Category: commentary

FCA knew about misselling of Blackmore Bonds three years before collapse

Blackmore logo 2019
~ Phoenix ~ 17 Comments

The collapse of Blackmore Bonds has once again laid bare the Financial Conduct Authority’s institutional contempt for its objective of consumer protection.

Paul Carlier, an independent consultant known for blowing the whistle on dodgy FX dealings at Lloyds, contacted the FCA on March 2017 to warn them that Blackmore Bonds’ high-risk investments were being missold by an unregulated introducer named Amyma.

They occupy the office next to us and the glass partition means we hear everything they say and do.

In a nutshell Boiler Room. […] They are pushing all manner of these bonds to pensioners citing them as “guaranteed by one of the worlds biggest banks”. […] “Everything is guaranteed” “I’ll put you down as a sophisticated investor”.

[…] And their phone rarely ever rings and assume from the fact that they have to ask people’s names that cold calling in some form is involved.

Carlier received a reply from the FCA to say that his report would be passed to “the relevant areas to consider”. Carlier replied

Please stress to whomever you pass the Amyma info to that pensioners are clearly being targeted.

It’s not just a Boiler shop issue but activity related to misleading pensioners, vulnerable under the new rules.

Carlier continued to press the FCA on the subject over the following years, but the FCA refused to engage with him regarding Blackmore Bond or Amyma.

Carlier was not the only one to warn the FCA long before Blackmore’s collapse. I can reveal that I also contacted the FCA to warn them of the same thing, a year after Carlier did, in early 2018.

I highlighted to the FCA a) the misleading way Blackmore was advertising its bond via social media, with terms like “Income Certainty” “Knowing how to invest your savings doesn’t have to be difficult” etc. And b) how Trustpilot laid bare how many Blackmore investors clearly did not qualify as high-net-worth or sophisticated.

Like Carlier, I never heard anything back beyond a boilerplate acknowledgement.

So what did the FCA do?

Amyma has also marketed Asset Life plc (now insolvent) and Westway Holdings (trading but in default of its obligations to investors).

The only action taken by the FCA in regard to Amyma that is in the public domain was to give it FCA authorisation, via the firm Equity for Growth (Securities) Limited. Amyma Ltd was an Appointed Representative of EfGS from July 2018 to September 2019. This means that the FCA did not authorise Amyma directly; EfGS was ultimately responsible for Amyma’s contact during that period. Why Amyma lost its appointed rep status in 2019 is not publicly known.

In 2019 Blackmore rowed back on its promotional activity following the collapse of London Capital and Finance, first closing to new business and then re-opening to non-UK investment only (despite there being no legal prohibition on it accepting money from within the UK).

However, no action was actually taken by the FCA against Blackmore that is in the public domain. Which given that Blackmore’s bonds were promoted to the general public is the same thing as no action being taken.

Regardless of what happened in the year leading up to Blackmore’s collapse, Blackmore was able to continue misleadingly marketing its bonds via its own social media and via third parties for years after the FCA was made aware of it.

Institutional contempt

Former FCA head and now Bank of England governor Andrew Bailey admitted in June 2019 that the FCA was aware of the systematic misselling of LCF bonds long before it intervened in December 2018. That it did the same with Blackmore is not a surprise.

Why does the FCA focus so much of its attention on issues such as the minutiae of “worst regulation ever” Mifid II, finger-wagging over easy access interest rates, hanging out with Arnold Schwarzenegger and chin-wagging conferences about excellent sheep; while over a billion pounds is lost on the UK on systematically missold unregulated investments, with far-reaching consequences to the wider economy and society?

This is not a rhetorical question.

The tea within the financial industry is that the FCA takes the view that banks underpaying their depositors by £1 billion is more important than people losing £500 million worth of life savings in scams or unregulated investments.

This comes from second-hand reports of private conversations with FCA officials, and the FCA will never verify this in public, so readers can take it or leave it. Personally I take it, because it is a model which consistently explains the pattern of FCA behaviour over a period of many years.

This “£1 billion of uncompetitive interest rates is more important than £500m of lost life savings” credo is of course complete nonsense.

Studies have consistently shown that the stress and misery caused by losing your life savings is comparable to that of losing a limb or a loved one.

By contrast, customers being overcharged for insurance or receiving 0.5%pa less than the best-buy rate causes precisely no misery whatsoever. If it caused them misery they would switch.

If the police took this attitude to crime prevention and prosecution, shoplifting would be priortised over murder on the grounds that £100 stolen from a shop is more important than £50 worth of clothing getting covered in the victim’s blood.

The idea that some banks paying less interest than others is more important than scams because the first involves more money, is a classic example of starting from the conclusion you want and then finding a reason to justify it.

The reason the FCA pays virtually no attention to the loss of hundreds of millions worth of savings in inappriorate high risk unregulated investments is because they view it as beneath them.

The FCA would rather be a vicar than a sheriff. Regulated businesses serve the FCA tea and biscuits in nice London offices and nod attentively when it lectures them about the font they use to disclose their charges. The FCA would rather eat their biscuits than drive up to grotty offices in Bournemouth and Bolton to serve cease and desist notices. But the latter is where action is needed.

We have gone way beyond “Why doesn’t the FCA do something?” The answer to that is the same as when the frog asked the scorpion “What did you do that for?” The question is now “When will Parliament do something about the FCA?”

The FCA has now been leaderless for four months and counting.

The last time the FCA was under interim leadership, London Capital and Finance obtained FCA authorisation, allowing the marketing of its bonds to go into overdrive.

I was tempted to conclude this article “Round and round we go” and call it a morning, but the reality is that the cycle can be broken. We also know how it can be broken.All investment security offerings registered with the FCA, as has been the case in the USA for almost a century, and a top-down reform of the FCA to bring about real and urgently needed cultural change.

It is now up to the Government to choose whether to break the cycle or throw future pensioners and other vulnerable consumers on the bonfire.

Footnote – Philip Nunn speaks – or doesn’t

Blackmore director and co-owner Philip Nunn remains active on Twitter, but appears to be pretending his most famous company doesn’t exist.

Since Blackmore collapsed into administration, Nunn has not had a word to say to his stricken investors, instead restricting himself to offering his services for raising investment in the cryptocurrency industry, and banal nonsense along the lines of “2018 – Everyone is a Bitcoin seller. 2020 – Everyone is a PPE seller.”

Since October 2018 (as far back as I could go), Nunn’s Twitter feed barely mentions Blackmore at all.

Also notable is that in a puff piece in 2018, Philip Nunn was still being introduced as “CEO of Wealth Chain Group and The Blackmore Group”. However, by 2019 Nunn was being mentioned in puff pieces only as CEO of Wealth Chain Group, with no mention of Blackmore.

This is odd because Wealth Chain Group is an obscure one-man band. (A one-man band that owes money to Blackmore companies, according to its 2018 accounts; its 2019 accounts are overdue.)

If you were the owner of two businesses, one a £45 million property firm, and the other an obscure one-man band, why wouldn’t you identify yourself first and foremost as head honcho of the property firm? Especially in 2019, long before the property firm collapsed, when it was still telling everyone that it was on doing great and on course to meet all payments to investors?

Patrick McCreesh by contrast has not updated his Twitter feed since May 2018. Until that point his Twitter activity mostly consisted of retweeted and self-penned Blackmore PR announcements.

The FCA is probably hoping that everyone forgets Blackmore existed as well.

Were Basset & Gold bonds risk-free after all?

Basset and Gold logo
~ Phoenix ~ 4 Comments

A couple of weeks ago West Ham sponsor Basset & Gold (reviewed here in December 2017) collapsed into administration.

So far so normal. Unregulated high risk investment fails, news at 11.

What was unusual about Basset & Gold is that back in 2018 at least, they were promoting their bonds while explicitly holding out that investors might be compensated by the FSCS if things went sour – on the basis of misselling.

Facebook
From Basset & Gold’s Facebook page in March 2018, since deleted. [sic]
The FSCS confirmed on 1 April that investors can make a claim for misselling if they were sold their bonds via Basset & Gold’s FCA-regulated company.

Although Basset & Gold Plc has also entered administration, FSCS is unlikely to be able to pay compensation based purely on Basset & Gold Plc’s failure to repay the bonds, as issuing bonds is not normally a regulated activity.

For FSCS to be able to pay compensation, the customer must have been mis-sold their bonds, for example, because they relied on a misleading statement about how Basset & Gold Plc was investing their money.

How many Basset & Gold investors were missold the bonds? The Financial Conduct Authority suggests it’s quite a lot.

The FSCS has determined that many investors have a good prospect of claiming compensation. […]

We had concerns around the accuracy and fairness of B&G plc’s financial promotions of the mini bonds.

As a result, B&G Finance made improvements to its advertising in December 2018 and wrote to all bond holders in January 2019 clarifying that B&G has used ‘the vast majority of Bond proceeds to finance a large facility agreement with an FCA-regulated short-term consumer lender’.

No further bonds were issued to retail investors from May 2019.

In short, the FCA was concerned that B&G plc was misselling Basset & Gold bonds until May 2019. So anyone who invested in Basset & Gold prior to their clarifying their investment literature in response to an FCA investigation, which will be most of them given that Basset & Gold closed to new investment in May 2019 (10 months before it collapsed), potentially has a claim for misselling. This is not according to me or some claims management firm trying to drum up business, this is according to the FCA.

That said, we’ve been here before.

London Capital & Finance, which collapsed at the beginning of last year, was also FCA-regulated. The vast majority of LCF investors are waiting to find out whether they will receive compensation. Early indications from the FSCS are far less positive than the message given to Basset & Gold investors above.

While FSCS maintains that the act of issuing mini bonds is not a regulated activity, and is therefore not something we protect, we have concluded there will be some customers who were given misleading advice by LCF and so have valid claims for compensation. However, we expect that many customers will not be eligible for compensation on this basis.

So whether Basset & Gold investors will be compensated en masse is still not clear.

How did we even get here?

Back in 2015 two minibond companies, Secured Energy Bonds and Providence Bonds, collapsed with total losses to investors. Both were promoted by the same FCA-regulated company, Independent Portfolio Managers, which signed off their literature (allowing the bonds to be legally promoted to the public) and also acted as Security Trustee.

As a result of IPM’s involvement, investors in Secured Energy Bonds and Providence Bonds were – after a legal struggle – compensated by the FSCS.

In retrospect therefore, both bonds were risk-free. If the bonds had succeeded investors would get higher returns than cash, and as they failed investors were bailed out by the FSCS. (Which is to say the general public.) Naturally the investors didn’t know at the time they would be bailed out, and they faced years of stress and worry while their lawyers fought the Financial Ombudsman, but that is the position with the benefit of hindsight.

The IPM literature was misleading at the time it was being issued to investors, and the legal position is that this made them eligible for compensation from IPM, and in turn the FSCS, if the investment failed (even if it took the FOS a while to acknowledge it). So the investment was in reality risk-free from the beginning – unless investors exceeded the FSCS limits (£50k at the time).

Basset & Gold have essentially attempted the same setup as IPM + Secured Energy Bonds (or Providence). One company issues the bonds (SEB bonds / B&G PLC). Another FCA-regulated company promotes them (IPM / B&G Finance). The bond issuer goes bust. Investors complain that they were missold by IPM / B&G Finance. FSCS bails them out – or has strongly suggested it will bail them out in the case of B&G.

The difference is that if Basset & Gold investors are compensated, Basset & Gold will essentially have executed a risk-free Secured Energy Bonds type scheme in advance, having successfully arranged its business to ensure that investors would be compensated by the FSCS, and having promoted its bonds to investors on the basis that the FSCS would step in, as per the Facebook screenshot above.

Back in September 2018 I asked (deliberately provocatively) whether the precedent set by IPM had made all unregulated investments risk-free, providing they took the fairly trivial step of setting up an FCA-regulated company to approve the investment literature, which is about as difficult as cutting out two tokens from a cereal packet and sending it to the FCA. (Unlike giving financial advice, signing off investment literature does not require professional qualifications and specific permission from the FCA.)

The collapse of LCF appeared to show it hadn’t. When they bailed out SEB and Providence investors the FOS inserted an anti-precedent device into its reasoning, stating very specifically that SEB and Providence investors were being compensated because IPM was particularly closely intertwined with the businesses it was promoting. IPM did not just sign off the literature but act as Security Trustee. This didn’t apply to London Capital and Finance, which both issued and promoted its own bonds.

However the much more positive noises made by the FSCS and the FCA towards Basset & Gold investors – “The FSCS has determined that many investors have a good prospect of claiming compensation” – seems to have turned that on its head again.

What is there to stop somebody else following the same business model as Basset & Gold – forming one company which issues the bonds, and another which obtains FCA registration and promotes the bonds – and offering whatever rate it feels like to attract investors, on the basis that investors will be bailed out by the general public on the basis of misselling?

Only the FCA taking prompt action to stop the misselling.

Basset and Gold started in its current business model in late 2015 (when an off-the-shelf company called Bladegold was acquired and renamed). Readers have alleged that its activities were reported to the FCA in 2017. No visible action was taken by the FCA until December 2018 when B&G changed its literature, and B&G was eventually stopped from taking new money in May 2019, before collapsing 10 months later.

So in other words, we – that is, all of us who pay FSCS levies via our bank accounts and pensions – are screwed.

Until the UK reforms securities laws to ensure that all investment securities offered to the public are registered with the regulator, as is the case in the USA. This would remove the current discrepancy where the promotion of investments is regulated (and FSCS-covered) but investments are not.

More public subsidy for West Ham

Another angle on the Basset & Gold story is the remarkable ability of West Ham to source money from the general public.

There is in reality no difference between the taxpayer and the FSCS-levy-payer as everyone in the UK pays taxes and everyone in the UK uses financial services.

West Ham already play in a stadium that was built by the taxpayer for the 2012 Olympics. As you don’t get crowds of 50,000+ to watch humans running in circles unless the Olympics is on, and the Olympics comes to the UK once in a lifetime, West Ham were allowed to rent the stadium on very favourable terms, to avoid the embarrassment of the Olympic Stadium being knocked down for flats.

Basset & Gold investor money was used to fund sponsorship to West Ham. If the FSCS bails out Basset & Gold investors to any substantial degree, that means the general public’s money replaces Basset & Gold investors’ money in that equation.

It’s almost as if a former Prime Minister was a West Ham FC fan.

Coronavirus to mean both bust and boom for unregulated investments

~ Phoenix ~ 12 Comments

Last year I counted over £1 billion in losses from unregulated investments marketed in the UK that went bust in 2019.

And the scary thing is that this was without a global financial crash.

Some unregulated investments hilariously put the blame on Brexit despite their assets being outside the UK – which meant Brexit should have made it easier to repay their Sterling-denominated debts with their overseas earnings.

The sad reality is that one of the consequences of coronavirus is likely to be a spate of further collapses in the unregulated investment world, as new investment dries up and already-shaky schemes exploit Covid as the perfect excuse to shutter their windows and disappear with what’s left.

The only question is whether 2019 was already the storm or just the canary in the coalmine.

It is also possible we may see schemes play for time by suspending withdrawals but dangling the carrot of future resumption. With the courts currently paralysed by lockdown, it will take a while for any disgruntled investors to enforce their debt (which always takes a long time anyway).

And while coronavirus may sound the death knell for old schemes, it will also be the starting gun for the next wave. Life goes on and there will still be a steady stream of inexperienced investors with windfalls to invest – such as pension lump sums, inheritances, and insurance payouts.

They are currently being told by all and sundry – including the mainstream media – that mainstream investments are scary and lost hundreds of billions during the corona crash (losses that don’t actually exist except for people foolish or imprudent enough to cash in at the bottom of the market). There will also be those who cashed in their pensions or investments in the stampede, and are now looking for some kind of magic solution to recover their self-inflicted losses. They are all being lined up for the wolves.

The only question left is to see what people come up with as the new magic “coronavirus-proof” “assured” “uncorrelated to the stockmarket” that delivers 8% per year, year in year out. In the early 2010s it was carbon credits, in the mid-2010s it was property development, in the Roaring Twenties it will be… answers on a postcard, or a Google ad.

We have seen it all before. Yet the UK Government, despite having recently proven itself capable of shutting down the entire country and all social contact at the drop of a pin, continues to refuse to take the simple, practical and already tried-and-tested measures that would significantly reduce losses to unregulated investments.

The indefatigable Mark Taber has already reported on some of the more blatant scammers exploting coronavirus in their advertising (from which Google continues to rake money with no noticeable compunction), as have Professional Adviser and the Mirror.

FSCS employs magic-based logic to compensate 159 LCF bondholders

London Capital & Finance logo
~ Phoenix ~ 5 Comments

Last week I reported on the FSCS’ decision to compensate only 159 London Capital & Finance bondholders.

The decision to compensate only those who transferred stocks & shares ISAs to LCF, and not those who transferred cash ISAs, over a technical interpretation of the compensation handbook, has been a particular point of controversy.

The FSCS’ explanation in its LCF Q&A was

Arranging a transfer out of a regulated investment, such as a stocks and shares ISA, is a regulated activity.

As veteran investor activist Mark Taber pointed out to the FSCS on Twitter, cash ISAs are also regulated. The FSCS replied that what they meant to say was not regulated investment but designated investment.

We apply different sets of rules to different types of claim. If a bank fails, under the applicable Depositor Protection rules, a cash ISA qualified as a type of deposit that FSCS can protect.

However, for investment claims, under the applicable COMP rules, there is a strict requirement for there to be a ‘designated investment’ (see COMP 5.5.1(1)).

So there you have it – stocks and shares ISAs are “designated investments” under the FCA and FSCS handbooks but cash ISAs are not. Therefore compensation is payable where LCF transferred a stocks and shares ISA to its own invalid ISAs but not where it transferred a cash ISA. Does that explain everything?

No it doesn’t. If you’ve ever read a pulp fantasy novel, a Lord of the Rings knockoff, you will probably have read a paragraph like the following:

“The High Elves can use fire magic,” explained the wise wizard Fladnag to Odorf, “because their earliest ancestors were created from a star that fell from the sky, and the fire in that star remains in their blood. But the Wood Elves were made from the trees of the forests so they can only use the magic of nature.”

In the confines of fantasy novels this serves as an explanation as to why High Elves can do magic with fire. In reality it explains absolutely nothing. Using the words “because” and “so” doesn’t make it an explanation. At no point does the wizard explain what it is about your distant great-grand-parents being made from a star that gives you the ability to make magic fire. All the steps in between “great grandparent made from star” and “can summon fire” are missing. It is not an explanation, but random facts about elves.

This is fine in a pulp fantasy novel, as it’s a waste of energy coming up with actual scientific explanations, explanations where the steps in between aren’t missing, for things that aren’t real.

But the FSCS is doing exactly the same thing with ISAs in place of elves. “Stocks & shares ISAs are a designated investment but cash ISAs are only a regulated deposit” is not an explanation, it is random facts about ISAs. And this isn’t good enough, because it’s real life and whether compensation is awarded or not has a dramatic effect on real people’s lives.

What makes these facts irrelevant and random is that by the time the funds reached LCF’s hands, they were neither stocks & shares ISA funds or cash ISA funds. When a stocks & shares ISA was transferred to LCF, it was not LCF that sold the investments into cash but the original ISA manager. Any distinction between cash ISA funds and stocks and shares ISA funds had disappeared by the time they reached LCF’s hands for LCF to perform regulated activities upon them.

No part of the FSCS’ pseudo-explanation has managed to explain this away.

Cynicism abhors a logical vacuum

There is of course a real distinction between stocks & shares ISA LCF victims and cash ISA LCF victims that does provide a logical explanation for why only the former might get compensation.

There’s a lot fewer of them.

How many cash ISA LCF investors there are hasn’t been stated as far as I know. However, the archetypal LCF investor was your classic unsophisticated saver, sick of cash interest rates but lacking any experience of how to obtain real asset-backed returns without taking the risk of permanent loss. They went Googling for terms like “best interest rates” which LCF’s marketing provider Surge had sat on, and the rest is history.

Anyone with a stocks & shares ISA was inherently less likely to invest in LCF. They were already receiving potential returns higher than cash which takes away the main driver to go looking for LCF. They had at least some experience of capital-at-risk investments, via their stocks and shares ISA, and a higher ability to understand that LCF had an inherent risk of 100% loss, and giving them all your money was a bad idea for the same reason it is a bad idea to invest all your money in Lloyds shares.

Why 159 stocks & shares ISA investors managed to invest in LCF anyway is for them to come to terms with (fear of losses leaving them open to an investment that gave a false assurance of no volatility, maybe). It doesn’t matter as the point is that there are almost certain to be far fewer of them to compensate. 159 investors translates into a mere £3 million or so, assuming the typical average investment in LCF of c. £20,000.

Back in June 2019 when the FSCS was still dangling the prospect of compensating investors on the basis of misleading advice, I pointed out that this risked a number of unfair outcomes, including compensating richer investors who received personal visits from LCF salesmen while hanging poorer ones who didn’t out to dry.

I cynically suggested that the main benefit of rewriting the definition of “advice” in this way would be to remove the most organised and well-resourced investors from the investor groups – “divide and rule”.

Now we have the FSCS choosing to compensate a group who were by nature less unsophisticated and more experienced with investments than the average LCF investor, by virtue of the fact they already held capital-at-risk stocks and shares ISAs.

Those who had very little excuse for not understanding that LCF had an inherent risk of 100% loss are getting bailed out by the general public. Those who’d never held capital-at-risk investments before and likely had zero knowledge of how to diversify are still twisting in the wind.

There is no rational explanation for this, no matter how much the FSCS bleats about subsection C and paragraph 5.

Investor confidence

This isn’t a call for cash ISA investors to be compensated as well, and nor am I trying to piss on the lucky 159’s chips by saying they shouldn’t have been compensated.

This is about investor confidence. (I don’t expect LCF investors to care about macroeconomics over their own losses so they can put this article down if they’re still reading.) A financial compensation scheme needs to a) give retail investors enough confidence in the system not to hide their money under the mattress, and b) discourage retail investors from putting their money in the unregulated underbelly, where it is highly likely to be wasted, in the belief that it’s a risk-free bet.

By dangling the prospect that LCF investors might be compensated en masse over “misleading advice”, despite LCF not being an advisory firm, employing no financial advisers, and having no permissions to advise retail clients, the FSCS gave false hope to LCF investors for months. The nonsensical technical decision over stocks and shares ISA investors compounds the impression of a system in chaos.

The failure of the UK to regulate all investment securities offered to the public has created a fractured system where some unregulated investments are eligible for compensation and some aren’t, with no discernible logic.

The loopholes engineered by the current UK regulatory system allowed a business which was both unregulated and regulated, and offered high-risk unregulated securities that somehow still manage to be FSCS-protected in extremely limited circumstances, to exploit this lack of clarity for three years.

This is a shambles. A slaughterhouse into which investors will continue to be led until the system is reformed from the top down.

FSCS announces compensation for only 159 London Capital and Finance bondholders

London Capital & Finance logo
~ Phoenix ~ 20 Comments

The hopes of most victims of FCA-authorised Ponzi scheme London Capital & Finance were dashed last week when the FSCS announced it would not compensate them on the basis of having received misleading advice.

It said that investors had merely been given incorrect information, which doesn’t generate a liability that is covered by the FSCS’ “protected business” rules.

That the FSCS has eventually taken this decision is disappointing for investors but ultimately not surprising. London Capital Finance was not authorised to give advice to retail investors, employed no qualified financial advisers, and its call centre staff were generally trained to avoid crossing the line from information to advice – as in any other non-advisory finance company. (Although some went off-piste and crossed the line into the “I’d tell my own mother to invest in this” school of advice.)

The surprising part is that the idea was floated by the FSCS and allowed to give false hope to tens of thousands for months.

That a suggestion that investors might be compensated on the basis of bad advice was even contemplated says a lot about how the industry and the public have been conditioned to accept the idea that the general public is liable for the losses of investors in high-profile scandals.

The unwritten rule in force in the UK is that if enough people believe an investment is risk-free, the Government has to spend everyone else’s money to make it so. This principle resulted in the bailout of defined benefit pension schemes, Equitable Life,  Barlow Clowes, IceSave and Northern Rock.

London Capital and Finance has not yet crossed that threshold but investors are unlikely to give up here.

Stocks & shares ISA investors compensated

A sliver of LCF investors – 159 in total – will be compensated by the FSCS due to the fact that they transferred stocks & shares ISAs to London Capital & Finance. LCF claimed to offer ISAs but in reality their ISAs were invalid as the LCF bonds they invested in were non-transferable.

Those who transferred cash ISAs to LCF are however not eligible for compensation.

The fact that stocks and shares ISA investors get bailed out but those who transferred cash ISAs don’t merely highlights the arbitrariness of the FSCS’ decision.

Why the grounds on which stocks & shares ISA investors get compensated don’t apply to cash ISA investors is something I’m struggling to understand. I can only imagine it has something to do with the fact that advising on cash ISAs is not a regulated activity whereas advising on stocks & shares ISAs each, but LCF didn’t give advice, so… anyway, if I don’t understand it you certainly can’t expect the average LCF investor to.

A financial compensation scheme needs to accomplish two aims: it needs to give the person in the street confidence to put their money into the regulated financial system instead of under the mattress, so it can be put to best use. And it needs to make sure they know that if they go outside the regulated financial system, they’re on their own, because the unregulated financial system tends to piss money down the drain unless investors know exactly what they’re doing.

At the moment the FSCS is failing at both.

As it enters 2020 the UK’s financial system is overseen by a leaderless FCA that refuses to enforce existing rules and backed by a compensation scheme that makes up the rules as it goes along. Still, it’s not like the UK should be particularly worried about investor confidence right now.

FCA chief Andrew Bailey kicked upstairs

~ Phoenix ~ 4 Comments

With the triumphant swagger of a county athlete who sees that he’s the 1-10 favourite for tomorrow’s race, drinks five pints of scrumpy in the pub the night before, and eventually staggers over the line an inch ahead of a 12-year-old farmer’s son before vomiting into the trophy, FCA CEO Andrew Bailey has shrugged off the ongoing scandal of the FCA’s failure to deal with unregulated investments and secured the appointment of Governor of the Bank of England.

Bailey must have been sweating a little as a succession of headlines about financial scandals old and new (minibonds, mortgage prisoners, vulture “restructuring” divisions) – with the FCA’s conscious inaction as a constant theme – rolled through the presses as the Government deliberated its decision. But in the end, Bailey’s “safe pair of hands” reputation won the day.

While no-one is accusing Bailey of being solely responsible for the billion-pound-sum of investors’ money lost in UK unregulated investments – we are in a cycle which started in 2014-15, before his appointment – it was nonetheless Bailey who was in charge as London Capital & Finance used its newly-acquired “CAT standard” of FCA authorisation to grow into a £230m Ponzi scheme, despite many IFAs and members of the public warning the FCA of the dangers.

It was also Andrew Bailey in charge when the FCA shut down Park First, and rather than appointing an independent receiver to act in the interests of investors, allowed Park First eighteen months to oversee the winding up of its own illegal collective scheme. Park First’s handpicked administrators subsequently told investors that their funds could not be returned in full and that £115 million owed to Park First creditors by Park First group companies would have to be written off.

Over in the regulated sector, it was under Andrew Bailey that the FCA allowed Neil Woodford to openly flout the requirement for open-ended funds to hold no more than 10% in unlisted securities, leading to a re-run of Arch Cru.

It is under Andrew Bailey that the FCA has pathetically squeaked about the “regulatory perimeter” instead of using its existing and well-defined powers to enforce the requirement that unregulated investments are only promoted to high net worth and sophisticated investors. And that unregulated schemes which rely on these exemptions can prove that their investors qualify as such.

Andrew Bailey is the architect of the FCA’s policy of masterly inactivity and the predictable and consistent results of this policy are his baby.

Bailey’s main job as Bank of England governor is now, from a retail investor perspective, to justify continuing to hold interest rates at virtually nil; i.e. to allow borrowers to continue spending savers’ money cheaply to avoid scaring the economic horses. I.e. to continue perpetuating the conditions that have driven UK retail investors into the arms of P2P, minibonds, unauthorised collective schemes and every other Tom, Dick and Harry trumpeting “8% secured interest”.

Bailey’s appointment has been repeatedly described as a “safe pair of hands” in the business press. Which for a financial regulator is not so much a backhanded compliment as a two-handed Serena Williams piledriver into your face compliment. Especially in a country riven by financial scandal and “McMafia” money laundering.

But having succeeded first Martin “shoot first and ask questions later” Wheatley at the FCA, and now arch-Remoaner Mark Carney at the BOE, Andrew Bailey has carved out a good niche in taking over from people who took the whole “politically independent” thing a bit too seriously.

A new FCA head will be appointed in the new year.

Bond Review is 2 today

~ Phoenix ~ 3 Comments

1f973

Today marks the second anniversary of Bond Review’s first ever article, which happened to be a review of the now sadly notorious London Capital & Finance.

So far Bond Review’s two years have seen:

  • 90 reviews of high-risk unregulated investments promoted to the public
  • 190 further articles bringing you news on the progress of these investments (or lack of it)
  • 8 attempts at legal intimidation
  • Plus a further 2 attempts to remove Bond Review from Google search results by making defamation claims to Google (without making any attempt to contact us directly)
  • 0 court proceedings started
  • 1 fake DMCA takedown
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On the industry side, 2019 saw a spate of collapses in the unregulated investment sector, starting with the high-profile failure of London Capital & Finance.

In 2020 we’ll see what effect, if any, the FCA’s recent ban on minibonds marketing to the general public will have.

The FCA has already confirmed that it expects some existing minibond schemes to collapse as a result of the ban (exactly who is unknown and unknowable). The outlook for minibond schemes in 2020 reminds me of the tagline for The Texas Chainsaw Massacre: “Who will survive and what will be left of them?”

Arguably more important than the effect on existing schemes is whether the ban actually has any effect on the amount of unsophisticated investors’ money going into unsuitable ultra-high-risk investments.

As regular readers will know I am deeply dubious about this. Even before the FCA ban, many companies were paying and will continue to pay lip-service to the idea that all their investors are high-net-worth or sophisticated. And minibonds are only one particular structure. The ban will not affect other types of unregulated schemes, including the ever-popular “invest in our collective property scheme with a fixed yield of 8% per year” which the FCA continues to largely ignore.

The need for consumers to be able easily access the facts about the risks of investing in unregulated investment schemes – as easily as these investments can be promoted to them via Google searches for “best interest rates” is as strong as ever.

Whatever the unregulated investment market dreams up over the next year, if it’s unregulated or quasi-unregulated (e.g. IFISAs investing in a single unregulated company), and promoted to the public, we’ll be there.

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What you may have missed in November and December

(A selection of the more in-depth news articles since the last roundup)

Did the FCA withdraw scam warning after legal threats?

Astute Capital publishes accounts, scrubs critical posts from Internet

FCA officials shit on the floor, as well as the bed

Signature Living continues to struggle with repayments, libels owner’s own brother, reports him for fraud

Park First told Russian investors that they’d repaid buyback investors

Carlauren collapse shows it’s not just investors who suffer

FCA acknowledges that minibond marketing ban may result in shortage of new money to pay off existing investors with

~ Phoenix ~ 3 Comments

Following its announcement of a 12-month marketing ban on minibonds being marketed to the general public, the FCA has confirmed that it is well aware that this could lead to existing minibond investors losing their money.

In a 46-page document outlining the ban, more specifically outlining how the ban complies with UK anti-discrimination law, the FCA stated:

There may be indirect positive or negative effects on people with protected characteristics as they may be (i) existing investors in speculative illiquid securitiesor (ii) prospective investors. The former may experience harm if market disruption from our measures exacerbates poor performance of existing products and the financial position of issuers that are already struggling, especially if an issuer isreliant on being able to raise further capital from retail investors with new issues and this becomes more difficult.

(For those not au fait with UK anti-discrimination law, “people with protected characteristics” means people who belong to an ethnic group, people d’un certain age, people with disabilities, etc. As a regulatory body the FCA is required to show that it has thought about them before it takes action.)

Credit where credit’s due: The FCA is of course entirely right to acknowledge that the marketing ban may inhibit mini bond firms from sourcing new investment.

But if they were previously sourcing investment from investors that they did not know where sophisticated or high net worth – to whom the new ban does not apply – this should have been stopped long ago.

If an investment is reliant on new investment to stay afloat, then it is doomed to eventual failure. The only question is when it collapses and how much is lost.

If an investment has relied on nothing but new investment to stay afloat, and never had any source of external revenue sufficient to pay off its investors after all other costs, it is a Ponzi scheme.

Either way, the longer it goes on for, the more liabilities it accumulates.

Imagine I raised £10 million from investors promising to pay them 8% for 3 years, and I have no source of EBITDA to pay them their 8%. In order to pay them off it’s not enough to raise £12.4 million from a new load of investors. The new investors will want 9% per year for 3 years (I already tapped out the people willing to invest in my obscure company for 8%) so now I need to raise £15.7 million from the next load of investors to pay them off. And so on.

Liabilities increase exponentially – even before we consider additional investment on top of that needed to pay off existing investors.

The longer a doomed scheme is allowed to run on for, the more liabilities it accumulates, and the more damage it does when it collapses.

Whenever an unregulated scheme collapses, it is pretty common to see its organisers claiming “everything would have been fine if the regulator hadn’t shut us down”.

This is invariably bollocks, and a variant of victim-blaming. It constitutes an admission that the scheme relied on new investment to stay afloat. Which means it was doomed anyway. All the regulator did was limit the damage.

When unregulated investments are accumulating liabilities with no realistic plans to ever pay them off, prompt and decisive action is required by the regulator to limit the damage.

But I guess the FCA’s marketing ban is the next best thing.

Carlauren collapse shows it’s not just investors who suffer

~ Phoenix ~ 5 Comments

With a few exceptions, investors in collapsed unregulated investment schemes generally find sympathy in short supply.

The media will occasionally print the hard-luck story of a someone who invested their entire pension lump sum, or an injury compensation payment, but the news cycle usually moves swiftly on.

And the general public’s opinion of people who invest too much money in collapsed unregulated investments is often that they were some combination of greedy (even though the idea that all collapsed schemes were “too good to be true” is a total myth), naive, or too tight to consult a regulated financial adviser.

This is not a view shared by this blog; anyone who gets the impression that we lack empathy for the position of investors in failed investments has not understood why Bond Review exists.

Those who parrot thought-terminating clichés like “a fool and his money are soon parted” might pause for a change to consider the plight of elderly residents in Carlauren’s care holmes.

In June, as Sean Murray’s empire built on promises to pay investors 10% a year collapsed around his ears, elderly and vulnerable residents at Tyndale House were told they had a month to find alternative accommodation.

As if this wasn’t distressing enough, on 2 July, the same day Carlauren COO Andrew Jamieson was confronted by unpaid staff, the residents were told this deadline had been accelerated to 24 hours. According to Bond Review reader cpnorfolk:

Social Services had to find emergency accommodation for the residents. My sister managed to get my mother into the care home she was due to transfer to. They were able to fit her in a week early, but it was utter pandemonium on the day and very distressing for all.

Another reader, Jps, says:

Due to non-payment of staff, the residents were put at risk. These risks were presented to senior management prior to closure yet they choose to ignore them. Residents had just 4 hours to find somewhere else to live. Staff continued to work really hard with the help of social services to ensure that this was done with as much dignity as possible. However no-one can compensate for the distress and heartbreak this caused those elderly residents and staff members.

According to ITV News, residents of sheltered housing owned by Carlauren were left without on-site support as a knock-on effect of the closure of Tyndale House. Carlauren said at the time they “have been working hard to ensure they receive the care and support required”.

The fact that the collapse of Carlauren’s unregulated investment scheme left a number of elderly care home residents as collateral damage is more than an unfortunate accident.

The purpose of the financial system is to move money from where it is to where it is needed.

The purpose of financial regulation is to ensure that it does so as efficiently as possible, with a minimum of waste. When this system goes wrong, people’s money is not used to bring economic benefit, but the opposite.

If, hypothetically, I take £5 million off a bunch of investors claiming I’m going to pay them 8% per year for investing in property development, and use £1 million to pay some architects and builders to build the skeletons of a few buildings, knowing it has virtually no chance of ever seeing completion because the scheme will run out of money long before, it is not just the investors’ £5 million which has been lost.

It is also a waste of the architects’ and builders’ time which could have been spent building something that actually had a chance of seeing the light of day.

Economists talk of “the multiplier effect”, which means that when somebody spends money to buy stuff, whoever they buy it from pays their workers and themselves, who buy more stuff, and so on. Economic activity generates more economic activity.

Unfortunately the multiplier effect also applies to economic damage.

The failure of duff investments leaves not just investors with empty pockets but abandoned building sites, wasted resources and in this case, distressed elderly residents.

Had Carlauren not been able to raise money directly from retail investors on promises of 10% per year, it is highly unlikely that it would have been able to purchase Tyndale House and other care homes. Institutional investors were unlikely to hand over money because a guy fresh off the back of the failure of a scheme involving the sale of distressed properties in Detroit had decided to try his hand at looking after the elderly.

The complacent idea that the collapse of unregulated investment schemes doesn’t matter because it only affects “fools and their money”, which has allowed the Government to leave UK securities law stuck in the 1920s, needs to be re-examined urgently.

A billion pounds is at risk of loss in unregulated investment schemes that solicited investment from the public and entered administration in 2019. This is not just a loss to the investors but to the UK economy as well.

Anyone home?

FCA announces 12 month ban on horses leaving through open stable door

~ Phoenix ~ 6 Comments

The FCA dramatically announced yesterday that it would ban minibonds from being marketed for a period of 12 months, starting on 1 January.

In addition, all marketing material approved by an authorised firm will have to declare any commissions paid to third parties (something we’ve already seen from Blackmore and The Capital Bridge in recent months).

During the temporary 12 month ban, the FCA will consult on more permanent measures.

What exactly this is supposed to achieve is difficult to see, until you remember that a decision on who will replace Mark Carney as the UK’s top economic panjandrum is expected any day now. Former bookies’ favourite Andrew Bailey is badly in need of something that makes it look like he has a grip. This is something.

Many unregulated investments are already promoted under the pretense that its investors are all high-net-worth or sophisticated investors. The FCA’s supposed “ban” is not a ban as a ban is something that stops you doing what you want to do. Not an extra hoop to jump through that many are jumping through already.

To quote Simon Marshall who commented on IFA trade rag New Model Adviser:

I was contacted the other day by one of these outfits. The guy said to proceed I needed to select whether I was High Net Worth, Sophisticated or Retail. He then pointed out that pretty much everyone was in the sophisticated category, which shows that they are already looking at a workaround.

Other workarounds commonly employed by the dodgier end of the minibond market include getting investors to click-through a declaration that they are high net worth or sophisticated (which many will do so without reading in the same way they dismiss cookie notices) or electronically sign a document before receiving investment literature.

Investors are often told that this is “just some red tape”. And in the absence of the FCA running spot checks on unregulated investments and their introducers to check that they hold evidence that their investors actually are high-net-worth or sophisticated (not just declaring they are), as they are required to, it remains exactly that.

The FCA’s press release contains a list of actions it has taken to stop UK retail investors losing money in unsuitable unregulated investments:

Investigating more than 80 cases of regulated activities potentially being carried out without having the right FCA authorisation.

Assessing over 200 cases of financial promotions that appeared not to have complied with the FCA rules.

Seeking to persuade the internet service providers, particularly Google, to take more action, for instance to take down websites promptly where they are likely to involve a breach of law or regulations.

Contact with the Department of Culture, Media and Sport to urge inclusion of financial harm in the proposed legislation on online harms.

Developing tools for data analysis, for instance introducing web scraping to assist in the identification of mini-bond promotions.

If this list was meant to disabuse us of the impression that the FCA prefers visiting fellow bureaucrats in the Ministry of Fun or big companies like Google for tea and biscuits, instead of getting its hands dirty with those breaking the rules, it’s not succeeding.

Conspicuously absent from the list is any sign of action taken against the numerous unregulated schemes still currently standing to check that they have complied with their regulatory obligations to obtain evidence that all their investors are actually high net worth or sophisticated.

We should also bear in mind that the ban only affects companies using the mini-bond structure, and has no affect on other unregulated investment structures like “invest in a hotel room with 8%pa assured rent”.

Bailey stated that the timing of the announcement was with a view to “ISA season” (when ISA managers of all varieties encourage investors to use their ISA allowance before the tax year rolls over in April).

The other interesting thing about the timing of the FCA’s announcement is that if any unregulated schemes collapse as a result of new investment drying up, it will be after a decision is made on the Bank of England appointment.