Watchdog in dock over collapse of savings firm

The City watchdog faces an official inquiry into why it allowed the sale of toxic bonds by failed business London Capital & Finance.

An independent review is being launched into the Financial Conduct Authority’s handling of LCF, which went bust earlier this year owing £237m to 11,500 mostly elderly savers.

LCF sold so-called mini-bonds which offered returns as high as 8pc.

Investors were told their cash would be lent to a wide range of promising start-ups. But after the company collapsed, administrators discovered it had gone to just 12 companies in a wave of ‘highly suspicious’ transactions. LCF investors face a long wait to get their money back – and could only see 20p for every £1 they handed over.

Mini-bonds are typically sold to the public by small companies that want to raise cash but struggle to borrow any from the banks.

They are meant to pay investors a regular sum – and have been used by a wide range of legitimate companies including hotel Chocolat and craft beer maker Brewdog – but are unregulated.

Unlike a bank account, the bonds are not covered by the Financial Services Compensation Scheme, meaning that if the company goes bust investors will be left with nothing.

FCA board members decided to ask the Treasury to order an independent review at a meeting last week. The probe will look at whether existing regulations adequately protect retail buyers of mini-bonds from ‘ unacceptable levels of harm’. It will also examine the FCA’s supervision of LCF.

City minister John Glen said: ‘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.’

The Mail revealed on Friday that the FCA knew the bonds were risky four years ago, but took no action to regulate them.

In a 2015 report focused on the peer-to-peer lending industry, the watchdog said: ‘Firms are failing to make clear that mini-bonds are investments that place investors’ capital at risk, and are not deposit-based or capital-protected products.’

LCF failed after the FCA stopped it from taking on new customers due to concerns about the way its mini-bonds were marketed. Four people have been arrested by the Serious Fraud Office, and the FCA is investigating a company called Surge Group, which was responsible for the bonds’ marketing.

Administrator Smith & Williamson said: ‘There are a number of highly suspicious transactions involving a small group of connected people which have led to large sums of the bondholders’ money ending up in their personal possession or control.’

Individuals named by S&W include LCF chief executive Andy Thomson, its founder Simon hume-Kendall, as well as their associates elten Barker and Spencer Golding.

The administrators have approached all four, asking them to hand over what they received so it can be returned to savers. hume-Kendall and Thomson have agreed to do this, but S&W is still waiting to hear back from the other two.