The collapse of London Capital & Finance (LC&F), in January this year, was one of the grislier events in financial services during 2019.
The Tunbridge Wells-based firm had issued unregulated “mini-bonds” worth £237m to 11,600 investors lured in by the promise of 8% interest rates. Those investors are likely to have lost most of their money.
The company’s collapse is now the subject of an investigation by the Serious Fraud Office.
The Financial Conduct Authority (FCA), the UK’s main financial watchdog, has commissioned an independent review of its oversight of the firm. The Treasury is also carrying out its own review, led by the former appeal court judge Dame Elizabeth Gloster, of the regulation and marketing of the kinds of retail investment products issued by LC&F.
While these investigations continue, the FCA today took a major step towards ensuring such an episode is not repeated, announcing a one year ban, beginning on 1 January, on the marketing of such bonds.
Andrew Bailey, chief executive of the FCA, said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved. This risk is heightened by the arrival of the ISA season at the end of the tax year, since it is quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status.
“In view of this risk, we have decided to complement our substantial existing actions with a further measure which will involve a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers.
“We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA Mission.”
The FCA’s move is being seen as a tough response. It has only introduced such a ban in two previous occasions.
Yet some will question whether the FCA should have done more sooner.
Mr Bailey insisted today this was only one of a number of actions that the FCA had taken with regards to mini-bonds and argued that, along with the other steps it had taken, it was appropriate – particularly coming ahead of the months in which ISAs are actively marketed to the public.
At the centre of the LC&F scandal is the fact that, while the FCA had regulatory oversight of LC&F, it could not actually regulate the mini-bonds marketed by the company.
Mr Bailey told Sky News: “The regime that we operate under, which is a product of decisions made by parliament and governments, creates what we call the perimeter. Inside the perimeter is everything we regulate and outside the perimeter is everything that we don’t.
“But it isn’t a clean divide and what we’re talking about today illustrates that – the bonds themselves are not regulated but the promotion of the bonds, the marketing of the bonds, usually is. That gives us a way in through the marketing, but it is extremely complicated, and it’s hard to explain to investors.”
In August this year, in its report on the affair, the Treasury Select Committee said that the FCA should be given formal power to recommend to the Treasury changes to the perimeter of regulation, with all recommendations publicly disclosed, providing greater transparency and focus to the process.
Asked whether he would like this power, Mr Bailey said it was ultimately for government and parliament to decide, but many of the most difficult and controversial issues with which the FCA had to deal had the perimeter in common.
He said the FCA would happily make its views clear if the scope of the perimeter needed changing.
The timing of the FCA’s ban is significant because LC&F’s marketing had, in some cases, wrongly asserted that the mini-bonds qualified for ISAs or were even described as fixed rate ISAs.
Not all mini-bonds are bad. They have been issued by a host of perfectly reputable borrowers in the past, including the retailer John Lewis, as well as a number of sporting institutions, including the Jockey Club, Surrey County Cricket Club, Wasps rugby club and Lancashire County Cricket Club.
Mr Bailey said that the problem with the mini-bonds marketed by LC&F was that they had been complex and opaque, since it was not clear to investors what they were investing in, nor how much security they had when investing their money.
LC&F used the money raised from selling the bonds to lend to small companies, including London Oil & Gas, a company that went into administration in March.
Among those arrested by the Serious Fraud Office, as part of its investigation, include Simon Hume-Kendall, the former chairman of London Oil & Gas and Andy Thomson, the former chief executive of LC&F.
Each has been released without charge pending further investigation.
The ban announced today does raise a number of issues. One is that, with the ban not coming in until the beginning of 2020, investors could, potentially, be placed at risk.
The other, which clearly troubles the FCA, is the extent to which web services companies, such as Google, can be relied on to help the regulator stop such promotions online.
Mr Bailey told Sky News: “Throughout the whole of this year, we’ve been in discussions with Google and with other internet companies, such as Facebook, and, while I would say we are making some progress, I think we’ve got a long way to go.
“What we’ve announced this morning relates to those mini-bonds which have promotions that do fall within our scope. Unfortunately, there’s a whole lot of other promotions…which come up on the internet which are outright scams and frauds in the sense that they’re not even trying to get an approval from us. They’re often put up as websites in the hope that they can defraud money from people and, in [those cases], we want Google and other companies to take more action on these.”
Mr Bailey, who is front-runner with the bookies to succeed Mark Carney as Bank of England governor, said he would like to reach an agreement with the likes of Google that, if the FCA had sufficient evidence to prove that a website was harming consumers, web services companies would take them down quickly.
He added: “At the moment, frankly, it is unsatisfactory that too many of these sites – and we see them coming up regularly – are left up for too long and, unfortunately, too many people fall foul of these.”
There is no doubt that the FCA’s ban does represent tough action.
What it may not do is counter criticism that the FCA ought to have seen the scandal coming earlier than it did.