Thousands of first-time investors who lost their savings through London Capital & Finance (LCF) have been told they are unlikely to receive compensation.
Nearly 12,000 customers invested more than £236m in total into the high-risk bond scheme before LCF collapsed in January.
As reported by the BBC, the scheme was marketing as a “fixed-rate ISA” and that marketing campaign is now under investigation for mis-selling.
Many of those who invested in the scheme were first-time investors – inheritance recipients, small business owners or newly retired.
“No grounds for compensation”
Although the Financial Services Compensation Scheme (FSCS) agreed that investors had lost money “through no fault of their own”, they added that “there were no grounds for offering compensation”.
But administrators said the investors could get as little as 20% of their money back.
Bev Budsworth MD of The Business Debt Advisor said: “Our team have spent some hours digging into LCF and the information makes for some really shocking reading.
“It is astounding that bondholders were characterised as sophisticated lenders when in reality they were ordinary investors who have put their life savings into a scheme believing it would provide a reasonable return. According to the FT, this company was insolvent on paper going back two years?”
The company is now in administration and under investigation by the Serious Fraud Office and the Financial Conduct Authority (FCA).
As reported by The Guardian, the FCA has also been ordered by the government to launch an independent review of how it handled the collapse of LCF.
Confirming that an investigation has been ordered by the government, the economic secretary to the Treasury, John Glen, added: “The recent stories of those affected by the collapse of LCF are incredibly concerning. I want to make sure we have the strongest and safest financial system possible.
“By ordering this investigation, we will better understand the circumstances around the collapse and make sure we are properly protecting those who invest their money in the future.”
Many are hoping that the government ordered investigation will throw a lifeline to the victims of LCF’s collapse in regard to potential compensation.
LCF mis-sold to customers?
LCF advertised itself as a low-risk Individual Savings Account (ISA) which promised to spread the funds between hundreds of companies.
However, in reality, the money was only invested in 12 companies and the fund did not actually qualify as an ISA.
The fund’s administrators also found that 10 of those 12 companies were “not independent” from LCF.
Where did the money go?
Last week, the company’s administrators Smith & Williamson released a report which found that there were a number of “highly suspicious transactions” involving a “small group of connected people”.
Investors’ money was loaned to a complex web of companies – the majority of which were connected to people involved in LCF – and a lot of those borrowers don’t appear to have sufficient assets to pay back LCF investors.
Some of those “highly suspicious” transactions include:
- A combined £27m in loans to two companies in Cape Verde intent on developing land – but neither company have legal rights to any land
- Loans to four companies in the Dominican Republic for land development – but all the companies only owned undeveloped land and owed nearly £50m
- More than £20m was loaned to a company called Waterside, which said it received the money “in good faith” for the refurbishment of a hotel in Cornwall
- An £840,000 loan to LCF’s parent company, London Financial Group, to buy a helicopter and sell it on to an American company for a “quick profit”
- A £20m investment in FS Equestrian Services that owned £15.1m worth of horses, owes £12.2m, but apparently has no bank account and changed ownership in January for free.
A quarter of all the money invested was paid to LCF’s marketing company Surge PLC.
The administrator said they are “very concerned” that management have made “no real efforts” to prove the value of the company.
In a letter to bondholders in February, administrator Finbarr O’Connell said once the £60m to Surge was paid, returns of up to 44% would be required in order for LCF to make good on its promises.
The administrator added there was “no evidence” that LCF would be able to repay the debt.
The marketing campaign
The marketing campaign was run by an agent, Brighton-based Surge PLC. LCF paid them 25% commission to run the marketing campaign – which amounted to £60m.
They ran a series of online adverts which promised 8% returns from secure ISAs were released and also linked to a comparison ISAs site which was run by a company with links to Surge.
LCF was authorised by the Financial Conduct Authority, but the FCA said they had only authorised LCF to provide consumer financial advice, not the sale of bonds or ISAs.
In December 2018, the FCA froze LCF’s activities, removed the adverts, and in January found that LCF had “made communications in relation to its fixed rate ISA or bond which were misleading, not fair and not clear”.
The FCA findings included the revelation that LCF’s bonds did not qualify to be held in an ISA account and because of this investors were misled by the claims in the advertisements that the interest they earned would be tax free.
A spokesman for Surge Financial said: “Surge has a number of clients and its fees for LCF are in line with the industry standard.
“LCF was an FCA regulated business and it signed off all marketing materials and financial promotions prior to publication as required by the Financial Services and Markets Act.
“Surge was a supplier of services used in relation to raising investment for LCF. It did not handle client money and had no involvement in the deployment of funds to borrowing companies.”
Where did LCF go wrong?
The LCF business model was a flawed one. The company issued bonds to the public and then lent that money on to other companies.
Its solvency was then reliant on those assets generating sufficient cash to pay off the liabilities the company had already taken on.
According to the Financial Times, figures published by LCF in the 2016-17 financial year revealed that the company’s assets were not sufficient to pay off its outstanding debts, making LCF technically insolvent at least two years ago.
However, the company published a balance sheet which suggested it was solvent, with net assets of £300,000.
But buried in the notes, LCF disclosed fair values for its loans to companies and liabilities to bondholders, discounting them using the yields of comparable listed bonds.
This showed that while the fair value of its assets was assessed at around £62m, its liabilities were worth closer to £72.5m, meaning that they actually had net liabilities of around £10m.
The balance sheet also showed the company would have to keep borrowing to continue trading, just to redeem outstanding liabilities as they fell due.
Get in touch
If you are a small business owner who has been affected by LCF going into administration, then please fill out our Contact Form and we will be in touch.
Alternatively, call us on 0800 781 0990. Our team has extensive experience and can arrange an initial consultation at no cost, usually on the same day.
If you lost money in the LCF scheme or you are struggling with debts, you can also find personal debt advice and solutions at The Debt Advisor.