What is a “mini-bond”? A mini history of a much-maligned label

[An expanded version of a Twitter rant posted last Monday ago.]

According to IFA trade rag Money Marketing, investors in London Capital and Finance are very angry that the Financial Conduct Authority has repeatedly referred to the loan notes in which they invested, marketed by LCF as "secured bonds", as mini-bonds.

So what is a mini-bond and why are LCF investors annoyed about the label? The FCA says (in an article belatedly posted last month) "There is no legal definition of a ‘mini-bond’, but the term usually refers to illiquid debt securities marketed to retail investors."

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FSCS tells potential victim of clone scam to ask the scammers if they’re FSCS-protected. *facepalm*

Earlier today I reviewed the latest in a series of clone scams which have jumped on obscure EU companies with "passporting in" rights to offer regulated services in the UK.

Because the genuine company is obscure and has no web presence of its own (it may even have shut down but the FCA didn't notice), the investor is unable to see, when they Google the company's name, that there are two "Andreas Geigers" and they have been given the wrong one. They are unable to contact the real Andreas Geiger to ask if they really offer bonds paying 17% per year.

One investor however still had concerns. They contacted the Financial Services Compensation Scheme to ask whether they would be protected if they invested their money with Andreas Geiger.

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What is due diligence, and what is pseudo diligence?

A theme that appears in nearly every review I post is the importance of due diligence when investing in unregulated or unlisted investments.

The problem is that “due diligence” is a much abused concept. Time and again you see people losing money because they think they were doing due diligence when they weren’t.

What they were actually doing is pseudo-diligence, i.e. something that felt like due diligence but in reality wasn’t.

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The LCF scandal was preventable. Here are 3 things we can do to stop the next London Capital & Finance

London Capital & Finance logo

A basic principle of law is that anyone who wants to take part in an activity that poses a high risk to the public should be regulated. If you want to own firearms for sport, drive a car, or offer investment securities to the public, you need to register yourself with the authorities. The law does not say you can't do it, but if you are going to do it, you have a duty to show you are doing it responsibly.

But did you know there is a loophole in UK firearms legislation that allows you to own a high powered assault rifle, as long as you put a sticker on it saying "This Is Not An Assault Rifle"? And that even if you start walking around in public waving your not-an-assault-rifle in people's faces, the police will take no action until people start getting hurt?

No there isn't, because that would be utterly ridiculous. Yet this is the situation that UK legislation allows in the offering of unregulated investments to the public.

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FCA commissions independent inquiry into whether they can pass the buck on London Capital and Finance

London Capital & Finance logo

The FCA announced yesterday that an independent inquiry will be held into its supervision of the FCA-authorised Ponzi scheme London Capital and Finance.

The inquiry will cover two areas:

  • whether the existing regulatory system adequately protects retail purchasers of mini-bonds from unacceptable levels of harm
  • the FCA’s supervision of LC&F
The first area of investigation will essentially cover whether the FCA can pass the buck.

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London Capital & Finance: Is Smith & Williamson’s softly-softly approach in the interests of investors?

London Capital & Finance logo

In Sunday's interview between Smith & Williamson's Finbarr O'Connell and Paul Lewis of BBC's Money Box show, O'Connell made clear that the administrators would be treating London Capital & Finance's underlying borrowers with kid gloves to ensure they didn't damage the ability of the borrowers to repay.

PL: So again it depends on those 12 companies [the handful of companies which borrowed from LCF] succeeding in what they're doing and not failing. FO'C: Absolutely, and nobody amongst administrators or listening to this has any interest in those companies becoming distressed, so we want to work with them on a very co-operative basis to ensure we get back the bondholders' money.
On the face of it, Smith & Williamson being "very co-operative" with LCF's underlying borrowers makes sense. For starters, the administrators may not have the right to demand the money back anyway, as a term for repayment will have been agreed at outset. Even if it can call in LCF's loans, it makes no sense to do so if the borrowers aren't currently in a position to pay it back in full, as long as they will be later.

The other option on the table is to sell the loans to a third party, on which the administrators would certainly have to take a loss, which again makes little sense if the borrowers can be relied on to repay the capital and interest in time.

There is one glaring problem with this logic. For some of LCF's borrowers, if they repay any capital or interest, it will be the first time they have ever done so. Research by Drew J of Damn Lies and Statistics showed that in at least one case, LCF loaned money to a dormant company, CV Resorts Limited, whose published financial results subsequently did not change for four years. This is only possible if the company was not trading, and paying no interest on its loan. Otherwise you would see movement in the balance sheet.

Smith & Williamson can be "very co-operative" with CV Resorts Limited by continuing to allow them to hold LCF investors' money without paying anything back, and in doing so they can say that the loan is still performing. (If I've borrowed money on the basis that I don't have to pay anything back for however long, and I don't pay anything back in that time, then I've met my obligations and the loan is performing.) But it doesn't recover anything for investors.

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London Capital & Finance administrators get off to unpromising start

London Capital & Finance logo

It has only been a week since four practitioners at Smith & Williamson were appointed as administrators of London Capital & Finance - by London Capital & Finance itself - but already the administrators have made a poor start in reassuring creditors that they are on their side and not the people who appointed them.

First, on the second day of their appointment, Smith & Williamson referred to London Capital & Finance's investors as "sophisticated or high net worth" in a statement to Professional Adviser.

Exactly how many of LCF's investors qualify as high net worth or sophisticated will only become clear when the FCA or the administrators get round to reviewing what evidence LCF has retained on file that its investors did, in reality, meet those criteria. FCA regulations require them to hold such evidence for any investors who invested on that basis (COBS 4.12.9 onwards).

For the moment, however, it is clear from the FCA's Second Supervisory Notice, and the personal statements of LCF investors on the Facebook action group and elsewhere, that a significant number of LCF's investors did not qualify as high-net-worth or sophisticated. Given that this contributed to LCF calling in administrators in the first place, parroting the idea that LCF's investors were mostly high-net-worth or sophisticated when the administrator has not had nearly enough time to establish that is a clear blunder.

Smith & Williamson has since rowed back from its claim that LCF investors were HNW/sophisticated, saying it should have been better worded.

This statement was then followed by an interview on the BBC's Money Box programme on Sunday 3rd Fenruary between BBC presenter Paul Lewis and Smith & Williamson's Finbar O'Connell. After a brief interview with an LCF investor (who made it very clear that he was not a sophisticated investor, and had invested money that he couldn't afford to lose), and a brief overview of the numbers, O'Connell made an astonishing statement: Continue reading...