If it’s too good to be true …

Recent press has been pretty vocal on the demise of London Capital & Finance who, having taken in c£263m from investors, went into administration with the potential loss of most of that money.

LC&F marketed a series of ‘asset-backed bonds’ promising returns of between 3.9% for 12 month and 8% per annum over three years.  They claimed the investments were eligible to hold within an ISA, that they had a 100% track record in paying back the capital and interest and that there were no set up costs, management fees or charges.  So what went wrong?

Looking at the marketing, there are a number of things that should have rung alarm bells.

• No set up costs, no management fees, no charges (‘no income tax, no VAT, no money back, no guarantee’ as Only Fools and Horses would have it).  So where would they make their money?  What they did do that we know of was pay 25% of the investments to another company to “market” the products.

• Returns of 8% per annum over three years.  That’s pretty good going in the current environment even from a portfolio of nothing but shares. Yet this was supposedly interest generating, asset backed and the implication being pretty much guaranteed and in the material compared to rates on deposit.  There was a ‘Capital at Risk’ statement in there somewhere however, the whole feel was of a guaranteed cash equivalent interest return.  With cash rates around 2% for that sort of term, if anyone is offering 4x cash then you have to ask “How?” and probably “Why?”.  If the return is more than you can get in cash there has to be a risk and the higher the return above cash the higher the risk.

As far back as 2015, an Independent Financial Adviser had raised concerns about the marketing of this product with the regulator, the Financial Conduct Authority.  According to their later comments, it appears that LC&F were never authorised to sell bond or ISA products.  Yet it wasn’t until December last year that the FCA took action against LC&F and in January this year the company went into administration.  A large chunk of the money by that point had been borrowed by the founder of LC&F for other projects of his.

Another sorry tale of misled investors, life savings destroyed and a failure by authorities to prevent the disaster.  What we learn from this is what we have learned from previous problems :

• Beware direct marketing;
• Beware anything that claims not to have charges;
• Beware anything that looks “safe” but promises returns in excess of the best cash returns;

If in any doubt, ask an expert, as a client of the IFA mentioned above did in 2015, much to his relief