles Randell, and said that while she appreciated the FCA was investigating LCF’s marketing material, that,
“There is a broader need to understand what can be learned in a regulatory sense from the events at LCF. I have therefore requested that the FCA board consider whether the failure of LCF, the potential harm to those consumers involved, and the regulatory system that led us here, warrants a statutory investigation.”
She said commented that there needed to be more information about the way firms were using the badge of FCA authorisation as well as the issue of whether mini-bonds needed regulating. It appears that many had little awareness of the riskiness of this investment and unlike listed retail bonds, mini-bond issuers do not have to put out a prospectus so there is no awareness of the businesses receiving the loans.
According to Finbarr O’Connell, administrator at Smith & Williamson:
“It would be better if LCF had had no FCA authorization, as fewer people would have bought the bonds.”
In recent weeks, it has been announced that the FSCS is looking at the issue of whether compensation is payable to the investors and the Treasury has said Dame Elizabeth Gloster will lead an independent investigation into the LCF case. Her findings will also include an assessment of how the FCA acted.
This is yet another financial scandal to hit the industry and certainly given the information available to date, those responsible for the failures at LCF must face justice. At the same time, the FCA will ask some questions of its regulatory process and compliance professionals should keep a look out for potential future changes in tightening regulation.