Advertisement

London Capital & Finance: mini-bond investors lose their savings

The plight of investors misled by London Capital & Finance is a warning to be on your guard.

938_MW_P24_Per-Fin
If it seems too good to be true, it is

The plight of investors misled by London Capital & Finance is a warning to be on your guard.

Thousands of people who invested in what was marketed as a "fixed-rate Isa" are set to lose their savings after the company collapsed.

London Capital & Finance (LCF) took £236m after advertising a product that offered an interest rate of 8%. The Financial Conduct Authority (FCA), the City regulator, began investigating the company in December, and it subsequently went into administration.

Advertisement - Article continues below

The problem is that the product LCF was marketing was not an Isa, but a mini-bond, which you cannot even hold in an Isa. With a mini-bond, investors lend their money to a company, in return for receiving a fixed return and their capital back at a set date in the future. They are a risky investment, as issuers tend to be small companies, which are more prone to failure than large established companies. They also aren't scrutinised in the same way as retail or corporate bonds, and you can't trade them on the stockmarket, which means you're stuck with them until the end of the term.

Importantly, if the company goes bust, mini-bond holders are very low down the pecking order to get their money back. In the case of LCF, investors could get as little as 20% of their money back, according to administrators. Also, as an unregulated financial product, mini-bonds aren't covered by the Financial Services Compensation Scheme (FSCS), so investors cannot claim their money back via the guarantee.

Advertisement - Article continues below

Many of the 14,000 people who invested in LCF mini-bonds did so because they believed the firm was regulated by the FCA. Unfortunately, although the FCA logo did appear on some paperwork, this was only because it was authorised to provide consumer financial advice, not to sell financial products.

Given the fairly complicated regulatory situation here, it's no wonder people many have been confused. Broadly, issuing a mini-bond is not an activity that is regulated by the FCA, so LCF did not need to be authorised to do this. However, it did have authorisation to issue financial promotions. It was the misleading claims LCF made in these promotions particularly calling the product a fixed-rate Isa that ultimately drove the FCA to ban it from carrying out further business.

To avoid falling victim to something like this, always check the FCA's register to establish whether a firm is specifically authorised to do what you are considering investing in. A general internet search to see if other consumers have been burned can also be useful. If you are concerned, check if the product you are contemplating investing in is backed by the FSCS, so that you can claim up to £85,000 if the company collapses. Finally, stick to the reliable rule: if it sounds too good to be true, it probably is.

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/520181/how-the-fear-of-death-affects-your-investment-process
Investment strategy

How the fear of death affects our investment processes

Many of our investment decisions are driven by one simple fact: the knowledge that, one day, we will be dead. Here, in an extract from his new book, J…
2 Jan 2020
Visit/520060/the-good-and-the-bad-investments-of-2010s
Stockmarkets

The good investments of the 2010s – and the bad

John Stepek takes a look back on which investments did well and which did badly in the decade that’s about to come to an end.
26 Dec 2019
Visit/513293/the-benefits-of-sitting-tight-with-your-savings
Personal finance

The benefits of sitting tight with your savings

Agreeing to lock up your cash can boost the interest rate on your savings significantly. Ruth Jackson-Kirby reports.
20 Aug 2019

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020