Our very own Forensic Partner, Roger Isaacs, recently lent his expertise to a discussion on BBC Radio 4’s Money Box Programme.
Thousands of listeners and investors across the UK tuned in to learn more about the ongoing concerns about London Capital & Finance (LCF) mini-bonds after the Financial Conduct Authority (FCA) launched an investigation and forced the firm to suspend all its regulated activity earlier this year.
LCF is a FCA regulated firm that offers a number of regulated products to clients, but it is its non-regulated fixed rate mini-bond that was marketed as an ISA, which it claimed offered returns of up to eight per cent that are of concern to the FCA.
It is understood that clients’ money was invested by being lent to a handful of companies in return for security over their assets.
Mini-bonds are unlisted, risky investments and because they are unregulated the investors may not be covered by the Financial Services Compensation Scheme (FSCS).
Having looked into the businesses behind LCF’s mini-bond offering, using records at Companies House, Roger told Radio 4’s Money Box that while he had found no evidence of illegality, there were a number of factors that would justifiably be cause for concern amongst investors.
“One of the key characteristics that kept popping up during my research for Radio 4 was that the names of the companies that had benefitted from LCF loans kept changing and that by changing their accounting reference dates they had delayed having to file accounts,” explained Roger, who is also the Chair of the Forensic Advisory Committee of the Institute of Chartered Accountants in England and Wales (ICAEW).
“This makes it very difficult for any investor to be able to tell how the companies behind these mini-bonds are actually performing.
“While this is well within the rules, it is a worrying lack of transparency and is a means by which the underlying problems about the companies’ ability to repay their loans could be masked.
“It is this lack of clarity that is probably of most concern to the FCA and will probably be the main issue for the owners of the 14,000 or so bonds that have been issued.”
It is understood that the FCA’s enforcement division is conducting further investigations at this moment in time to find out more about the businesses behind the bonds.
Further investigations will no doubt be undertaken by the administrators, who will focus their efforts on recovering as much as possible for the investors.
But where does this leave investors? Roger believes that there is little prospect of matters being resolved quickly and a significant risk that investors may end up recovering only a fraction of their initial investments.
“Unfortunately, there have been a number of unregulated bond schemes in the past that have led to investors suffering losses, including the well-publicised case of Providence Bonds in 2016.
“However, this is not to say that all unregulated products might not be suitable for sophisticated investors with a high-risk appetite. The problem with LCF is that it would appear that most of those who invested were actually looking for a low-risk ISA, which is a very different product from the mini-bonds that they were actually sold.”
If you would like to learn more about the ongoing case surrounding LCF, why not listen to Roger’s appearance on BBC Radio 4’s Money Box Programme by visiting www.bbc.co.uk/sounds/play/m0002kzn