UK regulator censures London Capital & Finance over minibond promotion

The UK’s financial regulator publicly censured London Capital & Finance, the now-defunct firm at the centre of one of the country’s worst retail savings scandals of recent years, for “unfair and misleading financial promotions” of minibonds.

The Financial Conduct Authority said on Wednesday it had stopped short of imposing fines on LCF, which collapsed in 2019, since the burden would ultimately fall on the firm’s creditors. 

“LCF’s use of financial promotion led to bondholders, many of whom were vulnerable, investing in unsuitable, high-risk products,” said Therese Chambers, the FCA’s joint executive director of enforcement. She added that while the censure would not “provide solace to those investors who lost out” it was important to call out LCF’s shortcomings. 

The implosion of LCF wiped out the savings of 11,600 investors who had pumped money into unregulated minibonds offering returns of up to 8 per cent. The FCA, which regulated the company but not its products, was rebuked in the subsequent Gloster review for “failing to effectively supervise and regulate” LCF ahead of its £236mn collapse.

A Serious Fraud Office criminal probe into LCF is ongoing, and the company’s former chief executive, Michael Andrew Thomson, was sentenced to a 10-month suspended jail term in May for breach of a restraint order placed on his bank account relating to that investigation.

The scandal prompted the FCA to ban the mass-marketing of risky illiquid securities — including speculative minibonds — to retail investors.

The FCA said it “considers it important to set out the key ways in which LCF’s financial promotions misled prospective investors and bondholders regardless of whether there was an underlying fraud and LCF’s knowledge thereof”.

Breaches of financial promotion rules included using “bondholders’ money to fund seemingly independent comparison websites to showcase its minibonds next to safer investments, which had a lower rate of return”.

“This had the effect of enticing retail investors into investing in LCF’s high-risk products. LCF also advertised the minibonds as ISA compatible when this was not the case,” the FCA added, referring to independent savings accounts, which attract special tax treatment.

The FCA also criticised LCF for “untrue and misleading” claims about the independence of the corporate borrowers in which LCF invested policyholder money, as well as claiming loans were secured when they were not, and giving the “misleading impression” that there were no hidden fees.

The “serious failings” around LCF’s advertising would have led to a “substantial financial penalty”, were the firm not already insolvent, with significant liabilities to creditors including its bondholders and the Financial Services Compensation Scheme, the FCA said in its decision notice.

The FCA also stressed that it had carried out a “significant transformation plan” to implement the recommendations from the Gloster review, which included “appropriate training” for staff around how to recognise potential fraud, and a more centralised system for maintaining data on firms so that “red flags” could be “easily accessed”.

“The FCA also put in place investment of £98mn over three years to strengthen the FCA’s data analytics to better identify potentially problematic firms,” the regulator said on Wednesday.