James Coney  

LCF scandal highlights mini-bonds’ failings

James Coney

James Coney

We now have a formal review in the collapse of London Capital & Finance – a scandal that is now being compared to the demise of Barlow Clowes in the late 1980s.

Personally, it reminds me a little more of Keydata, particularly given that savers thought they were getting an Isa, when they probably were not.

The Financial Conduct Authority’s role in the scandal has come under intense scrutiny over allegations that LCF may have been insolvent since 2017, and that an independent financial adviser reported the company to the regulator long before then. The watchdog sometimes has a very deaf ear for these things.

Some national newspapers were even warning about the high commission being paid to middlemen selling LCF bonds long before it failed.

Four people have been arrested and questioned in the police investigation. But the independent review of the LCF scandal will go much further than the way the FCA handled its regulation of the company; it will look at the role of the mini-bonds market in particular.

That seems about right to me. This area of the savings market is an absolute mess, and the way products are sold is causing detriment to consumers.

The problem is the way high-risk products such as the LCF bonds are marketed alongside regular savings products.

The saying goes, if it looks too good to be true, it probably is. But that is not necessarily the case with mini-bonds.

Type best savings rates or words to that effect into Google and it will throw up all kinds of results. Among them you will find the names of perfectly legitimate mini-bond providers and peer-to-peer lenders offering similar rates to LCF. In many cases, they will be wrapped inside an Isa, just for that added bit of credibility.

So although LCF offered 8 per cent, it was massively out of kilter with what the rest of the market could pay.

It seemed perfectly fine. There are plenty of differences you, as financial advisers, may find between the products, but for the ordinary consumer they all have the air of authenticity about them.

Part of the problem is the rise of the Innovative Finance Isa – a product heavily lobbied for by the peer-to-peer finance industry but no one else, before the tax-free wrapper was created by George Osborne (who else?).

The high rates advertised by these products are given extra legitimacy by being ‘Isa-able’. 

When the Sunday Times recently investigated so-called comparison websites that purported to have the best deals, we quickly uncovered a whole world of untruths and forced the comparison sites to change their marketing. Some of them claimed to be working with regulated companies, but were not.

If things go wrong with any of the products or the sales process, there is just no comeback. Advisers must be fuming that they are being cut out by these internet scoundrels.