The FCA has censured London Capital & Finance (“LCF”) for its unfair and misleading financial promotions of mini-bonds.
The FCA has said that it does not consider it appropriate to impose a financial penalty on the firm as it is insolvent and in Administration. “To do so would only divert funds that the Administrators may use for the benefit of bondholder creditors.”
A mini-bond is a type of investment that typically offers high returns. This reflects the much higher risks involved in the investment.
While there is no legal definition of a mini-bond, it's essentially an IOU issued by a company (or ‘issuer’) to an investor in exchange for a fixed rate of interest over a set period.
The return on investors’ money depends on the success and proper running of the issuer’s business. So if the business fails, investors may get nothing back.
Financial promotions were used by LCF to market minibonds to retail investors. These promotions presented a misleading picture of the minibonds and made them appear a far more attractive investment than they were. Investors were not told about the true nature of the minibonds, including the presence of hidden charges and the high-risk and unsustainable nature of the lending being carried out by LCF.
The FCA found that LCF used bondholders' money to fund seemingly independent comparison websites to showcase its minibonds next to safer investments, which had a lower rate of return. This had the effect of enticing retail investors into investing in LCF’s high-risk products. LCF also advertised the minibonds as ISA compatible when this was not the case.
Therese Chambers, Joint Executive Director of Enforcement and Market Oversight at the FCA, said:
“We recognise our censure will not provide solace to those investors who lost out. But it is important we set out what went wrong at LCF and how their promotions misled people into parting with their money.”
As a result, the joint Administrators of LCF, from Evelyn Partners (who were known as Smith & Williamson LLP when they were appointed in January 2019), have modified their estimated returns to secured creditors down from c.25p in the £ to 10-18p in the £, due to the valuation of some of the assets and the future realisation costs.
LCF and those responsible for running it may have been involved in knowingly defrauding bondholders, a case which according to the FCA, is being carefully considered by the Serious Fraud Office.