Regulator was warned about London Capital & Finance but acted too late. Now it must clean up the mess
I have said this before and I will say it again: West Riding Personal Financial Solutions’ Neil Liversidge is an adviser I respect hugely. Salty and down to earth, a committed trade body activist and a staunch defender of his clients’ interests, he is a fine example of what an adviser should be. Last week, both the Guardian and Financial Times provided another reason why he is so good.
Almost single-handedly, Liversidge smelled something fishy about London Capital & Finance, the self-styled bond firm which has just collapsed with some £230m of investors’ money. The firm is now the subject of a police probe.
Liversidge wrote to the FCA in November 2015 about his suspicions and to warn the regulator that “I would not class this as a suitable investment for the unsophisticated retail market”.
It then took the regulator three whole years to act on his warning, only freezing LCF’s accounts late last year, by which time it was too late.
I will come back to the FCA’s role in a minute. First, it is worth noting just how far advisers have come in the past decade when it comes to representing their clients’ interests.
About five or six years ago, I accepted an invitation from an adviser working in a town near to where I live to go out for a drink.
If I’m honest, I put the poor man off for many months, and only accepted when he told me he had a story to tell me about Arch Cru and advisers in his town.
Many readers of Money Marketing will have bitter memories of Arch Cru. As do some 20,000 investors, who were mis-advised to place up to £400m into supposedly cautiously managed funds, but the money went instead into all sorts of weird and wonderful investments, including wine, Greek shipping and forestry projects.
Last month marked the 10th anniversary since the suspension of the funds and many investors will be forever out of pocket, with some calculations I have read indicating the final payout averages 60 per cent of total sums invested.
Of course, some who invested less and received compensation through the Financial Services Compensation Scheme will have done better.
For advisers themselves, the Arch Cru scandal was also a blow. Some fell for the “low-risk” patter of those marketing the funds or were reassured by the fact that supposedly reputable firms like Capita were on board.
Others are still angry about having to stump up compensation to investors through the FSCS when they always believed investing in Arch Cru was likely to end in tears.
For some advisers, Arch Cru also brought an end to decade-long relationships with colleagues in their areas, as dividing lines opened up between those who had advised clients to invest in those funds and those that did not.
This is what happened to the chap I met for a drink. He told me that, in his town, which at that time had eight to 10 small- or mid-sized firms operating in the area, about three were known to have recommended some clients to invest in Arch Cru. The rest, for various reasons, did not. He was among the latter.
He told me that, in the summer of 2008, he began to have serious doubts about Arch Cru and not only told his clients to avoid its funds, but also spoke out against it in some of the formal and informal gatherings of advisers in his area.
Which is where it gets messy. He claimed that, as a result of doing so, he was ostracised by his colleagues – including some, like him, who thought recommending Arch Cru funds to clients was madness but felt you needed to show respect to your peers because you did not know the specific reasoning behind their advice to investors.
My adviser, it has to be said, never took his concerns to the FSA at the time.
And it is hard to tell if he was giving me the full picture. Someone at another firm whom he named told me the tale was “crap” and my drinking pal was a bit of a Walter Mitty. I never ran with the story.
Even so, I somehow suspect that, if Arch Cru were to happen today, a lot more advisers would be dobbing the firm in to the regulator for its suspicious activities, as Liversidge did with LCF.
Which brings me back to the FCA. There is nothing about its inactivity in this specific case that is unusual.
Many of us know from bitter experience that the regulator is incapable of acting quickly enough to prevent obvious cases of misselling.
What is unusual about this case is that there is clear documentary evidence in the shape of Liversidge’s letter that it sat on its hands for years and did nothing as thousands of investors lost their money.
Which is why not one penny of any FSCS compensation paid to clients who lost money should be levied on financial advisers.
The levy should be paid for indefinitely out of the wages of all FCA employees, starting with its senior executives’ salaries and bonuses, who bear any responsibility for this debacle.
This is a scandal of the FCA’s making – and it should pay to sort out the mess.
Nic Cicutti can be contacted at firstname.lastname@example.org