New update from London Capital & Finance administrators – S&W lays bare the risk of bondholders not being repaid in full

February 22, 2019February 22, 2019 ~ Phoenix ~ Leave a comment

Link: All our London Capital & Finance articles

The administrators of London Capital & Finance, Smith & Williamson, released a further update to LCF investors on Thursday.

After a few initial gaffes which appeared to give far too much credence to the company that appointed them, the latest update is much less forgiving towards the way London Capital & Finance was run until its collapse.

The update is inevitably non-committal on the question on every investor’s lips, whether they will get their money back. It states “It is too early for the Administrators to say how much money they will be able to return to Bondholders and when any payments will be made to them”.

Smith & Williamson does however go on record that the high commissions (up to 25%) paid out by LCF from investors’ money, plus other costs, make an extremely high rate of return necessary to return investors’ capital and interest.

Accordingly, in order for LCF to be able to repay the Bondholders, the Borrowers would need to make very substantial returns on the monies loaned from LCF to them. For instance, in the case of a:

1 year bond, we estimate that the associated Borrowers would need to repay LCF c.144% of the amount loaned to them, and thus requiring them to make a c.44% return in one year on the monies loaned to them.

2 year bond, we estimate that the associated Borrowers would need to repay LCF c.157% of the amount loaned to them over the 2 year period, requiring them to make a c.28.5% annual return on the monies loaned to them.

3 year bond, we estimate that the associated Borrowers would need to repay LCF c.174% of the amount loaned to them over the 3 year period, requiring them to make a c.24.5% annual return on the monies loaned to them.

5 year bond, we estimate that the associated Borrowers would need to repay LCF c.195% of the amount loanedto them over the 5 year period, requiring them to make a c.19% annual return on the monies loaned to them.

The previous management of LCF continue to stress that they believe the level of security available to LCF to cover its lending to the Borrowers will be sufficient to see the Bondholders repaid in full.

However, when both the level of the fundraising agent’s commissions, and the interest rates due to the Bondholders are taken into account, there is a substantial risk to the Bondholders that they will not receive a full repayment, including interest, of the monies due to them.

It is too early to determine the level of that risk to the Bondholders but the Administrators will keep the Bondholders informed of their assessment of that risk as the administration progresses.

For investors not familiar with realistic levels of investment returns: 19% per year over 5 years is an extremely ambitious target return, and any investment offering that level of return inherently has a very high risk of failure. You could diversify over a number of such investments in the hope of a few succeeding, but the ones that failed would bring your average return to well under 19%.

If your aim is to generate a 44% return over 1 year you might as well go into a casino and put half your money on red or black.

The administrators have been told by some of LCF’s underlying borrowers

that they will be unable to generate the very high levels of financial return needed to settle the claims of the Bondholders without engaging in debt for equity swaps. This suggestion was already in contemplation with regard to one of the sub-Borrowers when the Administrators were appointed.

For investors not familiar with corporate finance jargon: even if some of LCF’s borrowers pay their loans back as originally agreed, this will not be sufficient to return all investors’ money. The borrowers are suggesting that the debt is exchanged for shares in the company, in the hope that these shares will grow in value and the administrators will be able to sell them for enough money on the open market to meet investors’ claims.

This is a potentially attractive option for LCF’s borrowers because once the debt has been exchanged for equity, it is entirely the administrators’ problem whether they can sell the shares for enough money on the open market, and the borrower is no longer required to find the money to repay interest or capital.

(The drawback for the borrower is that they have to give up equity in the company. Hypothetically speaking, if the borrower doesn’t have the money to meet its debt obligations, then the equity is potentially worthless anyway.)

Further conerns

The administrators note a number of concerns that have been discussed in the public domain for the last few weeks, and will be no surprise to anyone reading this blog or the other forums following LCF:

There are concerning connections between people currently or previously involved with LCF and people currently or previously involved with the Borrowers and sub-Borrowers.

The fact that c£236m of Bondholder monies has been lent by LCF to a small number of Borrowers and sub-Borrowers shows a lack of the spread of risk that one would expect from a professional portfolio manager. It is especially concerning that c£122m was lent to one Borrower, notwithstanding that Borrower on-lent a large proportion of that money to a number of sub-Borrowers.

The Bondholders believed that their money was being lent to a wide portfolio of UK small and medium sized enterprises (‘SMEs’) but they now find that it has been lent to a small number of complex businesses with substantial risk profiles and which are often dependent on foreign and/or exotic (such as oil & gas) assets.

The Bondholders are very concerned:

– that they have been characterised as sophisticated lenders when, in reality, they are often people who have invested their life savings in LCF financial products for the best possible return. The Bondholders are very upset that the boards of directors of the Borrowers and sub-Borrowers have viewed them as investors with an interest in investments with high risk profiles.

– that LCF was planning to engage in debt for equity swaps with the Borrowers and sub-Borrowers, using the monies lent by the Bondholders. The Bondholders had seen no evidence in any of the Information Memoranda indicating that Bondholder monies might be used in this way.

– that there are corporate transactions involving the Borrowers and sub-Borrowers which involve companies with similar names, frequent name and accountingdate changes, Companies House strike off notices and the same individuals. The Administrators have been investigating and following up on the same matters as those reported by the Bondholders.

However, whilst analysing and interpreting all of the Bondholders concerns, the Administrators’ main focus is to maximise the financial returns to the Bondholders.

The administrators provide some information on measures they have taken regarding LCF’s underlying borrowers, but as none of the borrowers are named, this information is limited in nature. The administrators have previously stated that they do not wish to do anything that threatens confidence in the borrowers or their share prices.

The administrators also reveal that they are in discussions with the FSCS, and also HMRC with regard to the tax status of the ISA bonds (according to the FCA, the ISA status was never valid).

The administrators reveal that they have been in “constant communication” with Nathan Brown, the administrator of the largest Facebook investor group (London Capital & Finance Bondholders), as well as other smaller groups.

They are looking to speak to a cross-section of LCF investors as to how they were persuaded to invest in LCF bonds.

The Administrators have identified a number of Bondholders to assist in this regard through the Bondholder action groups but if any other Bondholder would like to be considered for involvement in this review process can they please email to [email protected] quoting, in the email subject heading, ‘Representations made to Bondholders during their bond application process’, and they will then be considered for inclusion in this process.

The Administrators are particularly interested in any advice given to them, or representations made to them, during the application process from LCF or its agents with regard to the benefits to be obtained from applying for or re-investing in the LCF mini-bonds or ISA-labelled financial products.

The Administrators’ full initial proposals are due to be submitted to investors by 27 March 2019.

The full update can be read here.

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

February 6, 2019February 6, 2019 ~ Phoenix ~ 3 Comments

Link: All our London Capital & Finance articles

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.

It is clearly in the borrowers’ interests for Smith & Williamson to be very cooperative with them (bearing in mind that the directors and ex-directors of many of LCF’s borrowers are ex-directors of LCF itself). Is it in the interests of investors? Only if being very co-operative means there is a realistic chance of the money eventually being paid back.

If on the other hand the money that LCF has loaned out on any particular loan is not recoverable, then it is in the interests of creditors for the loan to be written off as soon as possible, so that the administration can be brought to the swiftest conclusion possible, without the administrators racking up fees waiting for recoveries that never come, and the investors can move on with their lives.

It is therefore essential that the administrators are willing to make themselves unpopular with LCF’s borrowers if necessary, firstly to establish whether the loans are likely to be paid back, and secondly to ensure that repayment is not deferred indefinitely. Accepting their word is not good enough – accepting people’s word is what got LCF investors into this mess in the first place.

My old pa told me you could be someone’s creditor or their friend but not both. Clearly up until this point, LCF has been a very friendly creditor, given the number of close links that run between LCF and its borrowers via their directors and ex-directors. Following LCF’s admission that it was insolvent after becoming unable to raise new money from investors, this close friendship is no longer viable.

Does Smith & Williamson have the appetite to be unfriendly to the people that appointed it? Based on its public statements so far, that appears highly uncertain.

London Capital & Finance administrators get off to unpromising start

February 5, 2019February 6, 2019 ~ Phoenix ~ 2 Comments

Link: All our London Capital & Finance articles

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:

PL: How many companies are involved?

FO’C: It is actually only twelve companies, which is good in a way, becuase it means our focus on the borrowers we have to deal with is quite a small number.

PL: Ye-s, but the small number implies that the risk isn’t being spread […] These were supposed to be low risk, if you lend to twelve companies you’re entirely dependent on those twelve companies to get your money back.

FO’C: Yes, as you say, as regards spread, it is twelve companies, security is in place, we’re meeting those entities next week, and we’ll know more after that.

One of the most basic principles of investing (which Paul Lewis is clearly aware of) is that diversification reduces the risk of an investor losing money, without necessarily reducing the potential return. Other things being equal, the more individual companies invested in, the better. These should also be uncorrelated as far as possible – which does not apply if most of the companies you lend to are linked to your company.

It may well be understandable if Smith & Williamson are secretly quite pleased that LCF has very few underlying borrowers because it makes their job easier. It is however not what the creditors will want to hear – and remember that Smith & Williamson are working for the creditors. To go on national radio and state to the listeners (many of which will be LCF investors looking for more news) that it’s good that LCF’s loan book is chronically under-diversified because it gives them less work to do is an extraordinary self-serving gaffe.

O’Connell goes on to say that the administrators have already established that the money invested in LCF’s twelve borrowers matches the total invested by investors – “the numbers all add up”. Paul Lewis asks if this means that if investors will be safe if all these companies return interest and capital on time (acknowledging “that’s a lot of ifs”): O’Connell replies “that is the hope”.

The fact that the administrators have matched the amount invested by investors with the amount loaned out rather misses the point that LCF paid 20% of investors’ money to Surge Financial, who ran its call centres and comparison websites promoting LCF via misleading comparisons with deposit interest rates. (The 20% figure has been confirmed by the Evening Standard and is backed up by note 10 in LCF’s most recent accounts.)

To enable LCF to return all investors’ capital and interest, LCF’s borrowers therefore not only need to return capital to LCF with sufficient interest to cover the interest offered by LCF, but also cover the 20% commission, and any other costs incurred by LCF (such as those of its sponsorship).

Conclusion

Smith & Williamson has a statutory duty to work in the interests of creditors. When an administrator is appointed by the directors of the firm that has just become insolvent, they have extra work to do to convince creditors that they are working in their interest, not those of the people that appointed them.

Especially when you consider that S&W will spend the larger part of their time interacting with the directors, in order to establish the financial position of the company and any avenues for recovery. This means it is essential that creditors can be confident that the administrators will robustly challenge the directors.

This is not a good start.

Misleading statements by LCF is partly what got LCF investors into this situation in the first place (source: FCA’s Second Supervisory Notice). In which case you have to ask why S&W initially blindly accepted LCF’s assertions about the sophisticated / HNW status of their investors, and the idea that everything is hopefully fine because LCF’s borrowers will repay their loans on time (and with sufficient interest to cover not just LCF’s commitments but to recover the amounts paid out as commission).

Footnote

O’Connell does accurately state in the interview that the existence of a Security Trustee with security over LCF’s assets doesn’t actually help investors, as the investors have a claim against LCF anyway. This is an obvious point but you wouldn’t know it from the number of unregulated bond issuers that go big on the existence of a “Security Trustee” in their adverts.

London Capital & Finance: what happened and when?

February 1, 2019April 28, 2020 ~ Phoenix ~ 8 Comments

After London Capital & Finance recently admitted that it was insolvent and put itself into administration, bringing a three-year career of persistent misselling to an end, now seems a good time to look back upon its short life – and what the FCA did about it during that time.

July 2015: An obscure company called Sales Aid Finance (England) Limited renames itself London Capital & Finance, despite being based in Tunbridge Wells, about 20 miles away from Greater London’s outskirts. This appears to have signalled the launch of its new business model.

October 2015: A member of the public asks the Moneysavingexpert forum about LCF after coming across them while Googling for “investment ideas”. The forum is unanimous in advising them not to invest.

November 2015: A prominent financial adviser, after being asked about LCF by one of his clients, writes to the FCA to warn about their activities.

2016-19 (and ongoing): The FCA continues to expend hundreds of man hours a week on implementing the Mifid II directive, dubbed by one compliance expert “by far the worst piece of financial regulation ever in Europe”. Mifid disclosure requirements are so bad that the FCA itself advises firms that they should issue “additional explanation” when the documents that Mifid forces them to issue are misleading. All of this is for a directive that the UK no longer has any good reason to follow once it leaves the EU.

June 2016: After an application process which is likely to have taken at least six months, the Financial Conduct Authority approves London Capital & Finance (for corporate finance business only; its loan notes remain unregulated).

By authorising its business, the FCA allows LCF to target the ISA transfer market, using the new Innovative Finance ISA wrapper – notwithstanding that LCF’s bonds are not eligible for ISA status – as well as giving it the added cachet that comes from being able to display “Authorised and regulated by the Financial Conduct Authority” on your website.

Early 2017: The FCA spends £60,000 on a new logo (plus an unknown number of worker hours changing all its stationery). The new logo is identical to the old one, but swaps around the maroon/white colour scheme, ruining the genuinely clever spotlight effect in the old logo.

March 2017: Drew J of the Damn Lies & Statistics blog adds another complaint to the FCA’s pile of warnings against London Capital & Finance.

August 2017: The FCA pays an undisclosed amount to hang out with Arnold Schwarzenegger and get him to front a series of ads telling the two people who had PPI and haven’t yet made a claim to make one.

December 2017: Bond Review is founded and, in our first ever post, issues a warning about the high risk nature of London Capital & Finance bonds.

February 2018: London Capital & Finance finally files its annual accounts for 2017 four months late, having used the accounting-period-shortening loophole twice in a row.

Its auditors, Ernst & Young, do not identify any concerns or issues with the accounts, and state that they have not identified any misstatements in the Strategic Report or the Directors’ Report. The directors’ report states that LCF is a going concern, and makes no suggestion that this is dependent on continuing future investment.

March 2018: The FCA publishes a collection of 28 essays on “Transforming Culture in Financial Services” from “thought leading academics, industry leaders, international regulators and change practitioners”. Leading figures from centres of excellence such as the University of Greenwich pontificate on subjects such as “Creating a culture of learning through speak-up arrangements”, “The permafrost problem: from bad apples to excellent sheep” and “A New Dawn for Cultural Transformation as Organisations Make Stakeholder Interests a Reality”.

July 2018: The FCA launches a consultation into why most people still don’t switch their cash accounts for an extra 0.5% a year.

October 2018: The standard six-month deadline for London Capital & Finance to file its April 2018 accounts expires. London Capital & Finance again deploys the accounting-period-shortening trick to avoid being officially overdue.

December 2018: The FCA finally wakes up, orders LCF to remove all its marketing materials, followed swiftly by a second order to freeze all its assets including its bank accounts.

January 2019: LCF places itself into administration, stating that it is unable to raise money from new investors, and is insolvent.

Footnote

The only thing worse than realising that your spouse has been cheating on you for years is realising that you were literally the only person who didn’t know about it, and that you’re the laughing stock of the whole town. Unfortunately this is the reality that LCF investors are waking up to.

Some of the facts about London Capital & Finance, such as the lending to companies closely linked to LCF directors, have only come to light since the administration. However, it was always clear right from day one (i.e. late 2015) that LCF bonds were extremely high risk products that, like any unregulated loan to a small startup, carried a high risk of loss by their very nature. That risk has come to pass.

As for those facts that have only come to light in the last few weeks, they were never hidden; they have been public knowledge for months available via Companies House, but it took the FCA orders to spark enough interest in people with enough expertise to uncover them.

As always the investors are last to find out. And the cost of the FCA’s failure to act on LCF’s misselling before stands at anything up to £225 million of life savings, depending on what is eventually recovered in the administration.

London Capital & Finance goes into administration

January 31, 2019January 31, 2019 ~ Phoenix ~ 1 Comment

Link: All our London Capital & Finance articles

London Capital & Finance has gone into administration, with four practitioners from top-10 accountancy firm Smith & Williamson appointed as administrators.

According to a FAQ on the LCF website, LCF applied for the administration itself. After the FCA froze the company’s assets and censured LCF for persistently misselling its high-risk unregulated bonds to retail investors,

3. As a result of the above, LCF has been unable to raise further monies from investors.

4. Professional advice was sought and the Company was advised that LCF was insolvent and that it should be placed into administration to provide the best outcome for Bondholders and other creditors. The Company was also advised that in order for some independent party to be able to deal with the Company’s assets for the benefit of the Bondholders and the other creditors that the directors should place the Company into Administration such that the Administrators could perform those essential functions. As LCF is an FCA regulated firm, the consent of the FCA is required for the directors of LCF to resolve to place the Company into administration. Accordingly, the consent of the FCA was duly sought and obtained.

The news broke on the Smith & Williamson company website yesterday. The news seems to have crashed Smith & Williamson’s servers, as the smithandwilliamson.com website is unresponsive at time of writing.

In a statement to Professional Adviser, the administrators said:

“It is early days, but our role will be to work with LCF’s borrowers, staff, the security trustee for the bondholders, the FCA and other stakeholders to ascertain what needs to be done in order to maximise the returns to the bondholders.

“We are especially focusing on the various loans made by the company to borrowers. At this juncture, regrettably we are not in a position to return any monies to bondholders.”

Hardman added: “We are working using existing LCF personnel, and gathering information relating to the loans LCF made to various borrowers. These loans to borrowers are the major asset of LCF and the administrators will do nothing to jeopardise the position of the borrowers and hence their ability to repay their debts to the company.”

How likely are investors to see any money back?

The answer to this depends on how much the assets of London Capital & Finance are worth, which is to all practical purposes unknown, despite the hard work others have put in into finding where the money went. Although we know where some of the money went, we don’t know how much these loans are worth or how likely they are to be repaid.

Some of the money raised from investors has been spent (e.g. on commission and other fundraising costs) and is therefore not recoverable.

Contrary to what some investors believe, HMRC and shareholders do not rank ahead of bondholders. Bondholders will either be considered secured creditors with a floating charge, in the best case scenario, or failing that unsecured creditors.

HMRC are unsecured creditors so they are likely to at worst rank equally with bondholders. (A recent change to the rules which makes HMRC a preferred creditor for certain taxes does not apply – it only comes into force after April 2020.)

Shareholders will only receive a payout if there are still funds remaining after all creditors are paid in full.

The people who do rank ahead of bondholders are the administrators, who always get paid first in any insolvency.

How long is the administration likely to take?

Some investors have reported that they have been told to expect a response in 8 weeks or even 1 week. This almost certainly relates to the time for the administrators to submit their initial proposal and establish a creditors’ committee.

The administration itself is likely to take at least a year, and could easily take several years, based on previous administrations of this kind. The exact length of time it takes depends on how much London Capital & Finance has in assets and how easily they can be realised.

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

January 25, 2019January 25, 2019 ~ Phoenix ~ Leave a comment

Link: All our London Capital & Finance articles

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.

Two investor groups set up for London Capital & Finance bondholders

January 14, 2019January 14, 2019 ~ Phoenix ~ 16 Comments

Link: All our articles on London Capital & Finance

Two groups have been set up on Facebook for London Capital & Finance investors looking for information after the Financial Conduct Authority shut down the company pending an ongoing investigation.

The first, London Capital & Finance Bondholders, was set up on the 3rd January and is currently the larger of the groups with a couple of hundred members. The group is not allowing anyone other than investors to join and bondholders are only allowed to post if their posts are approved by a moderator.

The second, London Capital & Finance Action Group, has been set up to explore any avenues (legal or otherwise) investors can take to safeguard their funds. It was set up a couple of days ago and for that reason numbers just under 20 members at time of writing, but is growing rapidly.

I have been told that the larger Bondholders group has refused entry to anyone offering legal advice or other outside help (i.e. non-bondholders), which makes co-ordinating legal action practically impossible. The Action Group was therefore set up for investors who are not willing to simply watch and wait.

It should be noted that at this point it is unknown whether any investors have lost money, and London Capital & Finance’s limited communications to bondholders since the asset freeze have repeatedly stressed that none of its underlying loans have failed to pay money back to LCF.

Note however that “none of our borrowers have defaulted” is not the same thing as “we have enough money to pay all our investors back in full”. Even if all London Capital & Finance’s underlying loans are paid back in full, capital loss can still occur if the returns from these loans are not enough to cover London Capital & Finance’s costs (including the c. 20% fundraising costs disclosed in its last accounts) and the interest paid out already.

London Capital & Finance roundup: investors’ money loaned out to firms controlled by LCF directors and mortgaged to a company in Malta

January 10, 2019January 9, 2019 ~ Phoenix ~ 2 Comments

Link: All our articles on London Capital and Finance

It is now just over a week since the FCA froze the accounts of London Capital and Finance and, after over three years of masterly inactivity, dramatically plunged investors into limbo.

Drew J of the blog “Damn Lies and Statistics” and the members of the MoneySavingExpert forum have been doing some excellent digging into the limited amount that has been publicly disclosed about LCF’s finances. Rather than regurgitate all their research myself (which does deserve reading in full), here is a summary of the crucial points that have emerged over the past week:

LCF’s money has been loaned to a network of companies which are linked to LCF itself via a common registered address and common directors and ex-directors. The names that keep cropping up across these companies are Robert Sedgwick and Simon Hume-Kendall.

LCF representatives have apparently tried to explain this away by claiming that the reason these companies share directors with LCF is that LCF appointed non-executive directors to their borrowers’ boards to monitor their investment. This does not explain why so many of these companies share LCF’s old address of Wellington Gate, 7-9 Church Road, Tunbridge Wells.

At least one of these companies is subject to a strike-off proposal while another has used the same accounting trick that London Capital and Finance has used to delay filing accounts.

Robert Sedgwick was suspended by the Solicitors Disciplinary Tribunal earlier this year for moving money on behalf of a carbon credit scam around 2014, which he admitted was a “dubious investment”.

In one case, £5.7 million was loaned to a company called CV Resorts Limited, whose published accounts show no activity for the last three financial years.

London Capital and Finance’s last accounts (April 2017) disclosed that it had a total of 11 corporate borrowers. I haven’t missed off a digit. This figure was up from 5 in April 2016. It therefore seems likely that the web of interlinked companies identified by Damn Lies & Statistics and others continues to represent the majority of London Capital & Finance’s underlying loans.

London Capital & Finance has a Security Trustee, Global Security Trustees Limited, which has a charge over all London Capital & Finance’s assets. Global Security Trustees Limited is itself part of the LCF network of related companies; it was set up by Robert Sedgwick and registered at LCF’s former Wellington Gate, 7-9 Church Road address. Global Security Trustees Limited is majority owned by a company based on Malta named Oracle Limited.

In the event that LCF defaults on its bonds or for some other reason this charge is enforced, investors’ money will therefore be ultimately controlled by a company registered in Malta, which controls the Security Trustee.

Investor reaction

Early evidence suggests that investors in London Capital & Finance who are aware of the FCA’s actions fall into two camps – or possibly three.

1) The first group have resigned themselves to the worst almost as soon as the FCA’s freezing order was made public.

2) The second group are desperate to take the FCA’s initial statement that the FCA’s investigation relates to LCF’s marketing materials at face value. They hope that once the FCA has concluded its investigation, the actual underlying business will be left alone and allowed to continue paying interest and capital (which LCF had done without fail until the FCA froze its accounts).

Many of them have fallen into the familiar pattern of blaming the FCA for stopping their interest, bringing LCF bad publicity and potentially “causing the whole thing to crash”. It clearly suits LCF if investors blame the FCA. However, if existing investors’ returns depends on LCF not getting bad publicity, and therefore not being starved of new investors’ money, the scheme is going to crash eventually anyway. Whether this is the case with LCF is, of course, not known. What is known is that LCF’s borrowers aren’t going to stop paying because of bad publicity, and this is what LCF investors’ returns should depend on.

3) The third group doesn’t really care as they fully understood the risks and didn’t invest more than a small percentage of their investable capital – meaning that they can afford to write off their entire investment in LCF without caring too much what was going on (in the same way that most people with workplace pensions, tracker funds and other mainstream investments are not glued to the Carillion scandal in which they have lost less than 1% of their savings). This represents by far the smallest group. If indeed this accurately describes anyone at all.

How deep does this go?

Jane Sanders, a specialist lawyer who has worked on previous FCA investigations, commented on an earlier Bond Review article:

For the FCA to have frozen the bank account in question means there is a significant risk to the funds in question. It is more normal, if the business has been under review for some while, where it is not considered a ‘flight risk’ to implement a V REQ otherwise known as a voluntary requirement.

In those circumstances the FCA will normally ASK the business to voluntarily sign an undertaking that the business will not dispose of any assets and/or any other conditions it seeks to impose and register that notification on the FCA register under exclusions.

In this case there is no such exclusion which means that the FCA has injuncted the business quickly arguably because there is so much risk that it considers, in its inherent jurisdiction, that it MUST do so to prevent new investors getting ‘tainted’ and/or being exposed to unfair and/or unreasonable risk.

Until the FCA makes public the results of its investigation – which may not be for months – we won’t know for certain exactly how deep the investigation goes and how sound LCF’s finances are.

What is certain, going by the above, is that investors are wise to manage their expectations. The idea that this is just about misleading marketing material looks very shaky in the face of all the facts listed above. Which are all based on public knowledge from Companies House and elsewhere.

FCA freezes London & Capital Finance’s bank accounts; investors’ interest and capital repayments suspended

December 31, 2018January 24, 2019 ~ Phoenix ~ 5 Comments

Link: All our London Capital & Finance articles

The FCA’s ongoing investigation into London Capital & Finance took a more serious turn yesterday when the FCA revealed that it has placed the following restrictions on the company:

It may not (without the prior consent of the FCA) deal in any way with its assets, including the money held in its banks’ accounts.
It must cease conducting all regulated activity.

Around a couple of weeks ago the FCA ordered London Capital & Finance to remove all its marketing materials. The FCA has now announced:

that it is appropriate to publicise the fact of its investigation into LCF now, as a result of other public actions taken by the FCA and in anticipation of legitimate queries from investors regarding the firm.

The FCA is unable to say whether investors are likely to get their investment back at this stage.

Will I get my investment back?

The FCA’s work in relation to the firm is ongoing, but it is aware that investors are keen to receive details on the progress of this work and the status of the firm. The FCA will publish updates on its website, when it is appropriate to do so.

For its part, London Capital and Finance has confirmed on its website that both interest and capital repayments to investors have been suspended, along with new loans to its underlying borrowers.

In the meantime, LCF is unfortunately unable to make any further loans to borrowers at present, or to make payments of principal or interest to bondholders.

For the avoidance of any doubt, LCF would wish to stress that at the date of this notice no borrower has defaulted on loans made to it and the security taken in respect of each borrower loan remains in place.

Investors looking for more information should refer to the FCA announcement.

London Capital & Finance’s introducers look elsewhere

One of London Capital & Finance’s most significant introducers is RPDigitalservices Limited, which operates the websites best-savings-rate.co.uk and top-isa-rates.co.uk. RPDigitalservices Limited is wholly owned by Ronak Mahendra Patel. Patel resigned as a director of the company in June 2018, but remains its owner according to Companies House. The sole director is now Stephen John Jones.

Alexa lists best-savings-rate.co.uk and top-isa-rates.co.uk as the two biggest drivers of web traffic to London Capital & Finance’s website, with 53.8% of “Upstream Sites” visits (the website that users visited immediately before London Capital & Finance) coming from those two websites.

How much RPDigitalservices has earned in commission for referring investors to London Capital & Finance is not known.

After London Capital & Finance was ordered by the FCA to remove its marketing materials, RPDigitalservices switched to promoting Blackmore Bond plc. Like London Capital & Finance, Blackmore offers high risk unregulated bonds with a risk of total loss.

Unlike London Capital & Finance, Blackmore Bond plc is not an FCA-authorised company, which means it needs an FCA-authorised company to authorise its website and other promotions in order to be able to legally issue them to the public. At time of writing, Northern Provident Investments Limited is the firm which currently authorises Blackmore Bond plc’s website.

FCA orders London Capital & Finance to remove all its marketing materials

December 18, 2018January 24, 2019 ~ Phoenix ~ Leave a comment

Link: All our London Capital & Finance articles

London Capital & Finance has been ordered by the Financial Conduct Authority to remove all its marketing materials.

At time of writing, every page of its website londoncapitalandfinance.co.uk has been replaced with the following notice:

LC&F’s Facebook page has also been taken completely offline. Its Twitter page remains online, but no tweets appear since July 2017.

London Capital and Finance began issuing unregulated bonds in October 2015 and subsequently became an FCA-authorised firm in June 2016. The company is authorised by the FCA to conduct corporate finance business only (i.e. it is not authorised to conduct regulated activities with the general public). Its bonds are not subject to FCA regulation themselves – but its marketing materials promoting those bonds are subject to FCA regulation, hence the FCA’s takedown order.

Having used the accounting-period-shortening trick to give itself more time to file its accounts, London Capital & Finance’s last published accounts are now over a year and a half old.

I reviewed London Capital and Finance’s bonds in December 2017 as the first article on this blog. I noted that as an unregulated corpoate loan note, London Capital and Finance’s bonds were unsuitable for investors who were not sophisticated and/or high-net-worth, and should not be considered by investors who were looking for a “secure” or “guaranteed” investment.