London Capital & Finance entered into administration at the end of January putting the funds of more than 14,000 bondholders at risk.
Shortly before the collapse the Financial Conduct Authority had ordered London Capital & Finance to stop marketing its fixed-rate investment bonds and Isa products and froze the provider’s assets after it found clients had been promised fixed rate Isas with 8 per cent interest, but in reality their capital was invested into mini-bonds used to issue loans to small businesses.
In October last year Charles Chami, director at Glamis IFA, was approached by an existing client looking to invest £50,000 in a savings bond and who had seen the 8 per cent return advertised by London Capital & Finance at the time.
In an email seen by FTAdviser Mr Chami warned his client that despite the apparently attractive return, he had "serious concerns" about the firm’s offer.
Mr Chami said he could not find any reference to the firm’s charges and he was struck by its lending of between 12 and 20 per cent, which, he said, was suggestive of very high risk lending.
Mr Chami also found London Capital & Finance had described the investments in its bonds as "speculative" and therefore not fitting with his client’s own risk profile.
Whilst London Capital & Finance claimed to have a 100 per cent record on its website, Mr Chami warned his client that as the firm only issued its first bond in 2013 most of its longer term and higher risk loans would not have yet fallen due.
Speaking with FTAdviser, Mr Chami said: "London Capital & Finance prominently displayed statements touting their ‘100 per cent record’ which seemed extremely misleading to me and I am sure this led to many of the bondholders investing in the product with little idea of the risks involved."
Stipulated on its website at the time, London Capital & Finance advised its products were aimed at retail clients who were UK taxpayers and fell in the category of either "high net worth individual, sophisticated, self certified sophisticated or restricted investor."
Mr Chami said: "My primary concern was that my clients didn’t fall into this definition and so the product was likely to be inappropriate.
"In addition I felt that this line on the website was there, more to act as a retrospective disclaimer rather than a genuine warning to normal retail clients.
"I’d be curious to know if any due diligence was carried out by London Capital & Finance to ensure investors met this definition and indeed how many of their 14,000 bond holders really qualified as 'sophisticated investors'."
Mr Chami added: "I feel regulation of this firm must have been severely lacking for them to have been able to make the claims they did, entice thousands of people to invest and then fall into administration.
"When something like this happens it can be very distressing for the people involved especially when investing their hard earned savings.
"To make matters worse, people often blame themselves when it is entirely the fault of the advertising firm."
The FCA stated issuing mini-bonds was not a regulated activity so firms issuing mini-bonds do not need to be authorised by it.
However, when an authorised firm approves a promotion for mini-bonds, they must ensure that it is in line with FCA rules that the financial promotion is fair, clear and not misleading.
The regulator became concerned about the firm's marketing of its bonds and in December directed it to immediately withdraw its promotional material.
At the end of January Finbarr O’Connell, Adam Stephens, Colin Hardman and Henry Shinners of Smith & Williamson LLP were appointed as joint administrators of London Capital & Finance.
A spokesperson for Smith & Williamson said: "London & Capital Finance was the issuer of mini-bonds which were used for the purposes of making loans to corporate borrowers to provide those borrowers with capital for further investment.
“The main focus of the administrators’ current work is establishing what needs to be done in order to maximise the returns to the bondholders and other creditors and they are looking closely at the various loans made by the company to borrowers.
"However, as part of their work, the administrators are also investigating how the mini-bonds were promoted and sold to bondholders."
rachel.addison@ft.com
