Mini-bond Mayhem: London Capital & Finance in Trouble

What’s going on here?

In December 2018, the Financial Conduct Authority (FCA) launched an investigation into the activities of the company, London Capital & Finance. In January 2019, London Capital & Finance entered administration. 

What does this mean?

London Capital & Finance offered investors fixed-rate ISAs with a lucrative 8% return over a three-year period. Its marketing appealed to elderly savers who sought high returns on their pension savings, offering “higher returns than the high street”.

Customers’ investments were used to issue mini-bonds to corporate borrowers in order to provide capital for further investment in small and medium sized businesses. Investors received pay-outs from the high levels of interest that London Capital & Finance charged its borrowers.

High returns indicated a high-risk investment. If the small and medium sized businesses were to fail, there was a risk that they would not be able to repay their loan, and investors would not get any return. It is the lack of awareness about the risks involved with this bond that provided the emphasis for the FCA’s investigation.

What’s the big picture effect?

Regulation by the FCA is necessary for firms that perform any of the regulated activities within the legislation (Regulated Activities Order 2001). Yet issuance of mini-bonds is not deemed a regulated activity. As it fell outside the rules, London Capital & Finance did not need to be authorised to issue mini-bonds.

However, London Capital & Finance did require FCA authorisation in respect of their marketing and promotion of mini-bonds. The regulator’s investigation found a number of concerning practices, notably that:

  1. Authorised and regulated by the Financial Conduct Authority was clearly displayed on the company’s website. This was deemed to be misleading, given that the bonds were not regulated by the FCA and this was not clearly displayed to potential investors.

  2. London Capital & Finance promised “higher returns than the high street” but compared two very different types of investments with different levels of risk. Bond-holders should have been made aware that their capital was at risk, and that this was not a like-for-like comparison that could be made.

At the start of the investigation, the FCA imposed restraints on London Capital & Finance’s operations, preventing the company from using its assets without prior consent from the FCA. When the FCA concluded that the marketing of the mini-bonds was misleading, unfair and unclear, London Capital & Finance was deemed insolvent and entered administration proceedings in January 2019.

As a non-regulated activity, mini-bonds are not protected under the Financial Services Compensation Scheme. Now approximately 11,000 investors with investments totalling approximately £236 million may be left without any of the expected returns and no recourse to their initial investment.

This highlights the lack of protection for investors who are drawn in by high rates of return and may not always understand the inherent risks involved. Unfortunately, the demise of London Capital & Finance (and the problems that its bond-holders face) are not unique. Similar mini-bond schemes in the last few years also failed, notably Providence Bonds who went into administration in 2015 and reported investor losses of 100%.

With this in mind, perhaps the FCA will reconsider the need for mini-bond regulation to offer better protection for future investors. Although the marketing of mini-bonds must not be misleading, unfair or unclear, this alone does not prevent investors suffering detriment. In this instance, by the time the regulators investigated the mis-marketing of the mini-bonds, it was too late to offer any substantial protection to investors. They now risk losing their whole investment, especially in light of London Capital & Finance’s administration.

Report written by Rebecca B.

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