FCA slams London Capital & Finance’s misleading advertising; ISA status invalid

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The Financial Conduct Authority has published a “Second Supervisory Notice” on 17 January setting out the reasons why London Capital & Finance was ordered to withdraw all its marketing materials in December.

The reasons for the FCA’s order on the marketing materials boil down to the following:

1. London Capital & Finance’s bonds were not ISA eligible. Innovative Finance ISA regulations require bonds held within them to be transferable. LCF’s bonds were non-transferable, meaning they were ineligible to be held within an IFISA. This means any interest from the bonds will be taxable. As a further consequence, LCF’s marketing which described them as tax-free was misleading.

2. Undue prominence given to the firm’s FCA authorisation despite the bonds not being regulated or having FSCS protection.

The FCA notes that the LCF’s website did state that the bonds were unregulated and not FSCS-protected, but “these important caveats were not given the same prominence as the statements about FCA authorisation.”

3. Past performance warning insufficiently prominent. LCF’s website “prominently proclaimed “Over £224 million invested to date, 100% track record” but did not state that past performance is no guide to the future prominently enough.

(As I have mentioned before, the claim that a bond provider has a 100% track record is meaningless, as if they had only a 99% track record, the 1% who’d been defaulted on would be entitled to put the company into administration. A 100% track record should go without saying for any company open for business.)

4. Inappropriate comparison with cash savings. LCF’s literature compared high-risk investment with cash savings. As above, LCF’s risk warnings did not have sufficient prominence compared to headlines like “Looking For Higher Returns Than The High Street”.

LCF claims it has no control over its introducers

The FCA’s order directed LCF to remove its marketing materials from third-party websites, explicitly naming top-isa-rates.co.uk and best-savings-rates.co.uk (both run by RPDigitalservices Limited).

LCF has claimed that “it has little control over third party websites” and that the websites in question had “independently” removed their marketing materials.

The FCA notes in response that “the two websites removed the references to LCF’s Bonds very shortly after the First Supervisory Notice was issued on 10 December 2018”.

The FCA could also have noted that RPDigitalservices Limited is a cousin of Surge Financial, which is London Capital & Finance’s marketing agent and runs its call centre. Surge and RPDigitalservices share the same office and one director, Stephen Jones. Paul Careless, the owner of Surge Financial, has told the Evening Standard that Surge and RPDigitalServices have staff in common but operate separately.

LCF has little control over the firm that runs its call centre, and to which it paid commission for sourcing investors into its bonds? Someone needs to get a grip.

Wider implications

The FCA’s statement confirms what some of us have been saying for a long time: that it is inherently misleading to compare high-risk investment products with returns from cash ISAs. This includes slogans like LCF’s “Higher returns than the high street”, comparing the interest from a high-risk loan note to a cash ISA, etc etc. Unless they are accompanied by a clear, non-misleading and equally prominent explanation that the reason for the higher return is the risk that investors might lose money.

There is no excuse for misleading comparisons between cash savings rates and returns from high risk loan notes. This applies whether the company making the comparison is FCA-regulated or unregulated.

A statement like “Easy access cash accounts currently return up to 1% per year, whereas Company X’s bonds pay 8% a year, but with the risk that you could lose up to 100% of your money if they default” is potentially compliant as the risk is accurately described and carries equal prominence. “Beat The Banks With Company X Bonds Paying 8%” and a risk warning much further down the page in smaller type is non-compliant.

This has always been the case but the FCA’s notice against LCF serves as an explicit reminder, and removes any ability for firms to claim that it’s a matter of interpretation.

If unregulated companies issue such promotions on the grounds of “We’re not regulated so the FCA’s notice against LCF doesn’t apply to us” then this amounts to “We’re not regulated so we don’t care if our advertising is misleading” which is not a compelling proposition to investors. Especially not the high-net-worth and sophisicated investors that, by law, they are restricted to marketing at.

Where does this leave bondholders?

Some investors are clutching at the straw that all LCF has to do is to correct its marketing materials and fix the ISA issue (by either making the bonds transferable or informing investors that they are, in reality, liable to pay tax) and the investment will carry on as before.

While the FCA’s notice explains the reasons for the order to withdraw all LCF’s marketing materials on 18 December, it has not yet published the reasons for its second order to freeze all LCF’s assets on 31 December.

It is not yet known whether the FCA has extended its investigation into LCF’s general business model.

An update posted by LCF on their website on 22 January confirms the investigation is still ongoing at time of writing.

It also says that LCF has invited the Security Trustee, Global Security Trustees Limited, “to step in to assist in the management of the business of LCF for the time being”.

Global Security Trustees Limited shares the same Wellington Gate corporate address as London Capital & Finance, and was set up by Robert Sedgwick who set up a number of other companies which share LCF’s address. It is not clear what asking Global Security Trustees Limited to walk over to the other side of the Wellington Gate office is to accomplish.

London Capital & Finance is now officially overdue with its annual accounts, which were originally due to be filed October 2018, postponed to January 2019 by using a loophole in the Companies Act. It can no longer use the same loophole to delay filing accounts, due to being already overdue. Its financial position therefore remains unknown.

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