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FSCS deems LC&F liable for advice given by marketing firm

The Financial Services Compensation Scheme has deemed that “mini-bond” provider London Capital & Finance has liability for the advice given to investors by the unregulated marketing firm it used.

Online marketing company Surge acted on behalf of LC&F to target investors and made millions of pounds in the process.

An FSCS investigation found a “number of cases” where Surge “gave advice” to investors. By 8 July some 4,390 LC&F investors filled in a questionnaire asking them to describe “information or advice” they were given.

The FSCS concluded that the marketing firm went beyond providing information to investors and “made comments and value judgements” that involved a significant element of evaluation and/or persuasion.

Marketing firm behind London Capital & Finance connected to another mini-bond provider

The lifeboat noted: “Although the definition of advising has been narrowed for Part 4A permission purposes from 3 January 2018, the scope of FSCS protection was not affected and we are still able to protect advice without a personal recommendation.”

The FSCS has said today that while Surge was not authorised, LC&F has liability for the “advising” carried out by Surge because the marketing firm was acting on behalf of LC&F and was under its control.

The statement from the FSCS says: “Surge was not an appointed representative, but we are satisfied that LC&F is liable for Surge in this regard, as Surge was its agent acting with actual or ostensible authority and LC&F is vicariously liable for Surge’s actions.”

Insurance giant to sue LC&F marketing boss over separate alleged fraud

Surge had some 40 staff who worked exclusively for LC&F They would present themselves as LC&F when in email, telephone and personal contact with investors, who believed they were dealing with LCF representatives.

The lifeboat fund noted since LC&F has not yet been declared in default and it is not yet accepting applications for compensation.

Claims in relation toadvising” will fall to the investment intermediation levy class Class 2.

The FSCS said it is in the process of designing the claims process in this regard. This may entail obtaining access to further investor communications from LC&F ’s administrators. The lifeboat fund said it is not currently possible to estimate the number or value of potential advising claims.

Mini-bond investors did receive advice, FSCS confirms

The FSCS said: “Only advising that happened after LC&F became fully authorised on 7 June 2016 can be protected.  We understand that approximately 95 per cent of current bondholders invested after this date.

“Further, in order to pay compensation, FSCS will have to be satisfied that a particular claimant received advice, relied on this when investing, and suffered financial loss as a result.”

It added: “Ongoing investigations could provide evidence that LC&F has liability in connection with other regulated activities.”


Don Scott: Six senior managers regime myths busted  

Effort is required but compliance will not be too big a jump if the right processes are in place. With most regulation, a certain amount of interpretation of the rules is required, particularly in the absence of prescriptive guidance. This means firms can often go overboard, or not far enough. Nowhere is this more apparent […]


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There are 20 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 12th July 2019 at 1:37 pm

    The burning question for the rest of us is how much of whatever compensation is deemed payable to investors is billed to the authorised intermediary community.

  2. Legally, the FSCS can’t pay out unless advice was given. So, based on the above article, the new definition of advice appears to be:

    “…comments and value judgements that involve[d] a significant element of evaluation and/or persuasion.”

    I presume the FSCS have taken legal advice on this so it would be helpful for those footing the bill to see it so that they all know where they stand going forward. Transparency is paramount here to preserve credibility.

    This is clearly a decision that could be subject to judicial review. If the definition of advice used to justify payments isn’t valid then the FSCS would be exceeding it’s authority.

  3. So in other words, advisers pay?

    The stitch up continues. This FSCS decision must be challenged.

    Based on this (seemingly new) definition, the FCA now permit unregulated (and presumably unqualified) individuals to give “advice without a personal recommendation” on behalf of a regulated firm. How, precisely, does this marry with the FCA’s three operational objectives to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers? Quite simply, it does the reverse.

    • Julian Stevens 12th July 2019 at 3:22 pm

      As we all know, those claims on the FCA’s website are just empty aspirational hogwash.

      As for challenging the FSCS, why not get PIMFA on the case? With all its clout and firepower, I’m sure it’ll achieve a just outcome for all concerned.

  4. Perhaps we should all create our own levy, itemised separately on our invoices for our clients. This will, no doubt focus minds and may encourage people to write to their MPs to protest against money being taken from their pockets to subsidise others.

  5. Did I expect a positive outcome? …..a forlorn hope I fear !
    It’s been apparent for sometime now, people cannot and will not be held accountable for their own actions, and the law favouring the perpetrators rather than the victims
    This is evident throughout our society not just our little world …
    So where does this leave us all …up some kind of creek and void of a paddle.

    The UK as we now know it..
    as an individual, you shall not bare any responsibility for your own actions, nor bare any risk if things go wrong.
    As an individual, if you are engaged in a illegal practice, you will have the full weight of the law behind you, to protect any ill gotten gains you may have obtained.

    In a free society, we the government and subsequent regulators, have the freedom and unaccountability to (financially or otherwise) collectively punish the masses, who effectively had nothing to do with it or indeed could have (by any means) prevented it.

  6. This underlines how careful regulated firms need to be when outsourcing and using introducers. Also, I believe there is an Advisory Firm lobby group out there who are trying to raise funds to challenge things. This group is trying to help with PI Insurance issues too.

  7. Stick up again, agree Tim, we should in the interest of transparency start itemising our bills, cost of PI, FCS, FSCS, interim levies, I calculate that is approximately 25-30% of our turnover.

    These investors purchased directly, did not pay for advice, so whilst upsetting, they should not get a penny from the FSCS. We should not have to foot the bill, they were not authorised. This has become a joke, any excuse, why not just admit the FSCS will pay out to everyone and there everyone should have to foot the bill not just regulated businesses.

  8. Note from the real world.

    Interesting to see that none of the commentators here have expressed a word of sympathy for the human beings ( aka ‘clients’ ) who were ripped off by the con artists involved.

    • Andrew Gillott 12th July 2019 at 4:25 pm

      We all knew what the outcome of this would be as Andrew Baileys reputation is on the line and he really wants the Bank of England job.
      The definition of advice is a personal recommendation as defined by the FCA.
      Have you seen the FSCS questionnaire, talk about giving all the potential claimants everything they need to do and say to make a claim and look like they were given advice.
      This is morally wrong and we must this time challenge the establishment.
      This cannot go on, we pay the compensation without any influence on what is going on.
      So much for the advice gap, my costs just keep going up.
      The FCA must take responsibility for not acting in time (several years).
      Really not amused with this!

    • Andrew Gillott 12th July 2019 at 4:27 pm

      And their greed!
      Come on, you cannot get those rates without risk, everyone knows it!
      Where are you getting your cut from?

      • Julian Stevens 12th July 2019 at 6:21 pm

        Actually, if such a scheme is properly run, you can. It’s been done elsewhere ~ high interest loans to small businesses secured at 75% LTV against a commercial property. Should the borrower default, the lender is legally entitled to take ownership of the property and sell it with a 25% safety margin.

        • Where was the property or any form of collateral in this instance? In fact, how many small businesses (not the directors, but the limited companies) have any significant assets? The high interest rates are directly proportional to the level of risk. This is EIC or VCT territory, not at all suitable for inexperienced investors.

    • I have sympathy for the members of the public involved, primarily because this has occurred as a result of clear regulatory failure. However, two wrongs don’t make a right.

      I also doubt that the members of the public caught up in this will care one jot who foots the bill for this debacle. Just so long as they get their money back.

    • Interesting that you have not expressed a word of sympathy for the advisers (fellow human beings) who are being ripped off by a failed regulatory regime to compensate the consumers for whom we do indeed have a lot of sympathy

  9. What sanctions will be applied to LCF directors both for running a Ponzi scheme and giving unauthorised and unqualified financial advice?

  10. So they are saying the problem was non regulated firms advising and that obstebisble authority as agent then means that the FCA registered firm becomes responsible for the advice they were not authorised to give and yet that is not what lost the money, it is once again a flawed product and a firm authorised to hold client money so they are leaving the wrong section for the failure. The advice is only wrong due to the product failure

    • The advice (which was not advice it was a “sales puff” in-law I think) was not the cause of loss it was the potentialally fraudulent/ponzi PRODUCT so wrong levy section

  11. In clarifying the difference between “guidance” and “advice” the FCA were absolutely and unambiguously clear – advice involves a personal recommendation and not a steer. Of course they had to, because otherwise the Citizen’s Advice Bureaux would (as they now are) be in the firing line for litigation. If I ran a CMC, I’d be after the CABs like a shot.

    So, if advice excluded sales patter and information, no matter how tangentially influential it was in the punter’s own decision, how could LC&F be responsible for something they didn’t know existed? The FSCS have already conceded that Surge didn’t give personal recommendations. LC&F can only be responsible if they had a supply or agency agreement which said they would take the rap for Surge, and I doubt such an agreement exists. Even if there was one, I doubt LC&F would have ever considered what Surge were doing as “giving a personal recommendation” and so it is highly improbable that they would even have thought to tackle the liability.

    I’d say that this is one of the most contrived efforts to pay claims and one which reduces the FCA’s reputation to rubble. How can anyone now have any confidence in a word it says any longer? Moreover, they have now created yet more cover for fraudsters, who as we read last week are already costing £160bn (or 8% of the entire economy) a year.

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