Regulator issues advice to retail investors regarding mini-bonds in the wake of London Capital & Finance collapse

As MPs from across the political spectrum back a call for the chief executive of the Financial Conduct Authority, Andrew Bailey, to step down, the regulator has published a consumer notice about mini-bonds amid a growing volume of questions about London Capital & Finance (LCF) and uncertainty as to whether its clients are entitled to compensation.

FCA had already sent a ‘Dear CEO’ letter, but the latest notice targets consumers amid a growing volume of questions regarding whether the clients of LCF will be eligible to any compensation.

In its notice, the FCA says that a business does not have to be regulated by the FCA to raise capital by issuing shares or debt securities (whether ‘mini-bonds’ or otherwise); however, any investment services provided to these investments are regulated in the usual way.

For instance, if an FCA authorised firm provides investment advice about mini-bonds, it must make sure it is suitable for the client; where mini-bonds are distributed by an authorised person, for example an online investment platforms, that person will be subject to the FCA rules.

‘FSCS acknowledges its incomplete picture may have led to confusion and has apologised’

Furthermore, financial promotions usually need to be approved by an FCA-authorised person, to check that the promotion is compliant with FCA rules in being clear, fair and not misleading.

Mini-bonds are not normally covered by the Financial Services Compensation Scheme (FSCS); if the issuer is unable to repay investors’ capital there is no guarantee that clients of a company will receive any of their money back.

However, FSCS is investigating after its communications with LCF customers could have misled them to believe their investments were protected; one investor received an email from the FSCS stating:

‘London Capital & Finance Plc are authorised by the Financial Conduct Authority and therefore covered by the FSCS up to the compensation limit of £50,000.’

However, the mail fails to mention the fact LCF’s unregulated activities, such as issuing mini-bonds, are not covered; FSCS acknowledges its incomplete picture may have led to confusion and has apologised.

‘EDM expresses ‘alarm’ that the regulator seemingly failed to act on warnings about the firm’

LC&F’s demise left over 11,500 investors facing a total loss of £237m; following a large number of claim queries, the FSCS issued a statement saying that it is not accepting claims against the firm.

If a consumer received a regulated investment service, such as financial advice about the bond, from an authorised person that failed to meet the FCA standards, they may be eligible to complain to the Financial Ombudsman Service (FOS); if an authorised firm goes out of business, consumers may be able to bring a claim to the FSCS.

However, if consumers received no service from an authorised person, it is unlikely that they will have recourse to either the FOS or the FSCS; attention will then inevitably be focussed on whether they responded to a misleading financial promotion.

In the meanwhile an early day motion was put to Parliament by Labour MP for Birmingham, Hall Green, Roger Godsiff on 1st April stating:

‘This House… believes that, as London Capital and Finance was an FCA-regulated company, the chief executive of the FCA should resign for presiding over the biggest financial scandal of recent years, which is likely, according to the administrators, to result in more than 11,000 bondholders losing all or most of their money.’

The EDM was supported by five more sponsoring MPs from Labour, the Democratic Unionist Party and Conservatives; 10 MPs, including from the Green Party and Liberal Democrats, have also signed in support of the EDM.

The FCA has committed to commissioning an investigation in to its own supervision of LCF which will also cover, whether existing regulation of mini-bonds protects retail investors adequately.

LC&F collapsed in January, a month after the FCA ordered it to take down its promotional material for the bonds, saying they were ‘misleading, not fair and unclear’, as they were not eligible to be ISA investments as the company claimed.

The EDM expresses ‘alarm’ that the regulator seemingly failed to act on warnings about the firm some four years ago:

‘This House… expresses alarm that documentary evidence has come to light which shows that the FCA was alerted to the activities of London Capital and Finance back in November 2015, but the FCA still went ahead and gave the firm a FCA-regulated accreditation on 7 June 2016, albeit for only the promotion part of their activities, which enabled London and Capital Finance to raise money from bondholders by marketing themselves as FCA-regulated in their promotional literature.’

Clients of LCF may check for updates at this dedicated page by the FSCS.