Minerva Lending – unregulated loan notes offering up to 7% per annum over 5 years

February 2, 2018January 30, 2018 ~ Phoenix ~ 2 Comments

Minerva Lending plc offers unregulated loan notes paying 3.5%pa over 2 years, 4.5%pa over 3 years, 5.5%pa over 4 years or 7%pa over 5 years.

Status

Open to new investment.

Who are Minerva Lending plc?

Minerva Lending plc should not be confused with the much larger and older property group, Minerva Limited. As far as I can tell there is no connection.

In the company’s investment literature, the directors are identified as Dr Reeves Knight and Ross Andrews.

At time of writing Minerva is two weeks late filing its ownership details (“confirmation statement”) with Companies House. The December 2016 confirmation statement shows that the company is (or was at that time) wholly owned by Dr Phillip Reeves Knyght.

Minerva Lending was incorporated in February 2016. The December 2016 accounts, the first filed, show net assets of approximately £2 million.

How secure is the investment?

These investments are unregulated corporate loans and if Minerva Lending defaults you risk losing up to 100% of your money.

Minerva Lending lends investors’ money to other companies for the purpose of commercial property acquisition or development.

If Minerva’s borrowers fail to pay sufficient interest to Minerva, there is a risk that Minerva may default on its payments to investors.

Investors’ money is secured by a first charge over Minerva Lending’s rights in respect of the loans funded by their money, including any related security.

Before relying on this security, it is essential that investors undertake professional due diligence to ensure that in the event of a default, that these securities are valuable and liquid enough to raise sufficient money to compensate investors if needed, and that Minerva Lending’s rights over these securities are watertight.

Investors should not assume that because the loans are asset-backed, they are guaranteed to get at least some of their money back through sale of the collateral if the issuer defaults. Investors in asset-backed loans have been known to lose 100% of their money when it turned out that the collateral was insufficient to pay investors after paying the insolvency administrator (who always stands first in the queue).

We are not in any sense implying that the same will happen to investors in Minerva Lending, only illustrating the risk that exists with unregulated corporate loan notes even when they are asset-backed.

Minerva Lending plc’s literature emphasises that investors are not covered by the Financial Services Compensation Scheme.

Should I invest with Minerva Lending?

This blog does not give financial advice. The following are statements of publicly available facts or widely accepted investment principles, not a personalised recommendation. Investors should consult a regulated independent financial adviser if they are in any doubt.

As with any unregulated corporate bond, this investment is only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio and are prepared to risk 100% loss of their money.

Any investment offering 7% per annum yields should be considered high risk. As an individual security with a risk of total and permanent loss, Minerva Lending’s loan notes are higher risk than a diversified portfolio of stockmarket funds.

This particular bond is described as asset-backed. Before relying on the security backing the bond, investors should undertake professional due diligence to ensure that a) the security exists b) in the event of default, the security could be easily sold and would raise enough money to compensate all the investors, after the adminstrator deducts their fees.

Before investing investors should ask themselves:

How would I feel if the investment defaulted, the sale of the security failed to raise enough money to compensate all investors, and I lost 100% of my money?
Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?
Have I conducted due diligence to ensure the asset-backed security can be relied on?

If you are looking for “security”, you should not invest in unregulated products with a risk of 100% capital loss.

BBC’s You and Yours programme covers unregulated investments

January 30, 2018January 31, 2018 ~ Phoenix ~ 2 Comments

You and Yours, BBC Radio 4’s consumer affairs programme, has just released its latest episode which partly deals with three investors who were encouraged to invest their money in unregulated investments.

The programme makes interesting and, at times, painful listening for anyone with an interest in unregulated investments.

[2:40] Winifred Robinson (BBC presenter): The three people you’re about to hear were encouraged to invest their pension savings into risky unregulated funds. Two of them say they were cold called at home.

In 2015 Stephen Sefton needed to transfer his pension from his company pension scheme to a new one in order to access income drawdown.

[4:28] John Douglas (BBC presenter): He, like many people, was looking to take advantage of new pension rules. He wanted to be able to access his pension savings and leave money to his children. To do it, he had to transfer from his company pension scheme to a new one. That was why he went looking for a financial adviser, and he found David Vilka’s company [Square Mile International Financial] online.

W: Did he have much money in his pension?

J: Yeah, around £415,000. And Stephen agreed it should go into an overseas pension scheme before being invested in two funds. The first, called Blackmore Global, is where most of his money went. The rest went to another fund in Malta.

No reason is given in the BBC programme for why Mr Sefton was recommended an overseas pension. Overseas pensions are generally only suitable for expats with very specific tax circumstances.

Mr Sefton first encountered problems a year later when he couldn’t find out what his pension – his share of the two funds – was worth. He subsequently found out that Square Mile International Financial was not authorised to provide financial advice or transfer UK pensions. They were on the FCA register, but only to provide insurance mediation.

[5:48] J: The FCA has confirmed to us that Square Mile International Financial does not have the necessary permission to deal with pension transfers. David Vilka though maintains his firm is authorised and it hasn’t done anything wrong.

The programme then moves on to the nature of the underlying investments.

[6:10] J: We’ve seen a document which shows the fund is Malta is a “professional investor fund”, in other words it was never supposed to be for the general public, so wasn’t appropriate for someone like Stephen.

Then there’s that other fund, Blackmore Global, where most of his money went. We know the managers of a pension scheme on the Isle of Man were worried about that; they sent a letter to their clients who’d already invested in Blackmore Global saying they’d concluded it posed an unacceptably high level of risk.

W: In what way?

J: Well, the letter said that they’d become increasingly concerned at the lack of financial accounting information that was available for Blackmore Global, so they’d removed it from their list of approved investments.

The BBC programme goes on to describe a man named Paul (not his real name) who was one of those who received that letter from the Isle of Man pension firm. He’d invested all his pension savings, around £100,000, in Blackmore Global, after being contacted by a firm called Aspinal Chase.

The Isle of Man SIPP provider offered to try and get his money out of the Blackmore Global fund, and said that if Paul didn’t want to do that, he needed to get confirmation from a regulated adviser confirming it was still suitable.

Paul contacted Aspinal Chase, who

[8:25] J: …sent him a reassuring letter suggesting the Blackmore fund was performing well, the letter said the advice still stood from his financial advisers that the fund fit his circumstances perfectly. The thing is Winifred, Aspinal Chase listed Paul’s financial advisers as none other than Square Mile International Financial in Prague, the same company that dealt with Stephen Sefton’s pension. And the letter to Paul from Aspinal Chase went on to say that Square Mile certainly has the correct regulation, which of course we now know is far from certain. But those reassurances from Aspinal Chase were enough for Paul to leave his money where it is in Blackmore Global.

What he didn’t know is that there’s a connection between Aspinal Chase and Blackmore Global. Both companies were run by the same man.

W: So the people who are behind the company that Paul says cold-called him… they also own the fund where his money ends up?

J: That’s right. Philip Nunn and Patrick McCressh are both directors of the Blackmore Global Fund and directors of Aspinal Chase. Aspinal Chase was linked to David Vilka’s financial advisers in Prague, because it was described as the “UK administration team” on paperwork sent to advisers. So both the cold calling operation and the financial advisers’ admin team were based at the same address in Manchester. Phillip Nunn and Patrick McCreesh’s businesses were also involved in processing applications to transfer money out of pension schemes – money that would ultimately end up in the Blackmore Global Fund, which they control.

The BBC report then reviews the charges applied by the Blackmore fund disclosed in its fee document, with the aid of Rory Percival, a leading industry consultant and former regulator at the Financial Conduct Authority, where he specialised in the regulation of investment advice.

[10:45] Rory: Gosh. The fees are… in comparison with most investments, very very high. You’d have to be getting very very high levels of returns even to make any money out of that.

J: Is this sort of investment suitable for someone wanting an income from a pension?

R: No, because it’s up to the directors when you get your money. If you’re saving for your retirement, you want to be in control of when you get your money, to live on in retirement. So no, absolutely not.

J: Now even though it was mentioned in some of their paperwork, some investors didn’t realise their money would be locked into the Blackmore Global Fund for ten years. Even after that time, Rory says, getting the money out might not be easy, as it depends on the fund being able to sell its underlying assets.

Paul says he’s been trying for a year to get his money out of the fund, and has got nothing to date. He had hoped to retire at 60, and has found his money is locked into Blackmore well beyond his 60th birthday.

[12:25] P: I’ve got three grandchildren – we’d like to take them all to Disneyworld in America. I want to spend the money I’ve earned over the years – a bit of that money would pay off the last bit of me mortgage – so that is a big chunk of my future.

J: How has all this affected you and your family?

P: We do have the occasional arguments, and I feel as though I’ve let the family down. I’ve tried to put it to the back of my mind but when you start looking at what’s going to happen in the future… it’s what is going to happen in the future… I don’t know, I just don’t know.

The third investor (who does not speak on the programme) is Jacqueline, who invested £50,000 in Blackmore Global after being cold called by Aspinal Chase, and also has documents showing Square Mile International Financial as her adviser. Blackmore Global has refused to release her money “to protect the integrity of the investment for its other stakeholders”.

Stephen Sefton did manage to get his investment back, but only after taking a £30,000 loss on the unnamed fund in Malta, and after repeatedly emailing and complaining over a period of 18 months.

David Vilka and Square Mile International Financial say his company’s permissions and activities have been inspected and verified in full by numerous regulators, and that there is no financial relationship between his business and those run by Philip Nunn and Patrick McCreesh. He says he helped Stephen Sefton get his money out of the Blackmore fund.

Philip Nunn and Patrick McSheesh say there is no connection between themselves and David Vilka / Square Mile International Financial. They say Aspinal Chase never engaged in cold calling, and did not give pensions advice; any advice was given by separate regulated financial advisers. They told the BBC “they had nothing to hide, and wished to act with as much transparency as possible”, but refused to grant an interview or send audited accounts for the Blackmore Global Fund, or a list of its underlying holdings.

Conclusion

Stephen Sefton believed his adviser was authorised to offer financial advice because he found them on the FCA register. He did not know that he was supposed to check the drop-down list under “Permissions” to make sure they had the necessary authorisation to give advice, and to advise on pension transfers.

This is a well-known issue. It is simple for anyone who knows they have to check “Permissions” to check it, but for everyone else it is the classic unknown unknown. How are they supposed to know they should check the list of Permissions when they don’t know they should know?

Even government bodies such as the Pensions Advisory Service tell users to “check the FCA register” without making it clear they need to check the Permissions drop-down.

The FCA is under some pressure to make its register more “user-friendly”, but in the meantime investors should bear in mind the following:

Professional advice should always be taken from advisers regulated in the UK and authorised to provide advice. Do not just check the register, but check they have permission to advise. Do not respond to cold calls.
UK Investors should not invest in an offshore arrangement, whether a pension, a fund or any other wrapper or security, unless they have a need that would not be met by an onshore arrangement. Any regulator or compliance consultant will confirm this principle.
Any investor who is advised to invest all their investments in one or two funds should be very confident that it is highly diversified and liquid. Examples of funds which may be suitable as a single holding include Vanguard Lifestrategy or Legal & General Multi-Index, which are spread across thousands of mainstream blue-chip shares on recognised stock exchanges. This is trivial to verify. This is not the case with any investment which does not disclose audited accounts or a breakdown of its underlying assets.
There are many legitimate reasons to invest in unregulated and/or offshore arrangements. Any UK investor who should be investing in such arrangements will know exactly what they are, because they will either be a professional investor, or they will have a suitability letter from an FCA-regulated adviser detailing why the investment is suitable and why a regulated/onshore investment would not meet their needs. If you are advised to invest in any arrangement which is not regulated in the UK without good reason, proceed with extreme caution.

The quote above from Paul at 12:25 shows why these steps are necessary with heartbreaking clarity.

Correction

Mr Sefton, who was interviewed in the above report, got in touch with us to request a correction (this article originally read “No reason is given in the BBC programme for why Mr Sefton needed an overseas pension”).

I did not need a QROP; the BBC’s turn of phrase was unfortunate for giving that impression. I was actually “mis-sold” it by David Vilka on false statements of tax advantages that I later discovered were untrue, and also that it is “approved by the HMRC” which I later discovered is not true because HMRC do not approve schemes.

Braxton Knight – Unregulated securities offering fixed returns of up to 5% per month

January 30, 2018February 23, 2018 ~ Phoenix ~ 4 Comments

Braxton Knight describe themselves as a wealth management firm offering “investment models to suit all levels”.

Under the “Investment Models” webpage, Braxton Knight offer unregulated securities paying a fixed return of at least 5% per month, although returns are also described as potentially greater, up to 15% per month or even higher. The return depends on how much investors invest, as follows:

Bronze – Fixed return of 1% per month (£1k – £15k) or 1.5% per month (£15k – £40k) – and “between 3-6% capital growth per month with a capital risk of less than 5%”
Silver – Fixed return of 2% per month (£40k – £75k) or 2.5% per month (£75k – £150k) and “between 6-9% capital growth per month with a capital risk of less than 5%”
Gold – Fixed return of 3% per month (£150k – £300k) or 3.5% per month (£300k – £500k) and “between 9-12% capital growth per month with a capital risk of less than 5%”
Diamond – Fixed return of 4% per month (£500k – £750k) or 4.5% per month (£750k – £1 million) and “between 12-15% capital growth per month with a capital risk of less than 5%”
Black – Fixed return of 5% per month and “15%+ capital growth per month with a capital risk of less than 5%”

Who are Braxton Knight?

There is no information on Braxton Knight’s website as to who is behind the business. Companies House shows that Braxton Knight is wholly owned by Mark McHale, who is also the sole director.

Braxton Knight Ltd was incorporated in 2011, and Mark McHale took ownership in April 2013. Prior to that it appears to have been owned by an accountant dealing in company formations. The last accounts were filed in 31 March 2017 and were “micro-entity” accounts, meaning that the company was small enough to be exempt from audit and providing a profit and loss account. Net assets were £2.9m, of which around £1m was “cash at bank and in hand” and the other £1.9m “tangible assets”.

Braxton Knight’s website, braxtonknight.com, was only registered in February 2017. The registrant’s details are private.

Is Braxton Knight safe?

These are unregulated investments and investors run a very high risk of losing 100% of their money.

Braxton Knight’s description of their “Investment Models” raises red flags at every turn.

Braxton Knight claims that every investment model has “capital risk of less than 5%”, yet the underlying investments are variously described as “Stocks and Commodities” (Gold plan), “indices, commodities, FX markets and bonds” (Diamond/Black) or unspecified “trading” (Silver). These investments all carry risk of losses considerably in excess of 5%.

Furthermore Braxton Knight’s disclaimer at the bottom of every page states “This is a leveraged service which increases the level of risk and return”. Using leverage (i.e. investing with borrowed money) considerably heightens the risk, as the disclaimer says, and makes Braxton Knight’s claim that the maximum loss is 5% even more confusing.

The wildly differing returns offered under the “Bronze/Silver/Gold/Diamond/Black” models make little sense. In general the returns should depend on the underlying assets, not on how much the investor invests.

Investing more money may make different asset classes or funds available to an investor, but this should not be a problem for an investment firm which can pool its clients’ money. More money may also mean more bespoke management and attention from the firm’s investment professionals, but this does not guarantee higher returns – certainly not to the extent that a person investing £1 million would expect returns 5x higher than one investing £15k.

Braxton Knight’s offering of dramatically higher returns to investors who invest higher amounts only makes sense as a way to tempt investors into handing them more of their money.

Long term equity returns have over the last few decades generally been around 8-10% per annum for a diversified portfolio, and the FCA considers 5% per annum to be a reasonable “medium” projected rate of return.

Braxton Knight claim to guarantee returns of 80% a year (a fixed return of 5% a month compounded for a year = 80%) and that returns may potentially be up to 435% a year or more (15% a month compounded = 435%pa).

It is possible to generate a return of 5%-15% in any given month through short-term trading – as it is through online poker or any other form of gambling. However, short term trading is a zero sum game and the expected long term return is nil, minus costs.

Braxton Knight provides no fund factsheets, audited accounts, details of fund custodians or any other proof of being able to consistently generate sufficient returns to pay investors a fixed return of up to 5% a month from returns on trading.

The reality is that the only way to pay fixed returns of 80% a year without exposing investors to losses greater than 5% is to pay existing investors using new investors’ money.

The use of new investors’ money to pay existing investors makes Braxton Knight’s investment service a Ponzi scheme.

The inevitable result of any Ponzi scheme is that eventually the scheme runs out of new investors’ money to pay existing investors, and the scheme collapses. At this point the organisers disappear with any remaining money. A few early investors may see a return. The majority of investors will lose money.

While returns of 5% per month are only promised to investors who invest over £1 million, Braxton Knight describes its Gold plan as its most popular, which pays either 3% or 3.5% per month – i.e. up to 51% per annum.

It is no more possible to consistently generate returns over 51%pa, in order to make fixed payments to investors of 3.5% per month, than it is to generate returns of 80%pa.

Independent advice and financial promotion without authorisation

Braxton Knight’s FAQ refers to “our dedicated financial advice” and states “We offer completely independent advice.”

Offering financial advice in the UK requires authorisation from the Financial Conduct Authority (or authorisation in another European Union member state under “passporting in”).

The website also includes clear inducements to engage in investment activity – e.g. “Join our Gold plan and have the opportunity to receive returns of 15%+”. This constitutes a financial promotion under the Financial Services and Markets Act, which also requires FCA authorisation.

However a search for Braxton Knight on the FCA Register reveals no results. Nor did a search for the owner Mark McHale. Braxton Knight does not claim any regulatory authorisation on their website. It is therefore clear that Braxton Knight are both offering financial advice and financial promotions without FCA authorisation.

Update 02/02/18: On 31/01/18 (the day after this article went to press) the FCA issued a warning about Braxton Knight, confirming “This firm is not authorised by us and is targeting people in the UK. Based upon information we hold, we believe it is carrying on regulated activities which require authorisation.” The firm now appears on the FCA Register as an unauthorised company.

By offering financial advice and financial promotions without authorisation, Braxton Knight is committing criminal offences.

Should I invest with Braxton Knight?

This blog does not provide financial advice. The following are statements of fact based on publicly available information, or near-universally accepted investment principles; they are not personalised recommendations. Investors should consult a regulated independent financial adviser if they are in any doubt.

Braxton Knight’s claim to be able to pay fixed returns of 80% per annum with minimal capital loss bears all the hallmarks of a Ponzi scheme.

Furthermore, the firm is committing criminal offences under the Financial Services and Markets Act by offering financial advice and financial promotions without regulatory authorisation.

Update: On 31/01/18 (after this article went to press) the FCA issued a warning that Braxton Knight is believed to be carrying on regulated activities without authorisation.

Do not invest unless you are prepared to risk 100% losses.

Is Allansons / Mortgage Audit Services litigation funding covered by the FSCS?

January 29, 2018May 29, 2019 ~ Phoenix ~ 18 Comments

Earlier today we reviewed the Allansons / Mortgage Audit Services opportunity to invest in litigation funding.

Allansons / MAS project a potential return of 50% should their cases succeed, and your money back if it fails via After The Event insurance – assuming that Leeward Insurance of Bermuda, the ATE insurer, agrees to pay the claim and has sufficient resources to do so.

Allansons’ / MAS’ literature is clear that this investment is not covered by the Financial Services Compensation Scheme.

However, there are unregulated third party introducers promoting this investment as “High Returns with insurance and FSCS protection” and claiming that – via convoluted logic which we will review below – that the investment is covered by the FSCS, contrary to Allansons’ / MAS’ literature.

Allansons / Mortgage Audit Services cannot be held responsible for how unregulated third party introducers promote their investments, hence this point is being covered in a separate blog post to the opportunity itself.

The justification for the investment being promoted as FSCS-protected is shown above. This appears to be from a “terms & conditions” document but I have not had sight of the full document and do not know where it has come from beyond the unregulated introducer who emailed the above extract to a member of the public as part of their promotion.

In brief, what this extract says is that:

Box Legal has reviewed Leeward’s structure, finances etc, and will continue to do so, and has determined that there is no realistic prospect of Leeward failing to pay any claim.
And that if Leeward fails to pay any claim, Box Legal “irrevocably accepts that it will have rendered negligent advice to the solicitor and thereby also to the Client, and agrees to be responsible to both the Solicitor and the relevant Client for all losses and claims arising out of that negligent advice”.
And that as Box Legal is regulated by the FCA (not the Financial Services Authority – this was replaced by the FCA five years ago), its advice is covered by the FSCS.

This is a commendably imaginative way of attempting to provide FSCS cover for an investment offering potential returns of 50% over 6-18 months. However, it doesn’t work.

Essentially Box Legal claim that by inserting this clause about how they “irrevocably accept… to be responsible to both the Solicitor and the relevant Client for all losses and claims, including the non-payment of any valid claim” they have unilaterally shifted the risk from the investor onto the FSCS.

Unfortunately, it is not possible to dump liability on the FSCS by inserting clauses in contracts with words like “irrevocably accept”. Whether the FSCS is liable for a loss is governed by the definition of a “protected claim” found in the FCA’s COMP handbook.

If this approach worked, any financial adviser could write to their client saying that they “irrevocably accept that I will be liable if your investment goes down” and by doing so shift the investment risk from the client to the FSCS, while giving the client all the return if the investments go up. This would make them the most popular financial adviser in the country. But no adviser does. Why?

Box Legal would presumably say “because they weren’t clever enough to think of this”. The real reason is that saying “I irrevocably accept that I will be liable if your investments go down” or “I irrevocably accept that if this insurer goes bust I will be liable” and then failing to pay up is not a protected claim under the regulations governing the FSCS.

Advice is defined by the FCA as the provision of “personal recommendations to a client, either upon the client’s request or at the initiative of the firm, in respect of one or more transactions relating to designated investments”. The statement by Box Legal above is not a personal recommendation by any stretch of the imagination. Allansons / MAS investors are not all meeting with Box Legal to have a fact-finding exercise conducted and they are all being insured by the same insurer, so clearly Allansons / MAS investors are not all being provided with a personal recommendation to take out insurance with Leeward Insurance.

What Box Legal has done is broker the insurance contract, and insurance brokers are not automatically liable if their chosen insurer goes bust, any more than an investment adviser is liable if your investment falls.

Box Legal’s statement is in fact contradictory. The fact that they have “investigated and reviewed Leeward’s structure, management; claims payment record and finances…” means that even if Leeward fails, they will not have rendered negligent advice. Negligence would have occurred if Box Legal had brokered the insurance contract with any old insurer from a small island in the Atlantic and not paid any attention to that insurer’s capacity to pay. But Box Legal are specifically saying that they aren’t being negligent. If Leeward subsequently goes bust for reasons that Box Legal could not reasonably have foreseen when reviewing its structure and finances, Box Legal has not been negligent.

By irrecovably undertaking to recompense investors should Leeward Insurance fail, Box Legal may well be creating a legal obligation to do so that would stand up in a court of law. However, what it is not doing is creating a protected claim for the FSCS.

We do have to say that Box Legal’s claim is not a million miles away from the fact that people who are advised by an FCA-regulated adviser, who advises them to invest in unregulated investments, do get compensation from the FSCS when the investment goes bust and so does the adviser.

Same thing here, right? Regulated advice firm gives advice relating to unregulated investments, investments go bust, consumers must have their losses restored by regulated firm, regulated firm goes bust, FSCS must restore investors’ losses instead.

There are two problems with assuming the same will happen here. Firstly, advice to invest in unregulated investments is covered up to £50,000 only, so the FSCS’ liability is limited. Here, Box Legal are claiming that as insurance advice, investors are covered up to 90% of the claim, so the FSCS’ liability is virtually unlimited.

Secondly, as covered above, investors are not in reality being provided with personalised advice by Box Legal. Unlike in cases where a regulated adviser recommends that someone invests X amount of money in an unregulated investment, which is clearly personalised advice and is a protected claim.

(Note: the discrepancy between Box Legal’s claim that the FSCS will cover 90% of the investment and the unregulated introducer’s claim that clients’ money is “100% secure” is not explained. But frankly, if investors are only risking a 10% loss for investing in an unregulated product offering 50% returns over 6-18 months, who cares.)

This is our interpretation. Box Legal will no doubt disagree. Investors should bear in mind that the FSCS only decides whether a loss is a protected claim or not at the point a claim is made to the FSCS. By this time, it is too late for investors to back out. They should not expect the FSCS to state in advance whether they will be protected if the litigation funding investment goes south.

To the best of our knowledge, no company prior to Box Legal has attempted to secure FSCS compensation for an unregulated investment in this particular way, and had investors successfully claim losses from the FSCS. Equally, neither has any such claim failed. So Box Legal’s interpretation of the rules is untested, as is ours.

We will reiterate that these claims regarding Financial Services Compensation Scheme coverage were made by an unregulated introducer, who is also the source of the literature shown at the top of this article. They were not made by Allansons or Mortgage Audit Services Limited, who cannot be held responsible for how third party introducers describe their investment.

Allansons / Mortgage Audit Services states in their literature that this investment is not covered by the FSCS, and we agree with them.

Should I invest with Allansons / Mortgage Audit Services litigation funding?

As with any unregulated investment, there is potential for up to 100% capital loss should Allansons’ cases against mortgage lenders fail, Leeward Insurance fails to pay out, and the FSCS refuses to consider Box Legal’s “irrevocable undertaking” as a protected claim.

Unregulated investments with potential for 100% capital loss are only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio.

If you are looking for an investment that provides “100% security” or FSCS protection, you should not rely on novel and untested interpretations of the FSCS compensation rules, and you should not invest in unregulated products with a risk of 100% capital loss.

Footnote

Box Legal has been in business for nearly 15 years according to Companies House.

In the last accounts (to 31 August 2016) the auditors (UHY Hacker Young) stated:

Emphasis of matter – Going Concern

In forming our opinion on the financial statements, which is not modified in this respect, we have considered the adequacy of the disclosure made in accounting policy 1.2 to the financial statements concerning the company’s ability to continue as a going concern. The company has fallen short of certain regulatory requirements relating to compliance with the FCA rulebook during the year and as at the year end date. Whilst the implications of these instances of non-compliance are uncertain the directors believe they will be resolved without financial impact and have therefore continued to adopt the going concern basis in the preparation of the financial statements.

These conditions indicate the existence of a material uncertainty which if resolved unfavourably (despite the Directors view that this is unlikely to be the case) have the potential to cast significant doubt over the company’s ability to continue as a going concern.

It should be noted that many financial firms fall foul of the FCA rulebook with no lasting consequences. In a later note Box Legal’s failure to comply with regulatory requirements is described as relating to “holding client money and other areas of compliance”. This may well result in nothing more than a fine and/or an instruction from the FCA to improve their client money procedures. In general, we have no reason to doubt the directors’ belief that there will be no financial impact.

However, given that unsophisticated consumers are being told that this investment is “100% secure with FSCS”, which rests on Box Legal’s novel and untested interpretation of FSCS compensation rules, which is part of the FCA rulebook, investors should be aware that Box Legal has previously been tripped up by other parts of that rulebook.

Allansons / Mortgage Audit Services Litigation Funding – approximate 50% return within 6 to 18 months

January 29, 2018May 29, 2019 ~ Phoenix ~ 17 Comments

Allansons, in association with Mortgage Audit Services Limited, are offering investors the opportunity to invest in “litigation funding” whereby investors fund the cost of legal action on behalf of a mortgage customer who has been overcharged by their lender due to “automatic capitalisation” of payments in shortfall.

Should the case succeed, Allansons promises a return of 5% of any award plus 30% of Allansons’ base legal fees, which they estimate will provide a return of “approximately 50% on your money within 6 to 18 months.”

Should the case fail, Allansons promise that your investment is covered by After The Event insurance.

The investment is not promoted on Allansons’ website (and Mortgage Audit Services does not appear to have a public presence) but unregulated introducers have been promoting the investment to members of the public without proof that they are sophisticated or high net worth investors, one of whom passed the details to us.

Who are Allansons LLP?

Allansons claims to have been established in 1993. Allansons LLP was only incorporated with Companies House in 2008, but this is explained on Allanson’s website which states that the business was originally a sole practitioner, went on to purchase several other solicitors and converted to a limited liability partnership in 2008.

Allansons is a Limited Liability Partnership with two partners: Roger Allanson and Mohamed Patel. The Partnership had net assets of £98,000 according to their last accounts filed November 2016; as a small company they did not have to audit the accounts or include a profit and loss statement.

Who are Mortgage Audit Services?

Mortgage Audit Services was incorporated in November 2015. It has yet to file accounts as an active company; its only previous accounts in November 2016 were filed as a dormant company. It is owned 72%/28% by the directors Bryan Turner and Charles Haynes.

How safe is the investment?

This is an unregulated investment and if Allanson fails to win the case, and the insurer does not or cannot return your initial capital, you risk losing 100% of your money.

We are not legal experts and cannot comment on the specific merits or otherwise of Allansons’ cases, but it is a truism that no case is guaranteed to succeed in court. Allansons say they “expect to win” and say “The audit report that we use in these breach of mortgage contract claims has been given a 75% chance of success in court” but it is the judge that decides.

If the case fails, Allansons / MAS claim that an insurer providing After The Event insurance, Leeward Insurance, will step in and return investors’ money.

However investors are still at risk of losing money if:

Leeward Insurance does not pay out (e.g. because an exclusion in the insurance contract applies)
Leeward Insurance has insufficient resources to return investors’ money

Leeward Insurance is based in the offshore tax haven of Bermuda. There is virtually no public information available on Leeward Insurance.

(I have seen evidence that unregulated introducers are promoting this investment while claiming that the insurance payouts are protected by the Financial Services Compensation Scheme. However, this claim is not made by Allansons / MAS but by unrelated third parties, and will therefore be reviewed in a separate blog post. Allansons / MAS’ literature carries a very clear risk warning that the investment is not protected by the FSCS.)

Should I invest in litigation funding with Allansons / Mortgage Audit Services Ltd?

This blog does not provide financial advice. The following are statements of fact based on publicly available information, or widely accepted investment principles; they are not personalised recommendations. Investors should consult a regulated independent financial adviser if they are in any doubt.

As with any unregulated investment, this investment is only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio and are prepared to risk 100% loss of their money.

Any investment promising returns of 50% between 6 and 18 months is clearly very high risk in nature.

Before investing investors should ask themselves:

How would I feel if the case failed, the insurer did not pay out and I lost 100% of my money?
Do I have a sufficiently large portfolio of investments that the loss of 100% of this investment would not damage me financially?
If I am placing any reliance on the insurance contract with Leeward Insurance, have I conducted sufficient due diligence to ensure the insurance contract is watertight, and that Leeward Insurance has sufficient resources to return investors’ money?

If you are looking for an investment that provides “security”, you should not invest in unregulated products with a risk of 100% capital loss.

Background

In 2010 the Financial Services Authority (now the Financial Conduct Authority) introduced a regulation stating that if a mortgage customer falls behind with their repayments, the mortgage lender should not automatically add the shortfall into the calculation of their repayments – thereby increasing the amount the customer had to pay when they were already struggling to afford the original amount.

Some mortgage lenders have carried on with this practice regardless, and Allansons is seeking investors’ money to allow these customers to sue their mortgage lender for the amount they have been overcharged.

One thing that is unexplained in Allanson’s literature is why people who have been the victim of automatic mortgage capitalisation need legal funding in the first place. In April 2017, the FCA wrote to mortgage lenders instructing them to “review whether they have… automatically included payment shortfalls in their CMI calculations; if they have, review whether this practice has caused harm to customers… if so, assess and provide appropriate remediation”.

In other words, as with PPI and 1990s pension misselling, mortgage lenders are required to proactively find out if their customers have been the victim of this practice, and if so, offer them redress, without waiting for the customer to complain.

If the mortgage lender fails to do this, the customer can complain directly to the mortgage lender. If the mortgage lender still fails to offer redress, the customer can take their complaint to the Financial Ombudsman, a simple process which by design does not need legal assistance.

It would be possible for Allansons to handle a customer’s complaint to the Ombudsman on their behalf, but the rewards for doing so would be limited to a cut of the customer’s compensation; the Ombudsman does not award legal costs. This would certainly not generate a 50% return to investors.

Nowhere in the literature does it explain why mortgage customers should take their lender to court when they have the option of going to the Financial Ombudsman.

Indeed, judges now generally expect people to attempt alternative dispute resolution (ADR) before going to court; the Financial Ombudsman is one of those means of alternative dispute resolution. So if a customer takes their mortgage lender to court instead of going to the Ombudsman, there is a significant chance the case would be thrown out.

However, we reiterate that we are not legal experts and cannot comment on the legal merits of Allansons’ potential cases.

What is a matter of objective fact is that a) if the case does not succeed and Leeward Insurance does not pay out, investors will lose up to 100% of their money b) unregulated investments with potential to lose up to 100% of investors’ money are only suitable for sophisticated or high net worth investors as a small part of their portfolio.

Castle Trust – Corporate loan notes covered by the FSCS?

January 26, 2018March 1, 2018 ~ Phoenix ~ 2 Comments

Castle Trust Direct plc offers corporate loan notes paying 2% per annum for one year, 2.15% for 2 years, 2.3% for 3 years and 2.5% for 5 years.

An interesting feature of the bonds is that on maturity, the bonds will either be redeemed by Castle Trust Direct plc, or, if Castle Trust Direct plc is unable to redeem the bonds, Castle Trust Capital plc will repurchase them. Castle Trust claims that this obligation to repurchase the bonds – the “Repurchase Facility” – is covered by the Financial Services Compensation Scheme. For more analysis of this claim, read on.

Previously the company offered loan notes with returns linked to the Halifax House Price Index; these have been withdrawn from sale.

Status

Open to new investment.

Who are Castle Trust?

Castle Trust Capital plc was incorporated in 2010 as Morgan Trust Capital, changing its name to Castle Trust Capital in 2011.

Castle Trust Capital plc, which is the holding company as far as the UK side goes, is 100% owned by Castle Trust Holdings plc, an offshore company incorporated in Jersey. The board consists of Sean Oldfield (CEO), Matthew Wyles (Executive Director), Julian Dale (CFO), Andrew Macdonald (General Counsel), Barry Searle (COO) and Michael Bevan (MD of Omni Capital Retail Finance).

How safe is Castle Trust? And is Castle Trust protected by the FSCS?

These investments are corporate loan notes and if Castle Trust Direct plc defaults, and Capital Trust Capital plc is unable to honour its promise to repurchase the loans, you risk losing up to 100% of your money.

As mentioned, Castle Trust claims that if Castle Trust Direct plc defaults, and Capital Trust plc is unable to honour its promise to repurchase the loans (as Castle Trust Direct plc represents by far the largest part of Capital Trust Capital plc, it seems highly likely that if Castle Trust Direct has run out of money, the parent company will have too), the Financial Services Compensation Scheme will make good the losses, up to a maximum of £50,000.

This idea rests on Castle Trust’s assertion that “Castle Trust’s legal obligation to buy back Fortress Bonds and Housas is “protected investment business”.”

The FSCS provides cover for investors in the event that, for example, you instruct an FCA-regulated firm to purchase £50,000 of shares on your behalf, and they instead steal your money, and the parent company is unable to make good the losses. This is the kind of thing that is described by “protected investment business”.

The FSCS does not cover investors who invest in a loan note whose issuer defaults.

deposit v loan fscs — A simplified illustration of the normal distinction between a deposit and a loan note, and where compensation applies

Nowhere in COMP 5.5.1 of the FCA handbook does it define promising to buy loan notes in the event of the failure of the issuer as protected investment business.

If it is possible to obtain FSCS cover in this way, why doesn’t every bond issuer set up an FCA-regulated company, have it promise to buy their bonds in the event of default, and by doing so, substantially lower the coupon it will have to pay to attract investors?

Either every other issuer of loan notes in the country (and for that matter the world, as any company can set up in the UK, and FSCS cover is available to overseas nationals with a valid claim) is missing out on a huge opportunity to lower the cost of its borrowing.

Or Castle Trust’s claim that its loan notes are covered by the FSCS is wrong.

In the footer of Castle Trust’s website, it says “You risk losing capital should Castle Trust become insolvent”. The apparent contradiction between this text and its claim that the FSCS covers the Repurchase Facility is not explained. In our opinion, this section of the website is the accurate one.

Castle Trust will no doubt disagree with our interpretation of the FCA’s rules. Investors should note that in the event that Castle Trust Direct plc and Castle Trust Capital plc become insolvent, it is the Financial Services Compensation Scheme who will decide whether they have a claim, not Castle Trust.

Investors should not expect the FSCS to state one way or the other whether Castle Trust’s claims are accurate; the FSCS makes a decision on whether investors have a valid claim only when a firm actually goes into default. By this point, of course, it is too late for any investor to change their mind.

Investors may assume that as the interest rates on offer are very low given these are corporate loan notes – very similar to what you can get on a fixed-term deposit, which unequivocally is covered by the Financial Services Compensation Scheme – the FSCS must cover Castle Trust’s loan notes as well.

However, the definition of what is a valid claim under the FSCS has absolutely nothing to do with the interest rate on offer. A deposit account is protected by the FSCS – a loan note is not, regardless of what coupon it offers.

Should I invest with Castle Trust?

At time of writing, Atom Bank offers a 1 year bond at 1.8%, while Paragon Bank offers a 5 year bond at 2.4%, marginally lower than Castle Trust’s rates. However, Atom Trust and Paragon Bank are offering deposits, and investors can be virtually certain that should Atom or Paragon default, their bonds will be covered by the Financial Services Compensation Scheme.

With Castle Trust, they are investing in corporate loan notes and relying on the assumption that Castle Trust’s novel interpretation of the FSCS rules is correct.

If investors come to the conclusion they are not willing to rely on FSCS cover, then they should treat these investments as any other corporate loan note – high risk investments which should be held only as part of a wider portfolio.

A cynical person would say that Castle Trust’s rates appear to be calculated more to appear just slightly better than an equivalent deposit account than to reflect the risk of default.

Castle Trust stopped issuing investments linked to house price indices in 2015, but as some of its products were issued with a 10 year term, it will retain liabilities that will go up in line with house price indices until at least 2025. As nobody knows how house prices will move in the next 8 years, this means it is impossible to be certain how much Castle Trust will need to pay out as its legacy HPI-linked investments fall due.

Castle Trust also used to issue mortgages linked to house prices (i.e. if house prices go up the amount you owe goes up), so in theory their HPI-linked liabilities are matched by HPI-linked assets. But investors in their loan notes are bearing the risk that one does not match the other.

Providence Bonds plc completes administration, investors lose 100% of their money

January 23, 2018September 21, 2018 ~ Phoenix ~ Leave a comment

Providence Bonds plc offered unregulated corporate loan notes offering annual interest of up to 8.25% over a term of four years.

The scheme first showed signs of difficulty in June 2016, when payments were made late. In quick succession it emerged that a Providence subsidiary was under investigation in the USA for offering fraudulent and unregistered securities and had been ordered to stop trading. After that the Guernsey-based holding company, Providence Global, was wound up, and Deloitte stepped in as administrator to wind up Providence Bonds plc.

The winding up process was completed a couple of months ago and Providence Bonds plc has now been dissolved.

Providence Bonds’ literature made it clear that investors’ capital was at risk, but simultaneously claimed “We have designed Providence Bonds to address many of the risks associated with Mini Bonds” and that “Bondholders have three levels of protection:

the collateral inherent in the business of factoring itself;
there is a full parent guarantee of all liabilities to the Bondholders; and
there is a debenture over all the assets of Providence Bonds II PLC the Company, in favour of the Security Trustee.”

Deloitte’s final report lays bare how much protection this actually offered investors in Providence Bonds: none whatsoever.

The most crucial parts of the report are: “Having completed our statutory duties, and following a review of the intragroup claims, no further recoveries have been identified for the benefit of the Companies’ Secured Creditor [IPM, the Security Trustee]. …Insufficient realisations were achieved to enable a distribution to be made to the Security Trustee. No distributions have been made to the Preferential Creditor. There have been insufficient realisations to enable a distribution to be paid to the Unsecured Creditors.”

Other than the grand total of £15,109 from Providence Bond plc’s cash in the bank, the money was all gone. This £15,109 was paid to Deloitte – in any company administration, the administrator stands first in the queue. The Security Trustee received nothing. The bondholders therefore lost all their money.

Significance

The 2016 collapse was widely covered in the media; Deloitte’s subsequent picking over the bones has received little press coverage. This is not that surprising as “Investors in scheme that collapsed in 2016 have still lost their money” is not news.

However, there are still plenty of unregulated loan notes around which heavily feature terms like “debenture” “Security Trustee” “multi-layered protection” in their literature. Any investor who invests on the basis of such “protection” should bear Providence Bonds in mind.

Providence Bonds’ investments were even promoted by the military charity Soldiering On in exchange for sponsorship. It is not known how many veterans lost their savings as a result of Soldiering On’s paid promotion of Providence Bonds.

Who were Providence Bonds?

At the time of the last accounts filed before Providence went bust, the directors were Antonio Carlos de Godoy Buzoneli, Paul Everitt, Adam Tattersall and James Vinall. According to the Telegraph Buzoneli was the overall controller of Providence Group.

Further action

While no money has been recovered for investors in Providence itself, the Telegraph reported in January that an investor action group had launched a Financial Ombudsman case against the FCA-regulated company who approved the marketing material for Providence’s minibonds. ~~Whether the Financial Ombudsman has awarded compensation to Providence investors is currently not known.~~

Addendum 19.03.18: The Investor Action Group has confirmed that complaints against Independent Portfolio Managers are still being considered by the Ombudsman, after an inital decision to reject the complaints on the basis that Providence investors were not customers of Independent Portfolio Managers was overturned.

We have been asked to clarify that there were two Providence Bond companies, Providence Bonds plc and Providence Bonds II plc – both went bust with 100% losses to investors.

MJS Capital plc (Colarb Capital plc since October 2018)

January 19, 2018February 26, 2019 ~ Phoenix ~ 226 Comments

Update 27-Dec-18: Due to the numerous queries posted by MJS Capital investors on this blog, an Investor Action Group has been set up on Facebook to help them co-ordinate and share information. Unlike comments on this blog, posts on the group will only be visible to those allowed to join. Head to https://www.facebook.com/groups/mjscapital/ to join the group.

Update 10-Oct-18: On 5 October 2018, MJS Capital plc renamed to Colarb Capital plc. This article was published on 19 January 2018 when Colarb / MJS was known by its old name.

Below is the original article published on 19 January 2018.

— end updates —

MJS Capital offers unregulated corporate loan notes paying 5.85% interest for a one year term, 6.85% for two years, 7.85% for three years, 8.85% for four years and 9.85% for five years. Interest is paid out quarterly, or can be rolled up (which slightly increases the annual return).

The bonds can be redeemed early, subject to a penalty and provided that MJS Capital “determines in its discretion that it has sufficient liquidity to satisfy the request in whole or in part.” The penalty is 5% plus the difference between any interest paid out and the interest the investor would have received had they chosen that term originally. For example, someone who invested in an 8.85% four year bond and redeemed it two years early would have to pay [8.85 – 5.85 + 7.85 – 6.85] = 4%, plus 5%.

Status

The investment is not openly promoted on MJS Capital’s website, but is currently being promoted by unregulated introducers. I easily obtained details of the offering without being asked to provide any proof that I qualified as a sophisticated or high-net worth investor.

Who are MJS Capital?

MJS Capital’s website gives no details as to who is behind the company. The Information Memorandum and Companies House show that the directors of the company are Shaun Prince, Lord Timothy Razzall (Chairman) and Martin Westney. (Ajaz Shah is also listed as a Director in MJS’ Information Memorandum, but not on Companies House – he was appointed as a director on 15 May 2017 and removed as a director the same day.)

MJS is effectively 100% owned by Shaun Prince who holds 12,500 of the company’s 12,501 shares. The single other share is owned by a Stephen Prince, presumably related.

How secure is the investment?

These investments are unregulated corporate loans and if MJS Capital defaults you risk losing up to 100% of your money.

Investors’ money is used to invest in arbitrage trading in financial instruments.

Arbitrage is a perfectly valid way of making money, but the returns available are limited as any opportunity to take advantage of different prices on different markets will quickly be seized upon by other investors until the opportunity disappears.

If MJS Capital fails to make sufficient arbitrage profits to pay its bond holders up to 14% per annum, MJS Capital will default and investors risk losing up to 100% of their money.

The literature says that profits generated from the Company’s investments will be held in a designated Security Fund, which will be administered by a Security Trustee. However, the profits generated from the Company’s investments are being used to pay investors their interest and capital, so this offers no protection against the possibility that MJS Capital fails to make sufficient returns from arbitrage to maintain interest and capital payments to investors.

The literature says that Bonds are backed by a charge over the Security Fund, the Company’s cash balances, its trading contracts which utilise the proceeds of issue of the Bonds, and book debts arising from deploying the proceeds of issue of the Bonds.

The Security Fund we have already covered. If MJS Capital defaults, it will be because the Security Fund has already run out of money, i.e. profits generated from the company’s investments were insufficient to meet its obligations.

The company’s cash balance was £194 acccording to the latest accounts filed with Companies House (March 2016). (194 pounds, not thousands or millions).

Regarding the final two, given that MJS Capital’s business is to buy investments on one exchange and almost immediately sell them on another to generate profits from arbitrage, it is not clear what there will be to sell in the event that MJS Capital has insufficient resources to pay investors.

The company has an insurance policy of £10 million against the event that MJS Capital executes a trade not in accordance with its client instructions, and £20 million against operational risks such as fraud and computer viruses. Neither of these insurance contracts have anything to do with the possibility that MJS Capital fails to generate sufficient returns from arbitrage to meet its promises to investors.

Should I invest with MJS Capital?

Any investment offering up to 14% per annum yields should be considered very high risk (i.e. higher risk than a diversified portfolio of stockmarket funds).

These investments are certainly not “a very low risk strategy for our investors” as MJS Capital owner Shaun Prince has described them.

Before investing investors should ask themselves:

How would I feel if the investment defaulted and I lost 100% of my money?
Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?

If you are looking for a “secure investment”, you should not invest in unregulated products with a risk of 100% capital loss.

Footnote

Shaun Prince, the owner of MJS Capital, took part in this thread on Moneysavingexpert.com as a verified representative of his company.

During this thread Prince made the frankly astonishing statement “The saying “if it looks too good to be true it almost certainly is” is no doubt a saying created within the regulated market to encourage investors away from investments offering higher than average yields.”

In linguistic terms, Prince is objectively wrong. The phrase “too good to be true” is attested as early as 1580, long before there was such thing as a regulated market.

Less pedantically, investors will have to make up their own mind whether the phrase “too good to be true” is a conspiracy to scare them away from high-risk loan notes.

In any case, this investment is clearly not “too good to be true”. It is a high risk investment with a risk of 100% capital loss, and the high coupon paid by the bonds reflects that.

In that thread, Prince claimed that MJS Capital would be listing on the London Stock Exchange in April 2017. However, as at January 2018 a search for MJS Capital on the LSE returns no results.

FCA confirms it is investigating unauthorised binary trading firms – but has the horse already bolted?

January 18, 2018October 4, 2018 ~ Phoenix ~ Leave a comment

On Friday the Financial Conduct Authority issued a list of firms known to be offering binary options in the UK without regulatory authorisation. Offering binary options has required FCA authorisation in the UK since 3 January.

COME ON RAINDROP! GO ON MY SON! GO ON… oh… oh well, shouldn’t invest money I couldn’t afford to lose.

Binary options is a form of gambling in which punters place bets on whether a stock, commodity or other security will go up or down within a very short space of time, often 15 minutes or less.

It is the 21st century equivalent of gambling on which of two raindrops will reach the bottom of a window first.

Adverts for binary options bookmakers have been ubiquitous on local news media and other websites for some time, for those of us who don’t use an ad-blocker.

The adverts follow the well-worn pattern of an ordinary punter talking about how they were struggling with debt but have now found financial freedom. After several paragraphs of talking about how great it is to be able to provide security for their family and go on holidays when they want, they reveal the secret was binary options.

And how they were initially sceptical, wagered a few quid “as they had nothing to lose”, and then swiftly progressed to making 4 figures in one month and 5 figures in the next month as their returns multiplied.

The reality is that as with all forms of gambling, the house always wins. And many people have lost their savings even more quickly than if they had bet in a legitimate casino, as many binary platforms rig the trades, refuse to process withdrawals and simply steal punters’ money.

According to the police, £50m has been lost in binary options scams. Assessing the true scale of losses is almost impossible, as Google searches about binary options are drowned out by fake review sites and fake forums.

So the FCA’s action is welcome. Any firm offering binary options in the UK without authorisation is now committing a crime, and the FCA’s press release suggests that further action may be forthcoming against the firms on the list.

There is likely to be little the FCA can do against binary options firms operating outside the UK. Analysis of the FCA’s list reveals a surprisingly high number – around half – claim to be based in the UK. But it wouldn’t be at all surprising if many of these are virtual office addresses.

And the prospect of the FCA recovering funds on behalf of defrauded binary options investors is pretty slim even when the firms and their money are still in the UK. (If you weren’t defrauded, and just made a bad bet, then the chance of recovery is nil.)

But most of all, this may be yet another stable door that the FCA has shut after the horse has bolted. The binary options ads have already been swiftly disappearing from the local news sites over the past few months.

And what is being flogged by the ads that have replaced them? Cryptocurrency – or to be more accurate, contracts for difference allowing you to bet on whether cryptocurrencies will move up or down. Advertised to UK investors via UK local news sites, with no indication that the advertiser is authorised by the FCA to offer contracts for difference in the UK.

As it is written, as one door closes, another one opens.

“All payments made in full” – what does it mean?

January 17, 2018March 12, 2018 ~ Phoenix ~ Leave a comment

An increasing number of offerors of unregulated loan notes have started proudly advertising the fact on their website that “all of our investors have received every payment in full and on time”.

This may sound very reassuring, but is it?

Let’s suppose that I launch an unregulated bond paying 8% per annum for a term of three years. And that I attract 100 investors a year who each invest £10,000. And let’s suppose that I do nothing except sit on the money.

Actually, scratch that last sentence, as the companies making these statements might rightly object to me talking about fraud, even hypothetically. Let’s instead suppose that I invest investors’ money in property, but due to a combination of bad luck and incompetence, the property never makes any money – all the rent goes on the costs of maintaining the properties, my staff, etc, and the net return before payments to bondholders is zero.

In the first year, I take in £1 million, and have to pay out £80,000 to investors – easy.

In the second year, I take in £1 million, still have £920,000 from the first year’s investors sitting in property, and I have to pay out £160,000 – still easy.

At the end of the third year, the first year’s investors’ capital starts falling due, so on top of £240,000 in interest I have to pay out £1 million. Not a problem when I have £1.76 million in assets – not counting the £1 million I’m taking in this year.

In the fourth year, the same happens – but now I have £1.52m in assets. In the fifth year, £1.28 million in assets. Uh-oh. But it’s not until year 10 that I actually run out of money and I finally become physically unable to pay investors.

10 year business — The slow death of a failing business. Until 2028, “every investor paid in full”. And even in 2028, I can walk away from the wreckage proud that despite not making a single penny of profit, I still paid seven out of ten investors in full.

In reality, I would probably run into trouble earlier than that, what with having to fire-sale properties to raise enough money for capital repayments, and the unlikelihood of being able to convince investors to keep investing £1 million a year in a business gradually sliding into the abyss. But the point is that until the very end, I could proudly boast on my website “every investor payment made in full and on time”.

What I am describing is not a Ponzi scheme. A Ponzi scheme is where you use new investors’ money to pay off existing ones. My existing investors are being paid with rental payments and property sales. It just happens that I don’t have enough of them and run out, despite my honest best efforts to refinance the business and turn it around. It’s just a failed investment, and it’s not illegal to run a failed investment.

For avoidance of doubt, I am not suggesting that any particular company offering unregulated loan notes, reviewed on this blog or not, is not making returns and is going to default in ten years or at any other point. This model is simply to illustrate how little it means to a new investor to say that previous investors have been paid in full.

So what does it mean when a company offering unregulated loan notes proudly states “all investors so far have received 100% of their payments?”

Well, if they’ve been going for 20 years or more, it does suggest that they have a sustainable business that generates sufficient returns to maintain their coupons.

But this does not apply to many of the businesses offering unregulated corporate loan notes, many of which started soliciting investment around 2015. For a company that has only been soliciting investment for a few years, a statement that so far all payments have been made is almost meaningless.

In fact, “all investors paid in full and on time” is a statement of the bleeding obvious. If any investors hadn’t been paid, they would most likely put the company into administration, in order to recover as much of their investment as they could. In which case the company would not be soliciting new investment.

“All investors paid in full and on time” is a statement which may appear to reassure investors who don’t want to risk their money, but is in fact both irrelevant and redundant.

Investors who actually have the experience and knowledge to invest in unregulated loan notes won’t care whether payments have been made on time so far – they know there is a risk that they might lose their money in the future and they will only invest a small part of their portfolio accordingly.

Anyone who thinks that there is some measure of security in the statement “all investors paid in full and on time” should almost certainly not invest in unregulated corporate loan notes with a risk of 100% capital loss.

If they are looking for security of capital, they should stick to deposits from an FCA-regulated institution which is covered by the Financial Services Compensation Scheme and therefore offers certainty that they will be paid in full and on time.