More concerns for mini-bond investors as auditors question Wellesley Finance
Thousands of savers who ploughed £94 million into a savings bond company founded by Graham Wellesley, the 8th Earl of Cowley, may have cause to be nervous as auditors suggest Wellesley Finance may be in jeopardy after multimillion-pound losses.
Around 6,500 investors have been attracted to its high-risk, unregulated mini-bonds, with a further £20 million invested by 2,300 customers in a separate but related company whose fortunes rely on the success of loans issued by Wellesley’s business.
The mini-bonds were marketed via a TV campaign as an alternative to the big banks, paying up to 8% a year ‘interest’; however its accounts to the end of 2018, published last month, showed a loss of £10.2 million compared with a £1.2 million profit the year before.
The company had to restate its December 2017 net asset value (NAV) from £3.37 million to £140,000 following accounting errors; its NAV was -£9.2 million as of December 2018.
Based on an assessment by the company’s auditors, Wellesley’s directors said ‘the absence of current profitability and a negative net asset value may cast significant doubt about the company’s ability to continue as a going concern’.
David Hough of Blick Rothenberg, which reviewed the company’s accounts, said: ‘The financial statements could be a concern for anyone owed money by the business.’
‘The financial statements could be a concern for anyone owed money by the business’
Wellesley says it has been more cautious in its approach to loans issued since 2016 and all bond payments have been paid back in full and on time; it is also in the ‘process of recovering’ up to £12.6m of ‘receivables’.
Wellesley Finance used the money it raise to provide loans to property developers; however Mr Hough said that of the £88.1 million in loans and advances it issued, £41.2 million worth were considered to be weak or already in default, ‘demonstrating concern over the collectability of this amount’.
Unregulated mini-bonds are not covered by the Financial Services Compensation Scheme (FSCS); Wellesley lured investors from just £100 with free iPads and iPhones, and only stopped six months after the collapse of the mini-bond company London Capital & Finance (LCF) more
The failure of LCF led to an investigation by the Treasury and the Financial Conduct Authority (FCA), the City watchdog, into the regulation of high-risk products aimed at ordinary savers.
FCA banned the marketing of mini-bonds to retail customers in January; Wellesley now only markets bonds that are listed on a stock market, recently advertising bonds that yield up to 4% described as ‘fixed-rate retail bonds’.
‘now only markets bonds that are listed on a stock market, recently advertising bonds that yield up to 4% described as ‘fixed-rate retail bonds’’
£44.9 million was invested by 4,053 investors in a Wellesley property mini-bond; this was used to provide loans to residential property developers, with the bonds are secured against the properties.
Another £49.5 million is held by 4,084 investors in unsecured Wellesley mini-bonds; in total 6,489 people hold Wellesley mini-bonds, some of whom have both investments.
£20.6 million has been invested by 2,300 people in the company now issuing Wellesley bonds on the Irish stock exchange , unregulated Wellesley Secured Finance whose ‘principal business activity’ is to buy property development loans from Wellesley Finance.
The level of risk for both the listed property bonds and the unlisted mini-bonds is considered the same because the listed bonds are invested in loans issued by Wellesley Finance, so carry the same credit risk.
Marketing of the listed bonds is approved by the regulated company Wellesley and Co, and not covered by the FCA ban on marketing.
The FCA says: ‘Companies are not required to get our approval before issuing financial promotions. However, we have made clear our expectations and requirements of financial promotions, and continue to take appropriate action where we identify shortcomings.’
Wellesley Finance is majority owned by Wellesley Group Ltd which is majority owned by Wellesley Group Investors Ltd; Wellesley Group Ltd is not accused of engaging in anything that is not permissible under rules governing financial promotions, nor did it use the kind of hard-sell adopted by LCF.
Wellesley Finance expects the business to return to profitability this year and says that its marketing adhered to ‘the prevailing landscape at the time’; it says its investors had to complete an ‘appropriateness test’ to self-certify as a sophisticated investor, and accept that FSCS cover did not apply.
Wellesley offered anyone concerned about their mini-bonds to convert them to a listed version of the same product, at no cost, saying the company is: ‘commercially indifferent to whether our customers hold a regulated or unregulated investment — we hold ourselves to a common standard. Issuing bonds is not an activity which is regulated by the FCA and therefore does not require the issuing firm to hold FCA authorisation.’
Wellesley admits its early marketing was ‘wrong’ and changed it after receiving guidance from FCA; accountants BDO was engaged to ensure that the adverts were ‘clear, fair and not misleading’.
Those investing £5,000 in the mini-bonds received Apple ipads, with iPhobeXs for those investing £10,000; TV ad portrayed the company as an alternative to a bank, which BDO said was fully compliant with FCA rules and requirements and that the FCA ‘was satisfied with our work on this matter.’