The UK Financial Conduct Authority (FCA) has censured London Capital & Finance (LCF) for misleading promotions in regard to mini-bonds. The FCA said it did not make sense to assess a financial penalty as LCF is effectively bankrupt and in administration. LCF went into administration in January 2019 and failed on 9 January 2020. When the company failed it reported around 11,625 bondholders who had invested around £237 million. A compensation program was initiated by the UK government to compensate bondholders who incurred losses.
An independent investigation was conducted on the firm and a report was published in November 2020.
According to the FCA, LCF promoted mini-bonds to retail investors that made them appear “more attractive” than they were. This included hidden charges and the risky nature of the asset.
Mini-bonds are a form of debt capital and are considered high-risk investments. The FCA notes that, in general, an entity does not need to be regulated to offer the type of credit that has been used by smaller firms and startups in the past.
The FCA claimed that LCF used bondholders’ money to fund seemingly independent comparison websites to showcase its minibonds next to safer investments, which had a lower rate of return. This had the effect of enticing retail investors into investing in LCF’s high-risk products. LCF also advertised the minibonds as ISA-compatible when this was not the case.
Therese Chambers, Joint Executive Director of Enforcement and Market Oversight at the FCA said:
“LCF’s use of financial promotion led to bondholders, many of whom were vulnerable, investing in unsuitable, high-risk products. We recognise our censure will not provide solace to those investors who lost out. But it is important we set out what went wrong at LCF and how their promotions misled people into parting with their money.”