Lessons from LCF scandal

THE downfall of London Capital & Finance, a company peddling toxic loans, is one of the biggest and most worrying scandals to hit small investors since the credit crisis a decade ago.

This week, City watchdog the Financial Conduct Authority is under pressure to launch a ‘regulatory failure investigation’ – an independent probe into its own conduct that will look at whether it did enough to protect consumers.

This is the least it can do, given the scale of the collapse. Around 11,500 savers who invested £237m in LCF’s ‘mini-bonds’ – which were unregulated – stand to lose around 80pc of their money after the firm went bust earlier this year. Nicky Morgan, who chairs the Treasury select committee, has called for a statutory investigation into any failures on the part of regulators.

The watchdog should act swiftly to launch an investigation not only into its own behaviour regarding LCF but also into whether the rules covering mini-bonds give consumers adequate protection.

If the regulator refuses to do this of its own accord, then the Treasury should force it. And the findings should be published in full, not brushed under the carpet as has been attempted in some previous cases, including the failure of RBS.

The FCA certainly has a case to answer. It has been well aware for several years of the perils of mini-bonds – risky loans to small companies – of the sort being flogged by LCF, having produced a report as long ago as 2015 saying it was concerned over how they were being marketed. Yet it failed to intervene to shield consumers, many of whom now stand to be stripped of life savings.

To readers of a certain vintage, LCF is in certain aspects reminiscent of the Barlow Clowes scandal of the 1980s, where 14,000 pensioners lost life savings. Some of the lessons from that debacle remain true today.

FIRST and simplest, if a promised return looks too good to be true, it almost certainly is. Barlow Clowes offered an implausibly high return on supposed investments based on government bonds. It didn’t add up. Nor did LCF’s promise of an 8pc return when banks and building societies are paying a fraction of that.

Second, don’t assume that because a firm is regulated, all its activities are covered. Some of LCF’s activities did fall under the remit of City watchdogs, which may have given a misleading impression. In fact, the mini-bonds were completely unregulated and not covered by any compensation scheme. On past form, LCF investors may well receive compensation in the end, particularly if the FCA is found to have been negligent, though this can take years, or even decades.

In the wake of the credit crunch, regulation was tightened up all round, particularly at a high level for banks to ensure they have enough capital to withstand nasty shocks. But the post-crisis era has thrown up new perils for savers.

Ultra-low interest rates and some QE money printing were needed to shore up the financial system and the wider economy, but this left many savers desperate for better returns than the pitiful rates on offer from the banks. They need protection from unscrupulous operators bent on exploiting this desperation.

A combination of post- crisis disillusion with conventional banks and new technology has thrown up new forms of finance, including peer-to-peer lending, crowd-funding, challenger banks and crypto-currencies such as Bitcoin. Much of the innovation is positive, but the regulators need to keep a beady eye out for the scoundrels.