London Capital and Finance bondholders to be bailed out by new £120m taxpayer scheme

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Nearly four months after the original announcement, the Treasury has finally announced that any London Capital and Finance investors who have not been refunded via the Financial Services Compensation Scheme will be bailed out almost in full by the taxpayer, up to a £68,000 cap. Around 8,800 people are expected to be eligible.

In a sop to fans of moral hazard, the new scheme will refund up to 80% of the original investment, minus any interest payments or dividends from the administration. Having faced near total losses for over two years, it is unlikely investors under the cap will be too upset by a 20% haircut. A smaller number of investors who invested significantly more than the cap could be facing very large losses: we are meant to assume that they were too rich for us to empathise with, but there could easily be first-time investors of middling or modest means who invested pension lump sums or inheritances.

The FCA will also make “ex gratia” payments to some investors who contacted it before the collapse, some of whom were told by FCA call centre staff that their investments in LCF were covered by the FSCS. More with-it call centre staff who attempted to protect investors and raise concerns were slapped down by FCA management.

On top of the FSCS bill which in February stood at £56.3 million, this would bring the total bill paid by the general public over the collapse of London Capital and Finance to £176 million, plus any remaining successful FSCS claims, plus the FCA’s “ex gratia” payments.

The conclusion of the saga of LCF compensation confirms a long-standing principle in UK financial regulation: that if a sufficient number of people believe an investment is risk-free, the Government has to spend everyone else’s money to make it so. This principle has previously been applied to Equitable Life, Barlow Clowes, Icelandic banks and defined benefit workplace pensions and others.

Back in July 2019 I noted that an ad-hoc compensation scheme funded by taxpayers was one of the options on the table to resolve the issue of LCF investors let down by the FCA’s incompetence, as detailed in the Gloster Report. One and a half years later the Treasury has finally plumped for that option.

Whether the Government manages to recoup any compensation from the Four Horsemen of LCF remains to be seen. Thirteen individuals were sued by LCF’s administrators last year, alleging that ten of those individuals “misappropriated” investors’ money (now taxpayers’ money). No further developments in that case have been reported as yet.

The £26 million funneled from LCF investors (now taxpayers) to Facebook and Google for their misleading ads will almost certainly never recovered, as there was no rule against Facebook and Google taking £26 million to promote high risk unregulated investment schemes to the public – and still isn’t.

With the compensation saga coming to an end, the next big question is whether the Government will do anything to stop the next wave of unregulated investments taking in a similiarly large sum, which eventually falls on the taxpayer again.

The early signs are not promising. As part of the announcement on compensation, a consultation on bringing mini-bonds under FCA regulation has also been announced.

What this is supposed to achieve I’m not sure, bearing in mind that the FCA was happy to give London Capital and Finance all the authorisation they needed despite

  • London Capital and Finance’s consistent history of misselling their high risk investments to the public
  • LCF disclosing to the FCA that 25% of investors’ money was paid out as commission
  • Numerous other red flags being visible in LCF’s accounts

– all failings identified by the Gloster Report. Also, if it becomes difficult to issue minibonds to the public, all that will achieve is to make the unscrupulous advertise other unregulated investment structures instead – such as the “invest in our hotel room with an 8% assured return” structure, which continues to flourish unabated – or an entirely new structure.

It is depressingly revealing that the Treasury has not announced a consultation into bringing UK investment regulation out of the 1920s and requiring all investment securities offered to the public to be registered with the FCA, which is how it has worked in the USA for decades.

Without comprehensive legislation, an equivalent of the US’s 1946 Howey Test and proactive regulation, the UK will always be fighting the last war.

When will the Government put LCF investors and levy-payers out of their misery?

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The interminable saga of London Capital and Finance returned to the newspapers this week when John Glen, secretary to the Treasury, provided an update to the Sunday Telegraph on the announcement that the Treasury would set up an ad-hoc compensation scheme to compensate LCF investors who have so far missed out.

The update, three months after the compensation scheme was announced at the cig-end of 2020, is that there is no update at all.

John Glen, economic secretary to the Treasury, told the Sunday Telegraph that the compensation scheme is at the top of his agenda.

“I want to do it as soon as I can,” he said.

“Clearly, it’s been three months since I put down a written ministerial statement, that’s a significant amount of time. 

“I want to move it forward, and I will do so as soon as I possibly can. But I can’t give a categorical assurance on a date today.”

City A.M.

This is not a decision that requires a lot of head scratching, nor can the Treasury claim it is waiting for more information, two years since the FCA-authorised Ponzi scheme collapsed.

From the moment LCF collapsed, the options available to the Government have always been:

  • refuse to pay compensation (as the Government usually does when unregulated and pseudo-regulated investment schemes collapse – albeit mostly because they don’t often take in £240m and make the national press)
  • find a novel interpretation of the rulebook that allows compensation to be paid while claiming this is how it’s supposed to work (the Independent Portfolio Managers option)
  • admit the system has failed and form an ad-hoc compensation scheme (the Allied Steel, Barlow Clowes, Equitable Life etc etc option)

So far the Government has preferred an awkward halfway house where people have been compensated essentially at random. Or for reasons so arcane that they are indistinguishable from random.

This has become increasingly untenable the more compensation has been paid out, at the expense of those who pay levies to the Financial Services Compensation Scheme, i.e. everyone who uses financial services, i.e. you and I.

The latest figures suggest that £3 of every £4 invested in LCF is being bailed out (albeit from a sample size of only 25% of funds invested, so this could change dramatically). If that holds, the concept of moral hazard has already been thrown out the window.

So what is preventing the Treasury from making a decision? “We’re busy” isn’t an explanation, as delaying a decision that the Secretary of the Treasury has already announced creates more work, not less, as you still have to make the decision eventually but you also have to issue explanations for the delay on top.

Unless the Treasury is hoping that London Capital and Finance’s stable of duff investments manages to find a deposit of unicorn dust in the North Sea which magically pays out all investments, delaying a decision for three months achieves nothing.

The ideal scenario for all of us is if compensation for LCF investors was announced alongside a comprehensive overhaul of UK securities laws to require all investments offered to the UK public to be registered with the Financial Conduct Authority – as has been the case in the USA for almost 90 years.

The prospect of bailing out yet another collapsed unregulated scheme would be a less bitter pill for the regulated financial sector (and by extension the general public which banks, saves and insures itself with it) if it had a genuine reason to believe that it would be less likely to happen again, and result in a smaller bill when it inevitably does.

Such an undertaking would require a lot of work behind the scenes and could not be announced at the drop of a hat. It could also not be more timely as the UK plots its recovery from the pandemic, a recovery that would be significantly stronger if the UK sloughed off its reputation as the scamming capital of the developed world.

Alternatively, the Treasury could announce that it’s time to move on, lessons have been learned, and the UK will recover from the pandemic by having National Savings and Investments offer Covid bonds at 2% per year (maximum investment £5,000 per person).

LCF to cost legitimate finance industry and general public nearly £200 million?

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Figures published by Money Marketing last week indicate that so far the FSCS has paid out £56.3 million to 2,878 investors in FCA-authorised Ponzi scheme London Capital and Finance.

At around £19,500 per investor, that’s pretty typical of the average total investment.

Apart from £2.7m for investors who transferred a stocks and shares ISA, the vast majority of that was paid for LCF giving misleading “advice”. Despite not being a financial advice firm, not being authorised to give financial advice, and employing no financial advisers, Financial Services Compensation Scheme levy payers, i.e. the general public, have been put on the hook on the basis of “I’d advise my own mother to invest in this” school of salesmanship.

864 investors have seen their claims on the basis of advice rejected (a quarter of the total).

That £56.3 million bill represents only a quarter of the total number of LCF investors. If this ratio of successful claims continues to hold true over the remaining 7,858 who have not yet received a response from the FSCS, that would cause the total bill to levy payers and the general public to reach £187 million. I’ll emphasise that this is a finger in the air calculation, and could be miles out if the FSCS has prioritised claims with more chance of success, for one reason or another.

Still, if that ends up being anywhere close to the final bill, you almost have to ask why the Government didn’t just bail out 100% of LCF investors, rather than arbitrarily excluding a relatively small number. By the time you’ve decided to compensate 75% of investors (with the potential for more if the Treasury decides to pay further ad-hoc compensation), any arguments about moral hazard have already been thrown out of the window.

LCF investors have complained regularly that the system used by the FSCS to assess claims is inadequate, frequently rejecting claims initially and then upholding them if the investor has the gumption to appeal (i.e. the same system used by the DWP to keep the UK disability benefits bill down) and relying on gibberish machine-transcribed versions of recorded phone conversations.

As I’ve regularly predicted, we seem to be heading towards the worst of both worlds where neither LCF investors as a group nor FSCS-fee-payers are satisfied with the outcome.

Real reform of the UK’s securities legislation as a quid-pro-quo for a fair and consistent (but not necessarily 100%) bailout of LCF investors would at least have salved the pain to FSCS levy-payers, i.e. legitimate financial services businesses and the general public, who would be mollified by the fact that another London Capital and Finance couldn’t happen (at least not to the same extent). But as yet the Government seems to have gone with “let’s do the same thing over again and see if it has a different result”.

Bailey-Gloster LCF spat distracts from real issue

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An unedifying dispute broke out this week as Andrew Bailey testified to a Treasury Select Committee about the collapse of London Capital and Finance.

In one of the more depressing sections of Dame Gloster’s report into the FCA’s mishandling of the FCA-authorised Ponzi scheme (in a crowded field), Dame Gloster highlighted how, instead of using the investigation as an opportunity to learn from its mistakes, the FCA instead tried to shirk responsibility, claiming that holding individuals responsible for their failings might deter people from applying to be senior bureaucrats, and questioning whether, in a very real sense, there was any such thing as responsibility at all.

It also claimed that nobody could have seen the collapse coming (they did) and that the investigation was using the benefit of hindsight (it wasn’t).

Before the Select Committee, current Bank of England Governor Andrew Bailey tried to reverse ferret out of this dodging of the philosophical concept of responsibility, claiming that the report had made a “fundamental misunderstanding” and that he had only sought to remove personal names from the report where they related to “culpability” rather than “general responsibility”.

Gloster for her part refuted that there had been any misunderstanding and stated in an open letter that Bailey’s attempt to have his name removed from the report went beyond what Bailey claimed, and “the distinction between personal culpability and responsibility was merely one argument”.

Before the Committee, Bailey also claimed that Gloster “put it to you that if only we told the staff to pull their socks up the problem would have gone away”. How Bailey got that impression from Gloster’s forensic, comprehensive, nearly 500 page report is a mystery to me.

This is more than a case of “he said, she said”, because implying that the Governor of the Bank of England has not been straight with Parliament is a very serious matter. And yet it is still a side issue.

The best defence for Andrew Bailey would have been to say “Yes, we ignored the numerous whistleblowing reports from reputable professionals and the general public, failed to consider whether a company systematically misselling high-risk bonds needed more investigation then telling them to change the adverts, and wrongly dismissed the whole scheme as ‘not our problem’. But I was merely one big cog in a crappy machine. The entire UK securities law framework is not for purpose, and creates a pathway for high-risk investment schemes to be systematically sold to the public. I screwed up, but because there is a framework that allows you to sell high-risk unregulated investment schemes to the public, as long as you separate out the promotion of the scheme from the investment scheme itself, it was inevitable that someone would screw up.”

But Bailey can’t say that. Because the Governor of the Bank of England can’t tell the world that the UK securities law framework is not fit for purpose. In an interesting new version of the Peter Principle, Bailey has been kicked upstairs into a position of responsibility that gives him too much to lose by calling out the incompetence of those above him.

One of the implicit jobs of the head of the Bank of England, in between taking the flak from savers for lowering interest rates or borrowers for raising them, is to maintain confidence in UK PLC. So admitting that the UK is the scamming capital of the developed world is not going to happen.

London Capital and Finance collapsed two years ago, and there has been no serious movement since then towards:

  • Reforming the UK’s securities law, starting with the Financial Services and Markets Act 2000, to ensure that any firm offering investment securities to the public must register with the Financial Conduct Authority (or equivalent). In contrast to the current system that randomly exempts loan notes and other schemes that try to dodge the UK’s more limited ban on collective investment securities.
  • Reforming the FCA from the top down and rooting out its “regulatory perimeter”, aka the cultural attitude of “if it’s unregulated it’s not our problem”.

London Capital and Finance investors are at present still anxiously waiting to see whether the Treasury will announce further compensation for those left behind by the essentially random compensation payments made so far. (E.g. to people who transferred stocks & shares ISAs but not, for no discernible reason, cash ISAs, and people who successfully convinced the FSCS they received advice from a firm which was not a financial advice firm and employed no financial advisers.)

The legitimate financial industry and the general public, who will ultimately have to pay for any further compensation, are anxiously waiting to see whether Parliament will do anything to stop it happening again, and again, and again.

Treasury announces further compensation scheme for LCF investors

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Shortly after the release of the Gloster report into the FCA’s failings over London Capital & Finance, the Treasury announced that it would announce a scheme to compensate London Capital & Finance bondholders… maybe.

Taking into account the various channels through which people affected can seek compensation, the government will… set up a scheme to assess whether there is a justification for further one-off compensation payments in certain circumstances for some LCF bondholders.

John Glen, Economic Secretary to the Treasury

“Various channels” is a reference to the essentially random basis on which the Government has paid out compensation to LCF investors so far.

Investors who have managed to secure compensation far include people who transferred stocks & shares ISAs to LCF, but not cash ISAs (because there were too many of the latter because of some random nonsense about “regulated investments” being different from “designated investments”). It also includes people who managed to persuade the FSCS that LCF gave them advice (despite not being a financial advice company, not being authorised to provide advice, and employing no financial advisers).

The LCF investors who were told by the Financial Conduct Authority’s call handlers that LCF was legit and FSCS-protected also appear to have a decent chance of being compensated individually by the FCA. Although the Gloster report mentions several cases, this is likely to be only a handful of LCF’s 11,600-odd.

The FSCS has paid out about £50 million so far, representing just over a fifth of the amount lost in LCF.

How much the Treasury’s new scheme will pay out is unclear. Based on what little has been announced so far, it could be anything from zero, if the Treasury decides enough has already been done (although that would make the Treasury’s announcement, and the raising of investor hopes, rather pointless), to full compensation along the lines of the FSCS, perhaps with a cap. More details are expected in the New Year.

If we assume the Treasury’s scheme isn’t pointless, then of the three options available to the Government to justify paying compensation I outlined in an article a year and a half ago, it appears that we are staggering towards a mish-mash of all three. (1. Compensation for bad advice, 2. Compensation on a novel re-interpretation of what the FSCS covers a la Providence Bonds and Secured Energy Bonds, and 3. An ad-hoc, one-off compensation scheme in recognition of regulatory failure.)

Whether compensation is paid by the FSCS, the FCA or the Treasury is of academic interest, as fundamentally the bill lands on the kitchen table of the general public either way. (The category of FSCS levy payers, i.e. anyone who uses financial services, is indistinguishable from the category of taxpayers, although IFAs and others who get billed by the FSCS personally will have a different perspective.)

Whether the Four Horsemen of LCF or the nine other executives sued by LCF’s administrators will be repaying any of the investors’ money is as yet unknown. The lawsuit was launched in September and there’s been little further news since.

Regardless of what legal justifications are found, fundamentally the rationale for bailing out LCF investors is the same old rule: if enough people believe that an investment is risk-free, the Government has to spend everyone else’s money to make it so. See also final salary pension schemes, Barlow Clowes, Equitable Life, IceSave, etc etc.

2021 may be the year that LCF joins that list, depending on how far the Treasury decides to go.

Takeaways from the Gloster report into the collapse of London Capital and Finance

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On Thursday 17th, Dame Elizabeth’s Gloster’s long awaited report into the £237 million collapse of London Capital & Finance was published.

The report is damning and makes very clear that the FCA bears a large part of the blame for LCF accumulating, and losing, as much investor money as it did.

Furthermore, the following is, in the Investigation’s view, self-evident: had some or all of the FCA’s failures in regulation outlined in this Report not occurred, then it is, at the least, possible that the FCA’s actions would have prevented LCF from receiving the volume of investments in its bond programmes which it did. For instance, had possible irregularities by LCF been detected (and their significance appreciated) by the FCA42 sooner than late 2018, then the FCA should, in the Investigation’s view, have intervened (or taken other regulatory action) earlier.

This has been widely covered in the press, along with the apology from Andrew Bailey, who was head of the FCA throughout much of LCF’s lifespan, and was rewarded for its failure by being kicked upstairs to the job of Governor of the Bank of England.

Here are some edited highlights for those who want a bit more detail than the headlines, without reading the full 494 page report. This is not intended to be a full summary of the report (so you’ll have to forgive me for skimming over accounts of high-level supervision discussions at corporate away days, important as they are) but a list of the most interesting / juiciest bits for ordinary investors.

LCF was waving red flags from day 1, but its accountants didn’t notice

Accounting behemoth PriceWaterhouseCoopers told the FCA in November 2017, on being replaced by another firm of auditors, that there were no matters to bring to the FCA’s attention. The fact that LCF was paying 25% commissions and had no investments with a realistic hope of paying sufficient returns to fund 25% commissions and 8% interest to bondholders apparently wasn’t deemed worthy of notice.

A chartered accountant hired to review the historic information submitted by LCF to the FCA found “red flags” and inconsistencies in financial information that could have been spotted as early as 2016. It also found that the information provided to the FCA by LCF continually indicated that LCF could not meet its liabilities without raising further investment.

It noted that LCF had to charge up to 29% annual interest to its underlying borrowers to fund its commission and interest payments, and this made no sense considering LCF claimed to be engaged in secured lending with low loan-to-value ratios – such borrowers would have no need to pay such high interest. [A11]

The FCA told potential investors that LCF was not a fraud, and FSCS protected

An elderly (septuagenarian) investor was told by the FCA that LCF was “unlikely to be operating fraudulently” as it was FCA-authorised. This was not an isolated incident. [A6 4.2 and 6.7]

A call-centre worker who did advise a potential investor to be “very cautious” and report LCF to Action Fraud, having correctly identified the misleading nature of LCF’s promotions, and subsequently raised concerns with the FCA’s Supervision division, was slapped down as “in error”. They were told that there was already an article on the FCA’s intranet to say that they were “already aware of this issue” and that LCF was not in breach. [4.6-4.7]

A limited number of FCA call-handlers incorrectly advised LCF investors that they would be protected by the Financial Services Compensation Scheme. [6.2]

Potential investor: It does sound too good to be true doesn’t it?

FCA call handler: Let’s have a look… So that’s [London Capital and Finance] coming up as authorised and regulated, so that’s absolutely fine. That means if you wanted to invest with them, you’d be protected by up to £50,000 by the Financial Compensation Scheme.

Transcript of call between a potential LCF investor and an FCA call handler. [C12 2.36]

FCA action against LCF was limited to watering down their misleading advertising

The FCA first contacted LCF with concerns over how its bonds were being marketed in January 2016. At the time LCF’s website claimed LCF was “100% protected”. This was amended following the FCA’s intervention.

Despite LCF’s misleading promotions, the FCA took no follow-up action to verify a) that all LCF’s investors qualified as high-net-worth and sophisticated and that it could produce evidence to confirm this, and b) that it was lending investor money to a diverse portfolio of SMEs as it claimed. A cursory investigation would have revealed that neither was true, and led inevitably to LCF being shut down before it caused £237 million in investor losses.

The FCA’s previous intervention into LCF’s misleading financial promotions were not flagged up during LCF’s application for FCA authorisation. [A8 10/5/16]

Further FCA intervention into LCF’s misleading financial promotions took place in September 2016, this time over lack of past performance disclaimers and warnings about the illiquidity of the investment. Again there was no follow-up after LCF mollified the FCA by amending its website. [A8 Sep16]

In January 2017, LCF disclosed to the FCA that it paid 25% commission on funds invested by bondholders. This commission was not disclosed to bondholders. The FCA apparently didn’t see anything alarming about this. [A8 26/1/17]

In October 2016, LCF applied for permission from the FCA to hold client money. In a dim corner of the FCA’s collective mind, a lightbulb went on: “why would a firm dealing with corporate finance want to hold client money?” This led to LCF being subjected to an “Enhanced” risk assessment process (the 2nd most rigorous out of 4 classifications), during which the FCA asked detailed questions of LCF. In June 2017, LCF threw in the towel in its attempt to gain permission to hold client money.

In response, the FCA downgraded LCF to the “Standard” risk channel (the 2nd least rigorous out of 4) and from then on accepted all LCF statements and responses at face value in regard to its application for regulatory permissions, including in relation to the security of its loans. [C9 6.9]

The FCA consistently treated LCF’s unregulated bonds as not its problem

The report finds that, in the multiple times that the LCF crossed FCA desks, it repeatedly failed to examine LCF’s unregulated business or consider the investment scheme holistically (as a whole). [C2]

In the wording of the report, the “FCA’s approach to its regulatory perimeter was unduly limited” and “the FCA did not sufficiently encourage its staff to look outside the Perimeter when dealing with FCA-authorised firms such as LCF”.

The “regulatory perimeter” is internal code for the FCA’s cultural attitude of “if it’s unregulated it’s not our problem”. As per the statutory objectives given to the FCA, unregulated investment schemes promoted to the public very much are the FCA’s problem, and the Financial Services and Markets Act specifically empowers the FCA to act on such schemes, using court action if necessary where its statutory powers are insufficient.

FCA staff members responsible for reviewing LCF’s application for regulatory status had no accountancy qualifications, and training to analyse company accounts was “on-the-job”. (I.e. non-existent; when it comes to authorising financial firms so they can promote themselves directly to the public, doing the job with no training is not training.) [C2 2.6a]

According to a supervisor, there is little training on how to identify financial crime within the FCA’s Supervision division. [C2 2.6b]

LCF partly fell through the net because responsibility for its regulation had been transferred from the Office of Fair Trading (which formerly regulated consumer credit) to the FCA. 50,000 such firms were subject to a “limited strategy”. As a result, from 2014 to early 2019, LCF was subject to no proactive supervision by the FCA. [C2 3.5]

The FCA failed to see anything untoward about the fact that LCF was generating no revenue from the regulatory activities it had applied for permission to do. (This was, of course, because LCF applied for FCA authorisation purely to use it as a “seal of approval”, and to allow it to access the ISA market.) [C2 3.2]

The FCA treated LCF’s repeated breaches of financial promotion rules as separate cases, rather than considering whether these repeated breaches could indicate poor systems and controls or even misconduct. [C2 3.7b]

A number of members of the public contacted the FCA identified correctly

  • that LCF’s literature was misleading
  • that LCF’s published accounts raised questions over its financial viability, contradicted LCF’s claims to have loaned money to numerous SMEs,
  • that LCF had conflicts of interest between itself and connected companies

Whenever these reports from the public were escalated, they continually foundered against the FCA’s “it’s unregulated so it’s not our problem” regulatory perimeter.

An internal FCA report from 2013 identified that there was a risk of minibonds such as LCF’s slipping through the cracks. “In addition, if they [are] not sold on an advised basis, it seems that it would not be a sector team issue. This is a risk as there is a possibility that this issue is overlooked as each sector might consider it beyond the scope of their remit.” [Translation: nobody’s been given the job of looking at minibonds so every FCA team will say “more than my job’s worth”.]

The report also noted the increasing amount of money that was going into minibonds, and that misselling of minibonds via lack of risk warnings was endemic. It is unclear whether this report was ever acted on by or even reached senior FCA management. [C7 2.2]

There is no evidence that the FCA took any steps to check whether LCF’s bonds were sold only to high-net-worth and sophisticated investors. [C7 2.6]

FCA senior bureaucrats shirk responsibility

In its response to the Investigation, the FCA claimed that the Investigation was unfairly using the benefit of hindsight. [C1 10.3b]

As the Investigation notes, this is of course false, as per its accountant’s report which showed that there was more than sufficient cause for further investigation and intervention as early as 2016.

The FCA also claimed that it would have taken a forensic accountant to spot the red flags in LCF’s financial information. [C9 6.21]

As the Investigation notes, this is also patently incorrect. Plenty of lay members of the public managed to spot the issues in what little financial information LCF released, including the lack of evidence for its claim to have loaned out hundreds of millions to SMEs with asset security. Many took their concerns to the FCA.

The FCA ignored red flags in LCF’s provided financial information, ignored its own interventions into LCF’s misleading advertising, and has then had the nerve to claim nobody could have seen it coming at the time. It’s a bit like running your car over someone and then claiming “well it’s easy to say I should have seen them now they’re in the rear view mirror”.

The FCA claimed “the draft report had not adequately recognised that the FCA must necessarily prioritise and take a risk-based approach”. Or, to translate, “what’s all the fuss about? It’s only a piddly £237 million.” [C1 10.3]

In a paragraph straight out of an episode of Yes Minister, the FCA told the Investigation that it would be wrong to assign responsibility for the failings over the FCA to individuals, on the grounds that a) it might deter people from wanting to be FCA senior bureaucrats, b) that investigations such as these are supposed to focus on institutional failures and not individual ones, c) the very concept of responsibility is ambiguous. [C1 11]

As the Investigation pointed out, this attitude is at odds with the FCA’s own “Statements of Responsibility” and “Management Responsibilities Map”, implemented in 2016 after the Treasury recommended that the FCA should apply the same framework to itself that it applies to the senior management of banks.

For all the failings in the report, the most glaring paragraph to me is the one where it was claimed to the FCA that the concept of “responsibility” is some kind of ambiguous, philosophical concept, ignoring its own Responsibilities Map and the principles it (somehow) expects the UK finance industry to follow.

And where exactly did this come from? A footnote to the report reveals it came from the submission to the Investigation made by erstwhile head of the FCA, current head of the Bank of England, Andrew Bailey. It came from the top.

It appears to be lost on FCA senior management that responsibility and accountability is what they pay you the big bucks for. For many people it is what they pay you minimum wage for (ask any carer).

The FCA’s 2018 intervention into LCF was delayed by fears of being met with a hail of bullets

The FCA’s belated intervention in late 2018, which resulted in LCF being closed to new investment and immediately collapsing, only happened by chance, as a result of an unrelated search on an external database while looking for something else, which turned up a report which identified significant concerns about LCF. The FCA staff member who stumbled upon the document stated “if the document didn’t mention LCF, it’s entirely possible that nobody would have looked at it”.

The report was circulated by the FCA’s Intelligence Team, ultimately resulting to an unannounced site visit in late 2018. [C13 7.12f]

The site visit was initially due to take place on 21-22 November, but was delayed for three weeks because the FCA team responsible felt there was a risk of being met with armed resistance, and stated they would not proceed without police support. The local police force refused to attend as they concluded the risk of LCF meeting FCA bureaucrats with a volley of gunfire was insignificant. Consequently the site visit eventually took place on 10 December. An FCA team member described the delay as “frustrating”. [C13 7.12f]

An FCA team making an unannounced site visit to a Ponzi scheme, yesterday.

The FCA failed to consider taking action to freeze the accounts of LCF, and companies and individuals connected to it, prior to its December 2018 site visit. [C2 3.23e]


Dame Gloster makes a number of sensible recommendations as to how the FCA should reduce the chance of similar scandals happening in the future, and limit the damage when it does. These include better training for FCA call handlers, more effort to consider the whole of a regulated firm’s business when supervising it, more effort by senior management to identify emerging risks, etc etc.

What Dame Gloster does not address, most likely due to limitations placed on her by the Government which commissioned the report, is how we can expect the FCA to follow such recommendations.

When you consider:

  • the lamely defensive response of the FCA to the Investigation, which suggests that despite a change in leadership, the FCA has been more concerned about loss of face than using the Investigation to identify ways in which it can do better
  • the repeated and systematic way in which the FCA contrived reasons to file reports and screaming red flags about LCF in the circular filing cabinet under the desk
  • an environment where members of the Supervision division receive no training in financial crime, and where FCA call centre staff were so poorly coached that they actively endorsed LCF to potential investors

…we have a clear picture of an organisation that is so infested by the cultural attitude of “if it’s unregulated it’s not our problem” that I fail to see how anyone can be confident the FCA will follow the Gloster recommendations, no matter how many mea culpas the FCA and Bailey give.

If the Government had replaced Andrew Bailey with an outsider with a reputation for a pro-active and activist approach, we might have grounds for optimism that change could come from there. But they went with a lifelong mandarin in Nikhil Rathi, so we’ll have to hope he has hidden depths.

Change needs to come from the top as part of a full overhaul of the UK’s 80-years-out-of-date securities laws, and it can’t come soon enough.

“I’ve spoken to God and pulled my eyes out” – FSCS relying on gibberish transcripts, LCF investors say

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The FSCS has begun to rule on whether investors in LCF are eligible for compensation. As of August, it had issued 1,295 decisions, equivalent to 11% of the number of LCF investors, and paid out £20 million, equivalent to 8% of the total invested in LCF.

A back-of-the-napkin calculation would suggest that roughly three out of every four claimants are getting compensation, but that could be wildly inaccurate if, for example, the cases reviewed by the FSCS so far involve larger investments than the average.

The FSCS previously said in January 2020 it would not be able to compensate the majority of investors and in May 2020 estimated that about one pound in every five invested in LCF is eligible for compensation, based on its earmarking £44 million to pay claims. Unless a major volte-face is in progress, one can only assume that the investors with weak or non-existent cases for compensation aren’t even putting in claims.

LCF investors say that in those cases where the FSCS has turned down compensation, it is doing so on the basis of transcripts of phone calls with LCF and its marketing agent Surge that are wildly inaccurate.

FSCS have incomplete evidence resulting in arbitrary decisions. Compensation is being paid to savers who had no contact other than the website. Transcripts of calls from FSCS say: “I’ve spoken to God, ISiS & Frankie Valli during my investment period and pulled my eyes out”!

FSCS initially had calls “translated” using a computer generated programme which resulted in rubbish being produced. It is this data that they are listening to in order to base decisions. Guesswork – not science.

FSCS stopped issuing Subject Access Request info to investors as it caused more questions than answers. SARs have exposed the data irregularities leading to inconsistent awards of compensation.

@LCFBondholders on Twitter

In a more recent post, @LCFBondholders tweeted:

NO for a saver last week. Yesterday – overturn after challenge. It seems transcripts are used before calls are heard in which ISA = nicer, isis, Alistair, icer, my eyes are, oyster, older, ice is tax free etc

@LCFBondholders on Twitter

When the FSCS announced that it would compensate LCF investors for receiving advice from a company which was not an advisory firm, was not authorised to give financial advice, and employed no qualified financial advisers, it was always going to result in absurdities.

The FSCS’ 44 million pound fudge has so far managed to satisfy virtually nobody (other than the bondholders who draw a winning ticket); neither LCF bondholders as a whole, nor those who pay FSCS levies as part of the cost of running a financial business in the UK.

A judicial review is to be heard over the FSCS’ stance that LCF’s issuing of bonds was not a regulated activity. If successful it would potentially widen the number of LCF investors eligible for compensation to anyone who invested after LCF became regulated.

13 people sued by LCF administrators in £178m lawsuit

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According to the Financial Times, 13 people are to be sued by the administrators of London Capital & Finance in an attempt to recover £178 million of investors’ money.

The not-so-unlucky 13 include:

Clockwise from top right: Simon Hume-Kendall, Andy Thomson, Spencer Golding and Elten Barker.
  • The Four Horsemen Of LCF, the four directors of London Capital and Finance or connected companies to whom LCF on-lent money, who were arrested by the Serious Fraud Office and shortly thereafter released without any charge: Simon-Hume Kendall, CEO Andy Thomson, Elten Barker and Spencer Golding.
  • Hume-Kendall’s wife Helen.
  • Paul Careless, CEO of Surge Group which received a total of £60 million in commission for promoting London Capital & Finance.
  • Former Tory Energy Minister Charles Hendry, who is one of five defendants accused of not doing enough to identify the fraud while serving on the board of LCF-linked companies.
  • The other six defendants have not been named by the FT.

The lawsuit alleges that LCF’s purpose was to defaud bondholders. According to the lawsuit,

nearly 60 per cent of all of the investors’ cash — about £136m — was channelled to its executives either directly or via loans to companies they controlled or were connected to.

Add the £60m paid to Surge, and you only have at most £1 in every £5 invested by investors going into assets which might pay them a return, according to the administrators.

Although there is not a long history in the UK of the perpetrators of collapsed unregulated investment schemes having to give the money back, one wonders how many directors of unregulated investment schemes that have recently collapsed, or are in the process of collapsing, might be sleeping a little less easy in their beds.

It remains to be seen, probably over the next few years at a minimum, a) whether the administrators are successful in making the allegations stick against the defendants (who universally either vigorously denied wrongdoing or did not make any comment) and b) whether, if so, they can recover any assets.

Emboldened LCF investors secure crowd funding for FSCS legal challenge

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After being denied compensation from the Financial Services Compensation Scheme (other than a tiny handful of exceptions,) London Capital & Finance investors have raised money via crowdfunding to launch a judicial review.

As at 23rd April the campaign had already raised £7,833, exceeding its initial £7,000 target. Technically the campaign is to fund the judicial challenges of only the four LCF investors on the creditors’ committee, but if their challenges succeed, this will surely set a precedent for the rest.

London Capital & Finance investors have been both emboldened and enraged by the FSCS’ early indications that it will bail out investors in fellow collapsed minibond scheme Basset & Gold, which went into administration on 1 April.


In the case of LCF, the FSCS has only bailed out a handful of richer and more financially experienced investors – those who transferred stocks and shares ISAs to LCF. To everyone else it has indicated it is unlikely compensation will be payable.

We have concluded there will be some customers who were given misleading advice by LCF and so have valid claims for compensation. However, we expect that many customers will not be eligible for compensation on this basis.- Jan 2020 FSCS announcement

By contrast, Basset and Gold investors have been given a far more positive indication by the FCA that compensation will be payable on the grounds of misselling.

The FSCS has determined that many investors have a good prospect of claiming compensation.– Apr 2020 FCA announcement

The distinction between LCF and Basset & Gold is that LCF had one FCA-regulated company, which both issued the investment and the investment literature, while Basset & Gold had two separate companies, one of which was not FCA-regulated and issued the minibonds, the other of which was FCA-regulated and issued the investment literature.

Which is of course entirely meaningless from the perspective of an ordinary retail investor. Nothing was stopping LCF from setting up two different companies instead of one, and keeping the misselling separate from the bonds themselves, except that they didn’t think of it (or care).

It is therefore not a surprise that the Basset & Gold collapse has given LCF investors fresh hope for compensation.


My own money would be on the regulator and the Government as a whole eventually figuring out a Barlow Clowes / Equitable Life solution – i.e. compensation paid, not in line with arcane FSCS rules that even they don’t seem to understand, but on a one-off basis in recognition of regulatory failures which allowed LCF to run longer than necessary and lose more ordinary savers’ money than was necessary. This is what happened in recognition of regulatory failures over Barlow Clowes (in the 80s) and Equitable Life (in the 90s).

The litany of regulatory failures by the FCA is not seriously disputed. The FCA gave London Capital & Finance the “CAT standard” of FCA registration and ignored the systematic misselling of its investments for a further 3 years afterwards despite numerous attempts by outsiders to blow the whistle. As the FCA CEO in charge at the time has now been kicked upstairs to the Bank of England, the FCA is now free to issue regular mea culpas and lessons will be learneds.

Whether the FSCS or the Treasury pays compensation makes little difference as the general public pays either way; nearly everyone pays taxes and nearly everyone pays FSCS levies via use of financial services.

The main obstacle in the way of compensating LCF investors is moral hazard; the fear that if LCF investors are compensated, it will encourage others to invest in schemes paying unrealistically high returns for supposedly safe investments on the assumption that they’ll get their money back if it goes wrong.

The obvious counterpoint to the moral hazard argument is that the exact same argument applied to compensation for Barlow Clowes, the exact same argument applied to Equitable Life, and the exact same argument applies to Basset & Gold. In the first two cases the moral hazard argument was beaten by the argument that such a monumental failure of regulation and Government should result in compensation, and improvements to the regulatory system to ensure it doesn’t happen again.

There is a better way than whataboutery for LCF investors to counter the moral hazard argument; campaign not just for compensation but for the UK to bring the UK’s securities laws out of the 1920s and require all investment securities offered to the public to be regulated by the FCA, as is the case in the US.

If it becomes more difficult to open unregulated investment schemes and promote them to the public, this would counteract the moral hazard incentive to open and invest in them. It offers the taxpayer’s purse a quid pro quo – a one-off compensation payment (trivial in the grand scheme, especially now) in exchange for less economic damage in the future.

Or we could just do nothing and wait for the next wave of unregulated investment scandals, some of which, like Basset & Gold or investments recommended by dodgy FCA-regulated advisers, will inevitably fall onto the public purse. As my old ma always said, if you keep doing what you’ve always done, you’ll keep getting what you’ve always got.

FCA knew about misselling of Blackmore Bonds three years before collapse

Blackmore logo 2019

The collapse of Blackmore Bonds has once again laid bare the Financial Conduct Authority’s institutional contempt for its objective of consumer protection.

Paul Carlier, an independent consultant known for blowing the whistle on dodgy FX dealings at Lloyds, contacted the FCA on March 2017 to warn them that Blackmore Bonds’ high-risk investments were being missold by an unregulated introducer named Amyma.

They occupy the office next to us and the glass partition means we hear everything they say and do.

In a nutshell Boiler Room. […] They are pushing all manner of these bonds to pensioners citing them as “guaranteed by one of the worlds biggest banks”. […] “Everything is guaranteed” “I’ll put you down as a sophisticated investor”.

[…] And their phone rarely ever rings and assume from the fact that they have to ask people’s names that cold calling in some form is involved.

Carlier received a reply from the FCA to say that his report would be passed to “the relevant areas to consider”. Carlier replied

Please stress to whomever you pass the Amyma info to that pensioners are clearly being targeted.

It’s not just a Boiler shop issue but activity related to misleading pensioners, vulnerable under the new rules.

Carlier continued to press the FCA on the subject over the following years, but the FCA refused to engage with him regarding Blackmore Bond or Amyma.

Carlier was not the only one to warn the FCA long before Blackmore’s collapse. I can reveal that I also contacted the FCA to warn them of the same thing, a year after Carlier did, in early 2018.

I highlighted to the FCA a) the misleading way Blackmore was advertising its bond via social media, with terms like “Income Certainty” “Knowing how to invest your savings doesn’t have to be difficult” etc. And b) how Trustpilot laid bare how many Blackmore investors clearly did not qualify as high-net-worth or sophisticated.

Like Carlier, I never heard anything back beyond a boilerplate acknowledgement.

So what did the FCA do?

Amyma has also marketed Asset Life plc (now insolvent) and Westway Holdings (trading but in default of its obligations to investors).

The only action taken by the FCA in regard to Amyma that is in the public domain was to give it FCA authorisation, via the firm Equity for Growth (Securities) Limited. Amyma Ltd was an Appointed Representative of EfGS from July 2018 to September 2019. This means that the FCA did not authorise Amyma directly; EfGS was ultimately responsible for Amyma’s contact during that period. Why Amyma lost its appointed rep status in 2019 is not publicly known.

In 2019 Blackmore rowed back on its promotional activity following the collapse of London Capital and Finance, first closing to new business and then re-opening to non-UK investment only (despite there being no legal prohibition on it accepting money from within the UK).

However, no action was actually taken by the FCA against Blackmore that is in the public domain. Which given that Blackmore’s bonds were promoted to the general public is the same thing as no action being taken.

Regardless of what happened in the year leading up to Blackmore’s collapse, Blackmore was able to continue misleadingly marketing its bonds via its own social media and via third parties for years after the FCA was made aware of it.

Institutional contempt

Former FCA head and now Bank of England governor Andrew Bailey admitted in June 2019 that the FCA was aware of the systematic misselling of LCF bonds long before it intervened in December 2018. That it did the same with Blackmore is not a surprise.

Why does the FCA focus so much of its attention on issues such as the minutiae of “worst regulation ever” Mifid II, finger-wagging over easy access interest rates, hanging out with Arnold Schwarzenegger and chin-wagging conferences about excellent sheep; while over a billion pounds is lost on the UK on systematically missold unregulated investments, with far-reaching consequences to the wider economy and society?

This is not a rhetorical question.

The tea within the financial industry is that the FCA takes the view that banks underpaying their depositors by £1 billion is more important than people losing £500 million worth of life savings in scams or unregulated investments.

This comes from second-hand reports of private conversations with FCA officials, and the FCA will never verify this in public, so readers can take it or leave it. Personally I take it, because it is a model which consistently explains the pattern of FCA behaviour over a period of many years.

This “£1 billion of uncompetitive interest rates is more important than £500m of lost life savings” credo is of course complete nonsense.

Studies have consistently shown that the stress and misery caused by losing your life savings is comparable to that of losing a limb or a loved one.

By contrast, customers being overcharged for insurance or receiving 0.5%pa less than the best-buy rate causes precisely no misery whatsoever. If it caused them misery they would switch.

If the police took this attitude to crime prevention and prosecution, shoplifting would be priortised over murder on the grounds that £100 stolen from a shop is more important than £50 worth of clothing getting covered in the victim’s blood.

The idea that some banks paying less interest than others is more important than scams because the first involves more money, is a classic example of starting from the conclusion you want and then finding a reason to justify it.

The reason the FCA pays virtually no attention to the loss of hundreds of millions worth of savings in inappriorate high risk unregulated investments is because they view it as beneath them.

The FCA would rather be a vicar than a sheriff. Regulated businesses serve the FCA tea and biscuits in nice London offices and nod attentively when it lectures them about the font they use to disclose their charges. The FCA would rather eat their biscuits than drive up to grotty offices in Bournemouth and Bolton to serve cease and desist notices. But the latter is where action is needed.

We have gone way beyond “Why doesn’t the FCA do something?” The answer to that is the same as when the frog asked the scorpion “What did you do that for?” The question is now “When will Parliament do something about the FCA?”

The FCA has now been leaderless for four months and counting.

The last time the FCA was under interim leadership, London Capital and Finance obtained FCA authorisation, allowing the marketing of its bonds to go into overdrive.

I was tempted to conclude this article “Round and round we go” and call it a morning, but the reality is that the cycle can be broken. We also know how it can be broken.All investment security offerings registered with the FCA, as has been the case in the USA for almost a century, and a top-down reform of the FCA to bring about real and urgently needed cultural change.

It is now up to the Government to choose whether to break the cycle or throw future pensioners and other vulnerable consumers on the bonfire.

Footnote – Philip Nunn speaks – or doesn’t

Blackmore director and co-owner Philip Nunn remains active on Twitter, but appears to be pretending his most famous company doesn’t exist.

Since Blackmore collapsed into administration, Nunn has not had a word to say to his stricken investors, instead restricting himself to offering his services for raising investment in the cryptocurrency industry, and banal nonsense along the lines of 2018 – Everyone is a Bitcoin seller. 2020 – Everyone is a PPE seller.”

Since October 2018 (as far back as I could go), Nunn’s Twitter feed barely mentions Blackmore at all.

Also notable is that in a puff piece in 2018, Philip Nunn was still being introduced as “CEO of Wealth Chain Group and The Blackmore Group”. However, by 2019 Nunn was being mentioned in puff pieces only as CEO of Wealth Chain Group, with no mention of Blackmore.

This is odd because Wealth Chain Group is an obscure one-man band. (A one-man band that owes money to Blackmore companies, according to its 2018 accounts; its 2019 accounts are overdue.)

If you were the owner of two businesses, one a £45 million property firm, and the other an obscure one-man band, why wouldn’t you identify yourself first and foremost as head honcho of the property firm? Especially in 2019, long before the property firm collapsed, when it was still telling everyone that it was on doing great and on course to meet all payments to investors?

Patrick McCreesh by contrast has not updated his Twitter feed since May 2018. Until that point his Twitter activity mostly consisted of retweeted and self-penned Blackmore PR announcements.

The FCA is probably hoping that everyone forgets Blackmore existed as well.