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Collapsed UK firm under investigation for mini-bond fraud

Treasury committee calls on watchdog to consider statutory investigation into regulatory failure


London Capital & Finance is being investigated by the UK’s Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA) in a joint action after the firm took £236m ($313.3m, €276m) of investors’ funds.

The firm issued “misleading” mini-bonds and Isas on a non-advised basis, promising 8% returns to clients.

Mini-bonds allow investors to lend money directly to businesses and are, in effect, IOUs that the companies sell to investors.

The joint investigation was opened after the FCA filed a referral to the National Economic Crime Centre.

On 4 March 2019, four individuals were arrested in the Kent and Sussex areas. All have been released pending further investigation.

Two days later, London Capital & Finance entered administration, with Smith and Williamson as the named representatives.

Investors received bad news that same day, with the Financial Services Compensation Scheme (FSCS) confirming that “the sale of mini-bonds […] is not a regulated activity under the Regulated Activities Order and, therefore, is not FSCS-protected”.

“For this reason, while the firm is insolvent, we’re not accepting claims against the firm.”

Investigating regulatory failure

But, an HM Treasury committee is now looking into whether FCA-authorised products can still be misleading to consumers.

Nicky Morgan, chair of the Treasury committee, wrote to the FCA board asking for a statutory investigation into a possible regulatory failure that lead to the firm’s misconduct.

“The FCA is currently investigating London Capital & Finance’s marketing material and the SFO is investigating individuals associated with the company.

“Yet, there is a broader need to understand what can be learned in a regulatory sense from the events at London Capital & Finance.

“I have therefore requested that the FCA board consider whether the failure of London Capital & Finance, the potential harm to those consumers involved, and the regulatory system that led us here, warrants a statutory investigation.”

Overruling the regulator

Morgan added: “If the FCA decline, I have asked HM Treasury to consider using its power to require the regulator to conduct such an investigation.

“Even if the regulator does not conduct an investigation, the FCA board should set out whether firms are using their FCA-authorisation in a way that may be misleading to consumers, whether consumers need greater clarity on what such an authorisation does to protect them, and whether mini-bonds should now be regulated.

“The government and the regulator must do all they can to prevent history from repeating itself.”

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