Troubled minibond provider Blackmore hit the news again over the Christmas period after missing a third consecutive interest payment and falling overdue with its annual accounts.
Rather than regurgitate the last two articles, we’ll examine the important issues in depth.
Q: Why has Blackmore stopped paying interest?
A: Blackmore has defaulted on three quarterly interest payments, starting in August. August’s was eventually paid a week late; Blackmore blamed a clerical error.
September and December’s payments remain unpaid. Blackmore has now blamed Brexit and delays in selling property.
Q: Why is there so much media interest?
A: An obscure small business (Blackmore raised over £25 million; a £100 million company in the UK is considered micro-cap) being unable to pay its debts on time is normally a “dog bites man” story, as anyone who has lent money or extended credit to a small business knows.
Blackmore however has excited media interest due to unfortunate parallels between itself and London Capital Finance. Both companies paid commissions of c. 20% to Surge Financial. After LCF was shut down by the FCA, Blackmore briefly replaced LCF on comparison sites run by the Surge group of companies.
As discussed in our original December 2017 review, investment in Blackmore was only suitable for high-net-worth and sophisticated investors who could swallow the inherent risks of lending their money, and for whom it made sense to loan a small part of their money to unlisted small businesses. It is clear from Blackmore’s deteriorating Trustpilot rating that a significant number of Blackmore investors were not in fact mentally prepared for the inherent risk of default.
This is not surprising given that Blackmore used the same marketing channels as LCF, which was also promoted to unsophisticated investors.
Q: Where are the accounts?
A: As a PLC, Blackmore should have filed its accounts for December 2018 by June 2019. It has twice used a loophole in the Companies Act to extend the deadline, and now appears to have missed it entirely. Companies House shows the due date as 27 December which was over a week ago.
There are two obvious reasons why it didn’t use the loophole a third time: 1) Blackmore has grown a conscience about using the loophole 2) nobody in the company cares enough anymore to submit the filing necessary to use the loophole.
Q: What does this mean for Blackmore’s attempt to raise money outside the UK?
A: In April 2019 Blackmore briefly closed to new business. When it reopened it had stopped accepting money from within the UK. There remains no legal prohibition on it accepting investment from UK investors (though there are restrictions on how its unregulated bonds can be promoted).
In May Blackmore opened an office in Dubai with plans for further offices in Hong Kong and Tokyo.
The Emirates, Hong Kong and Japan all have one thing in common; they don’t use the Roman alphabet, meaning investors in those countries Googling for Blackmore are less likely to see negative publicity in the UK.
How much investment Blackmore has taken in from outside the UK is unknown, partly due to its failure to submit accounts in a timely fashion.
Q: What is the Financial Conduct Authority doing?
A: Probably nothing. Or nothing visible to the public, which in relation to an investment formerly promoted to the public is as good as the same thing.
Over the last five years the FCA has consistently taken the view that unregulated investments are not its problem (despite its statutory objectives to preserve confidence in the markets and protect consumers). After the departure of Andrew Bailey it is currently rudderless.
Although the FCA intervened in London Capital and Finance over its misleading promotions, which was swiftly followed by the collapse of the scheme, its powers to intervene in Blackmore are more restricted as Blackmore is not an FCA-related company.
At present the FCA appears content to let things run their course.
The consistent failure of the UK to bring its securities laws out of the 1920s, and of the FCA to enforce the requirement for companies relying on “high net worth / sophisticated investor” exemptions to prove that their investors qualify as such, means companies like Blackmore are free to raise money from UK investors without oversight from the FCA or meaningful disclosure requirements.
This is not a scandal as scandals have an element of the unexpected. This is the expected and intended consequence of deliberate regulatory and government policy.
Q: Are Blackmore investors likely to get their money back?
A: Due to the lack of public information on Blackmore’s finances it is impossible to say which will happen from the outside.
Blackmore’s bonds had a minimum term of 3 years and the first capital repayments fall due in 2020.
Small companies can and do recover from temporary cashflow issues. It is also an inherent risk that a loan to a small company results in a 100% loss. The fact that Blackmore’s loans were promoted as “secured loans” does not change that as there is an inherent risk that the security is not enough to cover the administrator’s fees.
Long term, Blackmore needs to generate returns of up to 16% per year after all overheads and costs in order to successfully repay its investors (the return required to sustain 20% upfront commission and 7.9% per year to the investor over three years). The risk that it fails is inherently extremely high.
Q: What can investors do?
A: If you loan money to a company and they stop paying it back, there are only two options: 1) Write it off, forget about it and treat any return as an unexpected bonus 2) Consult a solicitor and run the high risk of throwing good money after bad. All other options are more stressful and less productive versions of 1) and 2).
Investors who were advised to invest in Blackmore by an FCA-regulated financial advisor or used an FCA-reguated SIPP provider may have recourse to the Financial Ombudsman and Financial Services Compensation Scheme.
If investors are contacted out of the blue by people claiming they want to buy their investment in Blackmore, it is probably a scam.