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.

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.

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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.

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.