View more on these topics

Do the rules on investment marketing need a rewrite?

The demise of London Capital & Finance has raised fears over FCA-regulated firms offering unregulated products

The way in which unregulated investments are promoted was thrust into the spotlight again earlier this year after the FCA told mini-bond provider London Capital & Finance to take down its marketing over claims it was misleading.

This led to the firm’s default, leaving 11,500 investors with combined losses of more than £237m.

Experts are warning this could be just the tip of the iceberg, so do the  rules regarding investment promotion need an overhaul?

Loophole in the rules
An LCF investor who spoke to Money Marketing was confused about how she could be left without any entitlement to compensation when the company she invested in was regulated by the FCA, and appeared reputable and safe because of this.

The high-profile case not only exposed the FCA’s oversight of LCF, but also shone a light on a “loophole” in the Regulated Activities Order, which lets a regulated business conduct unregulated activities, such as selling mini-bonds, while
describing the firm as a whole as “FCA-approved”. Mini-bonds – loans issued by companies to raise funds – are a high-risk investment and are not regulated.

But the promotion of investments has to be in line with the FCA’s rules, and therefore be “clear, fair and transparent”. The LCF mini-bond promotions did not fit the bill. They falsely referred to high-risk mini-bonds as fixed-rate Isas.

The FCA had another issue with the LCF marketing. In a second warning to the firm, it said LCF gave “undue prominence” to the fact that it was regulated by the watchdog, compared with disclosures that the mini-bonds themselves were not regulated or protected by the Financial Services Compensation Scheme.

LCF is not the only firm to have done this, according to website

FCA chief executive Andrew Bailey has expressed “great concern” that some FCA-authorised firms use that status to claim credibility for unregulated activities, noting that “people are being misled by this”.

Probing the past
In light of the FCA’s activity, the watchdog is about to be investigated itself over how it handles promotions. The FCA board said it would commission an inquiry into how it dealt with LCF after it faced pressure to do so from MPs.

When Treasury select committee chair Nicky Morgan first called for the investigation, she asked for it to look into whether the FCA acted swiftly enough in its supervisory action against LCF.

While issuing mini-bonds is not regulated, LCF’s business was, and a closer inspection revealed that it lent money to a handful of firms, some of which had links to LCF.

Morgan suggested the FCA examine if retail investors understood the extent to which companies are regulated and the nature of mini-bonds in general.

Calls for compensation
Bond expert Mark Taber, who campaigned for bondholders in the Co-operative Bank crash, has called for the investigation to include a “customer-facing individual”. He was also concerned in the case of Co-op Bank that the FCA would not start its enforcement for four years.

According to the latest estimates from administrators Smith & Williamson, only 20 per cent of lost investments in LCF can be recovered.

The FSCS issued a note on March 6, saying that LCF investors would not be eligible to claim, as it understands transactions were made on a non-advised basis, which is an unregulated activity.

According to the administrators’ report, LCF representatives were trained not to provide advice.

A Smith & Williamson spokesman confirms the FSCS will be listening to calls, however, where advice may have been given.

Two action groups have been formed. The LCF Bondholders Group on Facebook, which is strictly for LCF bondholders, has 1,585 members. LCF – Action Group has 1,025 members and according to its description, is run by an administrator “involved in consumer rights protection, and there is a specialist lawyer in financial services giving advice about this and other similar situations”.

The group is currently coming up with possible ways to claim compensation.

Taber has called for a recovery fund for the victims out of the FCA’s pocket, if it can be proved that the regulator has failed.

Expert view

Investors pay high price for misplaced trust

It was not the lack of FSCS protection that tripped most LCF investors up. LCF’s website was very clear that the FSCS did not apply. Investors were told by LCF that it didn’t matter there was no FSCS protection, because it lent money to hundreds of small- and medium-sized enterprises, and these loans were asset-backed, which lowered the risk. We now know, of course, that none of this was true.

That in itself just makes LCF your standard failed unregulated investment.

What makes LCF special is that it had been regulated by the FCA since 2016, and this gave investors a false sense of security and allowed the firm to take in more than £230m from over 10,000 investors.

The modern financial system can only function if the ordinary retail investor is generally willing to take on trust what FCA-regulated businesses say. Otherwise, most people would keep their money in jam jars and gold bars rather than banks, funds and insurance companies.

LCF took in £230m because investors assumed that they could trust what the company said as it was regulated by the FCA.

The FCA did nothing to tell them otherwise until December 2018, despite being warned about LCF’s activities from 2015 onwards.

“Brev” is the administrator of website

Has the FCA learned lessons?
The high-profile LCF case prompted a backlash against the regulator. But has it learned from past mistakes?

When the FCA ordered LCF to withdraw its promotions at the beginning of January, it  published a Dear CEO letter on its website, in which it warned mini-bond providers to comply with marketing regulations.

Last week, the FCA published another Dear CEO letter, stressing the seriousness of the situation, sending the letter directly to 23 mini-bond providers.

But with the line between regulated and unregulated activities blurred, can UK retail investors be sure their money is safe?

Money Marketing understands that last month, an IFA notified the FCA about a website called, which advertised mini-bonds, after he had found inconsistencies in its register number.

The website claimed it had FCA-authorised credentials, but also had disclosures that mini-bonds were not regulated or FSCS-protected.

One of the mini-bonds that Asset Backed Investment advertised on its website was issued for a company called New Coal Solutions.

New Coal Solutions’ website says: “Our licensed technology converts the toxic waste from coal production into high-performing artificial lump coal, while also upgrading it by removing non-carbon particles and producing a usable high-value product.” New Coal Solutions incorporated in 2017. Its annual report was due on 8 February, but it was late on its accounts by two months at the time of writing.

The missing reports were the first ones due from the company, meaning a potential mini-bond investor would struggle to assess the firm’s financial health or operation.

On Monday, the Asset Backed Investment website was taken down. 

The FCA declined to comment on whether Asset Backed Investment was one of the 23 companies sent its Dear CEO letter, saying it does not comment on individual cases.

The administrator of the website, who goes by the nickname of “Brev”, says: “It is possible the FCA had nothing to do with it, unless the FCA confirms otherwise. They may just have gone to ground.

“There have been dozens of these websites since the mini-bond gold rush kicked off.

“The fact that one has disappeared is nothing to celebrate, like the death of one head of the Hydra.”

Adviser view

Darren Cooke
Director, Red Circle Financial Planning

I first came across LCF in late 2018. I’m always very wary of such promotions offering high rates, but this one in particular because the risk warnings were buried and it highlighted that it was FCA-registered to give an added impression of security in its promotions.

It was that promotion that I, and others, reported it for at that time, and it was that, I understand, the FCA first investigated it for.

What it was doing was, on the face of it, not illegal. There is nothing wrong with selling mini-bonds if it is done correctly and the money raised is used correctly.

The problem here is it was not promoting them correctly and once the FCA looked into it, it found that the money was not being used correctly either.

I suspect other Isas using mini-bonds are doing the same but, as yet, have not been caught out.

I have notified the FCA of other businesses but, again, as it stands, we can only report when they breach promotions regulation, not any suspicions on how they are using the funds raised. Mini-bonds are unregulated so the FCA isn’t responsible or, indeed, interested in that.

As for compensation, there is no claim on the FSCS and that is entirely correct.

Why should anyone pick up the pieces if somebody invests in something like this?

That really would make it risk-free and then people could just invest in anything they saw advertised, safe in the knowledge that if it did all go wrong they would get their money back anyway.

I think we need LCF, and possibly a few more like it, to happen for the public to start to think a bit more before they shove their life savings into any old rubbish they see advertised online on Facebook or other social media sites.

If we pay compensation, it has to come from somewhere, either FSCS funded as now, or the government, hence taxpayers.

If the victims all receive full payouts, there is, I think, less incentive to pursue the crooks and thieves who have scammed and stolen the money, recover as much as possible, and then lock them up.


Sam Sloma

Sam Sloma: Helping clients to ‘live richly’

I have been thinking about financial freedom recently. It’s a term that’s used a lot in the profession I’m in. People look at it as something to accomplish or to aim for; achieving financial freedom is seen as the Holy Grail for clients of financial planners. I get the sentiment. I understand that helping people […]


Auditors at collapsed mini-bond firm questioned as compensation looms

Accountants and lawyers are among at least 30 people asked to hand over information about collapsed mini-bond provider London Capital & Finance, according to The Times. Before its collapse at the end of January, £237m had been invested in LCF by some 11,500 private investors. The firm had previously raised flags with the FCA for […]


Editor’s note: Advisers need to report the rogues in their midst

Each time an advice market scandal emerges, a flood of commentary inevitably follows bemoaning the fact it was not spotted sooner. Why did the regulator fail to act until after the horse had bolted? At the Money Marketing Interactive conference earlier this month, the FCA’s co-director of financial advice and life insurance supervision Debbie Gupta […]


Garry Heath: My FOS and FCA road trip

The health monitor on my mobile is currently in raptures. It seems I am hitting my steps target every day, but this is not due to a sudden desire to be fit. It is the fall out of Financial Ombudsman Service’s barking idea to increase its maximum pay out to £350,000 and the resulting problems […]


News and expert analysis straight to your inbox

Sign up


There are 7 comments at the moment, we would love to hear your opinion too.

  1. Whilst Darren makes a controversial point “I think we need LCF, and possibly a few more like it, to happen for the public to start to think a bit more before they shove their life savings into any old rubbish” I do think that outcomes like this should focus every ones minds and whilst I wouldn’t wish financial hardship on anyone, we’re in a situation where there seems to be a lot of investments being punted on Social Media offering high (relative) growth with no apparent risk.

    I’ve also been in ‘networking meetings’ where non-regulated individuals are promoting high risk, unregulated investments to the general public – whether that be UCIS or property ‘deals’. This is dangerous territory – specifically for those of us propping up the FSCS.

    This issue is, where does the line get drawn and on what side does compensation sit? As Darren also, rightly, points out, risk takers can’t face a ‘win win’ scenario whereby they face impunity if they make ‘bad’ decisions whereby they get bailed out in any case.

    I’ve said it multiple times – standardise disclosure so that any investment has to disclose regulation / FSCS / advice nature.

    Is advice being given Y/N (and if so, IFA, restricted)
    Is the investment regulated Y/N
    Is the investment covered by FSCS Y/N

    A brief explanation of what each means and then, if the answers are N,N,N … investors are well aware that they are on their own if (when) it all goes wrong.

    • Barton Clewes didn’t make the public think. Nor did Privilege Wealth, Secured Energy Bonds and Providence Bonds. Nor did dozens of other, more obscure collapsed schemes. And LCF won’t either. In 5-10 years time no-one will remember what London Capital & Finance even was, other than LCF investors. Unsophisticated investors susceptible to the next generation of scams certainly won’t remember.

      These schemes generally have a three year lifecycle on average which means by the time their failure becomes public knowledge it is far too late for anyone to learn their lesson.

      Your disclosure rules wouldn’t have stopped anyone investing in LCF. The answer to the first one is “N” but that doesn’t matter as LCF used pull marketing. People think that no advice is a good thing because they won’t pay fees or commission, an attitude the FCA actively encourages with its obsession over whether people who invest in mainstream regulated investments are paying 0.1% too much. As does the mainstream media who publish articles headlined “Is your financial adviser ripping you off” above adverts for unregulated bonds.

      The answer to the third is also “N” but that also doesn’t matter as LCF clearly disclosed that it wasn’t FSCS-covered. And the answer to the second one was “Y”.

    • Paul, I won’t directly identify the culprit here, but I will tell you that one of the more famous funds that seemed to have a NAV that would relentlessly rise and rise was simultaneously publishing (albeit many months in arrears) sets of accounts that showed that the assets were becoming grossly overvalued. Each year the margin would get worse between the director’s valuations and the expert employed by the auditor. By the time the last set of accounts came out, the gulf was 66%, and then, of course the whole thing collapsed and investors received nothing. Judging by the accounts, funds run by the manager involved all go through this same process.

      Now, you’d have thought that that ought to be enough evidence for people and their advisers to avoid putting money in. The true horror wasn’t hidden, it was in full view, for at least a decade and, yet, they still just tipped their money in. Why? Because they are lazy; because they are actually too incompetent to actually have money; because they don’t know what a set of accounts is telling you; and most of all because they have bought the impossible dream.

      So, faced with that little catalogue of consumer resistence, what can the FCA really do? And moreover, why should they do it. Yes, they should tighten up the marketing rules, and yes the whole regulatory badgery regime should be overhauled or at least codified more simply (see the MFSA for ideas as they new approach is great), but honestly, as long as I have got two eyes and one nose, there will be any number of pillocks chucking their money down the drain. LCF told their clients that they were not protected by teh FSCS and they all were prepared to take the risk – until it was too late, of course.

      As one final matter, I think that having some litigation protected status for licenced authorised private consumer product reviewers should be something legislators think about. I’m a bit fan of Brev’s site, but he/she is necessarily mealy mouthed in many cases and I have been dying to post some reveals at the foot of his/her reviews, but the crims are well tooled with lots of OPM and can be very litigious – indeed aggressive litigation is very often a sign that something is wrong – and in so posting, that would probably have resulted in Brev’s site getting a takedown which is in no-one’s interest.

  2. “If the victims all receive full payouts, there is, I think, less incentive to pursue the crooks and thieves who have scammed and stolen the money, recover as much as possible, and then lock them up.”

    Actually there is more incentive. When the FSCS pays out they take the creditors’ place in the queue. As a government body, the FSCS should be in a much better place than individual investors to ensure recoveries are pursued to the maximum possible extent, including against any individuals who are in possession of investors’ lost funds.

    Realistically, individual investors owed a few tens of thousands are not in a position to provide meaningful oversight of the administrators. The FSCS is.

    At the moment LCF is in the hands of administrators who were appointed by the same individuals into whose accounts multi-million sums were paid as part of LCF dealings. All of this is public record as per the administrator’s report. They may have statutory duties, but how much incentive do you really credit them with?

  3. I think there is also a strong case for ensuring that individuals get appropriate punishment. If those arrested in the LCF debacle get saddled with really effective restitution orders, and sensible sentences then others are less likely to think ‘that looks easy’.

    Currently there appears to have been about £60m of commissions paid – if they stay hidden then it would be worth a few years in clink for some people.

    There need to be sufficient powers in place for all the monies misappropriated to be reclaimed.

    Current expected recoveries from LCF are very low – track the money, chase the money, get it back, ensure that crime doesn’t pay. Otherwise this will keep happening – and criminals will continue to break the rules about telling people whether a product is regulated in order to separate them from their hard earned savings.

  4. @Sascha Klauss

    You make a very good point. However as someone funding the FSCS why should I volunteer to plug the gap when recoveries are less than 100%.

    I agree a statutory body should be involved – I just disagree it should be one funded by me and my fellow advisers.

    Given the prevalence of financial fraud there perhaps ought to be a ‘white collar crime’ division of the Police Service dedicated to getting involved in such cases to assist recoveries as well as gather evidence for prosecution. The SFO has not covered itself in glory over the years, but that is the obvious body to be undertaking such tasks. It would not require a huge expansion of their powers to be able to pressure the administrators.

    • Like you I hear what Sascha is saying and I value his input, but agree with you, a statutory body to pursue is good, but not to collect from the innocent to give to the deceived and let’s be clear, in this case they were NOT doing what they said they were with the money which is plain fraud.
      These white collar criminals need to be pursued and an example made so that it is only the mad white collar workers who do it and consequences be damned, which will hopefully be fewer than those who currently know they can get away with it as even when caught it’s more like a slap on the wrist compared to what a blue collar thief gets.

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm