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Paul Lewis: Ministers should not pass the buck on LCF mini-bonds

Paul-Lewis-greyThe government should take responsibility after helping the firm create an air of official approval

When I lived in Kent, there was a ritual every spring called “beating the bounds”. The local vicar and some councillors would walk around the border of the parish to mark its extent. Some people would carry sticks and symbolically strike a hedge or a tree in a ritual that dated back to before the Norman Conquest. Beyond the parish boundary, there were dragons, and dreadful things might befall anyone who strayed over it.

Today, it is called the “perimeter” and the FCA has been asked to get out its sticks and check exactly where it lies. This year, it has left 11,625 people outside and the dragons have breathed fire over £237m of their money. For those inside, the parish alms box would make up at least some of their losses. Yet anyone outside is left unprotected, apart from a share of a few singed notes blown into the boundary hedges.

On May Day, the FCA issued a paper which opens the door for it to consider this perimeter. It is to begin the process of assessing “whether advice and guidance services meet current consumer needs and will do so in the future”. I prefer to call this paper “what customers of financial services want”. The answer is perimeter clarity.

Readers will be familiar with the egregious case of the dragon called London Capital & Finance, which took £237m off 11,625 investors and went into administration in January.

FSCS launches registration process for London Capital & Finance investors

The administrator says they might get back 25 per cent of the money.

LCF sold investments which it called mini-bonds, saying the money would be lent to small businesses and their repayments would fund the promised returns to investors of up to 8 per cent. Some did indeed get their quarterly payments and were no doubt behind the 98 per cent Feefo satisfaction that LCF reported.

Unlike most peer-to-peer lenders, investors had no relationship with the firms LCF passed their money on to. So it would have been a collective investment, except that mini-bonds are excluded from that category.

However, a partner in the London office of US law firm Shearman & Sterling – who has an interest in the matter – has written a 10-page letter, explaining the products were never bonds at all because LCF had no intention of investing most of the money. A quarter of it – £58m – was paid to a PR firm, Surge, and Shearman says most of the rest was “dissipated” into items producing negligible returns, such as a helicopter and horses. LCF broke its contract so these products were not bonds and became regulated collective investments.

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To solve this problem in the future, regulated firms should not be allowed to sell unregulated products, or the perimeter should be flexed so any product sold by a regulated firm is regulated.

Being regulated would bring these products into the scope of the Financial Services Compensation Scheme and allow redress for victims up to £85,000. However, it would not help the victims who invested in LCF. The solution to that lies elsewhere.

One reason people trusted their money to LCF was the claim, in big type at the top of webpages, that it was regulated by the FCA.

Investors were not told that this only covered financial promotion and advice, and naturally thought it gave them protection when the LCF call centre advised them – whether or not in a regulated sense – of how marvellous these mini-bonds were.

LCF continued taking money until the FCA stopped it on 19 December.  That was more than three years after the FCA had been warned by IFA Neil Liversidge, and subsequently by others, that LCF’s figures did not add up. On 1 April, the FCA announced the government had ordered it to investigate its own behaviour.

The regulator was not alone in giving investors confidence in LCF. The firm got approval as an Isa manager from HM Revenue & Customs on 1 November 2017 and subsequently sold the mini-bonds as tax-free Isas. It was not until seven weeks after LCF went into administration that HMRC announced the mini-bonds were not suitable for an Isa. It added, unbelievably, that it would be going after investors for the tax due on any payments already received.

Guided by the twin lights of FCA regulation and HMRC approval, thousands of investors entrusted LCF with their money.

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Three days after it received the letter from Shearman, the FSCS announced it was reconsidering whether it could compensate investors. If it does, who will pay?

Normally, it would be the good and honest financial advisers – including 4,500 independent advice firms – who are levied to pay for the misdemeanours of others.

Their levy from the FSCS is already high and if it does approve compensation, they could be levied again to cover the balance of the £237m. That would be wrong. Given the regulator and HMRC’s part in making these mini-bonds seem officially approved, the government itself – but not taxpayers in general – should fund the compensation.

Eight years ago, the Treasury started snaffling FSA/FCA fines for its own. Total fines since then exceed £3.5bn. In the first four months of this year, fines totalled £273m. The FCA deducts the cost of enforcement and collection before passing the money on, but there is plenty in the Treasury coffers from fines on the bad guys to pay compensation to investors who trusted LCF. If anyone should be levied to pay the cost, it is not the good, honest IFAs (OK, or restricted sales advisers) but the government and its agencies, which helped LCF create an air of official approval when it sold these products.

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s Money Box programme. You can follow him on Twitter @paullewismoney

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. This mess adds more weight for the call for a product levy to fund the FSCS. Consumers could easily be made aware that only products that pay the levy are covered for compensation. They pay a small amount and they get cover. They pay a small levy on their advice fees and their advice is covered too (that wouldn’t need to be much – how many pure advice scandals have there been?).

    Obviously, FSCS would only take levy payments from regulated funds from regulated providers.

    Consumers like those misled by the regulatory status of LCF or anyone investing in unregulated junk, would know it to be high risk and that no FSCS would come to rescue them. They might just think twice.

    Honest advice firms and their customers would cease to be paying to fund the dishonest and reckless. The current system fails everyone – I do not understand why the FCA won’t replace it.

    • The most likely reason that the FCA won’t replace it is because they continue to get the system paid for, without any real fuss or headlines, by an industry which is effectively held captive and enforced to pay fees or deregister. Fairness and suitability doesn’t come into it.

  2. Hazel O'byrne 28th May 2019 at 5:21 pm

    What nobody seems to take on board is that nowhere in its promotion of these bonds were they described as ‘mini-bonds’ the majority of the investors of LCF had not heard this term until after the company failed and then the FCA referred to them as mini bonds. I am one of the investors in an ISA which states that is held in ‘secured bonds’ and that was how the investment was referred to throughout. The M.P’s FCA and any others should take note of this fact – as had the words mini bonds been used i for one, and i know the majority of the other bond holders would never have invested. we understood we were inesting in at least 200 small companies not companies linked to LCF direct

    • With plenty of legitimate minibond issuers out there – the like of John Lewis and Hotel Chocolat, to name but two – it’d be wrong to tar them all with the same brush.

      The problem is, unfortunately, that the average person in the street is incapable of properly assessing risk. While I’m hugely sympathetic to the impact this event has had on investors, the professional half of me struggles not to think of the offer of an 8% return as being a “sucker filter”.

      If it was as easy to make money as LCF and their ilk would have you believe, you’d be able to get 8% from a bank. The fact that you can’t should be a huge red flag.

      The best advice (guidance) I can offer people is to only put money into brands you know and trust. You’ll get a lower return on your investment, but at least you’ll get a return.

  3. Paul. Are you aware of https://assetbackedinvestments.com/ Similar operation to LC&F advertising online and via email? Another accident waiting to happen? Haven’t seen much in the media about this company and the pitfalls for investors but I might just be reading the wrong newspapers.

  4. Philip Castle 28th May 2019 at 7:59 pm

    To ensure Paul Lewis gets credit for saying the right thing here, I thought I better post as insufficient people have commented on this article, probably because we’re pretty much in agreement with his position, i.e. this was a regulatory failure and hence people like Hazel do need an element (not full) repayment from someone. I agree with Paul in that it should NOT be from regulated firms standard fees and as the Treasury started trousering fines originally for good causes (injured veterans), but now is trousering for other reasons, it is this which should cover Hazel.
    Going forward I agree with Tom Scott a product levy on regulated funds and regulated advice, no levy paid, no FSCS protection and that advertised so no consumer can fall through the perimeter fence. The FCA need to then focus more on protecting the perimeter fence, especially when told by someone like Neil that the fence is being vandalized and slacken off on some of the rubbish they ask of regulated firms which adds nothing to the consumer other than increased costs.

  5. Julian Stevens 29th May 2019 at 11:49 am

    Debbie Gupta of the FCA has said she wants more advisers to blow the whistle on dodgy practices. In light of Neil Liversidge’s experience, those of many other people and the FCA’s refusal to draw up and publish a whistle blowers’ charter, does she really expect anyone to bother? Such reports simply disappear into a black hole (along with all the GABRIEL data).

    BTW, have there been any developments on the call by a cross-party committee of 16 MP’s for Andrew Bailey to resign?

  6. Stuart Thompson 29th May 2019 at 12:20 pm

    “the government itself – but not taxpayers in general – should fund the compensation.”
    How does that work exactly?

  7. Christopher Petrie 29th May 2019 at 3:33 pm

    Unfortunately I’m rather cynical about this campaign for compensation for this unregulated investment.

    Mr Lewis wants the government to pay (though not the taxpayer!!!! – sorry but the fines he mentions are already in the same pot as the tax money, it’s all the same),

    I suspect he’s worked out there’s not a snowball in hell’s chance the FSCS could pay out on unregulated products, even if the staff did give “advice”, because that “advice” would be prohibited under the Financial Markets Act. The FSCS would have to pay out every time the bloke down the pub gave a bad share tip, in that scenario.

    But this feels to me like Equitable Life again. Wealthy people in positions of influence have been mugged and lost money, and they don’t like it. So they immediately assume they’ll be compensated by other people.

    But, however hard it might be to say, and not all those ripped off will be rich and powerful, it’s simply not possible to compensate all people who get ripped off.

    There’s a compensation scheme in place. It’s very generous by international standards but it cannot pay out every time a crook smooth-talks some money out of somebody’s pocket.

    The unregulated scheme “guaranteed” 8% a year. Well, everyone knows nothing like that can be guaranteed. It’s a shame for all the investors but the rich and powerful ones behind this push to get everyone else to pay for their own errors will have to just suck it up on this occasion.

    • Sascha Klauss 29th May 2019 at 4:19 pm

      “I suspect he’s worked out there’s not a snowball in hell’s chance the FSCS could pay out on unregulated products, even if the staff did give “advice”, because that “advice” would be prohibited under the Financial Markets Act.”

      Doesn’t matter if LCF is deemed to have given advice – if an authorised company with no permissions for advice gives unauthorised advice, it’s still covered by the FSCS. The FSCS recently confirmed this point. News to me as well until then.

      “The FSCS would have to pay out every time the bloke down the pub gave a bad share tip, in that scenario.”

      Only if the bloke down the pub was representing an FCA-authorised company.

    • Julian Stevens 29th May 2019 at 7:39 pm

      The FSCS doesn’t pay out in respect of products marketed by an unregulated provider. It pays out when advice on such products has been given by a regulated intermediary. The very worrying issue here is that it seems to be contemplating paying out on advice given by certain persons not authorised to do so and who, therefore, have paid no levies.

      Yes, such persons and their employer should be sanctioned for such a breach (though there’s almost certainly no money available to meet any fines), but to expect the regulated community to foot the bill is totally unacceptable. As you rightly say, were such a stance to be remotely valid, the FSCS would have to pay out every time the bloke down the pub gave a bad share tip. Ridiculous.

    • “even if the staff did give “advice”, because that “advice” would be prohibited under the Financial Markets Act.”

      I’d counsel readers to understand the effect of section 20 of the Financial Services & Markets Act 2001 before agreeing with this comment.

  8. Maybe the good thing that comes out of all this, is the press have finally cottoned on to what we have been saying for years.

    Albeit, this article of Paul’s is a rehash of Nic’s the other week.

  9. Did anyone hear Megan Butler interviewed by Paul Lewis on the latest edition of R4’s Money Box? He put it to her that the FCA has been negligent in having failed, as a result of not having its eye on the ball, to avert the numerous instances of poor advice given to members of the BSPS. Would she admit it? Would she hell. All she was prepared to say was that the FCA “is working on the problem on a number of fronts”.

    What about the fact that the losses suffered by some of the victims are substantially in excess of the compensation they can expect to receive from the FSCS? Again, no meaningful response.

    Time (I suspect) precluded Paul from asking her why the FCA also failed to ensure that the firms who’d advised people to invest their CETV’s in wholly unsuitable and now failed unregulated investments had no relevant PII cover, though I imagine she’d have wriggled away from giving a straight answer to that too.

    Draw your own conclusions.

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