Traditional stockbrokers safer than FX brokers? Not in this case as London firm goes bust

Perhaps rather unjustly, the retail FX business has been the subject of some regulatory drubbing over the past few years, especially in Europe, where the European Securities and Markets Authority (ESMA) has systematically singled out retail margin trading companies for draconian changes to the way in which products, particularly CFDs which are popular in Britain, are marketed and distributed.

Endless leverage restrictions, advertising curtailments and amendments to trading terms have been applied by Europe’s bureaucrats, often to companies with a long, illustrious history and a satisfied client base.

The unwritten but assumed notion that traditional investment providers such as bond issuers and stockbrokers are somehow more reliable and take a longer term, more risk averse approach to spot FX and CFD firms can be written off, as one of Britain’s fixed rate bond issuers, London Capital & Finance, leaves thousands of investors in the lurch after promising them an 8% return on investment.

The company, which on December 28, 2018 was the subject of a publication by the Financial Conduct Authority (FCA) of relating to’Information for London Capital and Finance PLC investors’ on the FCA website, had been investigated by the regulator and found to be mis-advertising its products.

This notified investors that the FCA was conducting an investigation into the affairs of London Capital & Finance and had imposed certain requirements on the company, notably that the company may not without FCA consent deal in any way with its assets, including the money held in its bank accounts. The Information included a short series of questions and answers to which readers of this website are referred for further details.

Since then, London Capital & Finance website has stated that the directors of of the company appreciate that the Information, coupled with the earlier direction given by the FCA to London Capital & Finance to withdraw all its marketing materials relating to its Fixed Rate ISA or Bond, was likely to cause considerable anxiety to LCF bondholders and borrowers.

London Capital & Finance had its accounts frozen by the Financial Conduct Authority on 13 December 2018 following an investigation, and at the time, the company had raised up to £214million from 14,000 investors, including pensioners.

Rather similar to many other traditional investment vehicles that use modern crowdfunding-orientated methods to generate their fund, the firm offered 8% interest to investors, and detailed this on its marketing material, rather in the same way that new age investment platforms offer similar terms, such as the very interesting Burrito Bond offered by London and Manchester-based restaurant chain Chilango.

As 2019 began, the FCA told London Capital & Finance that the way in which it was marketing it bonds was misleading, not fair and unclear.

Today, the company has entered administration. According to the FCA, investments in the company’s mini-bonds are unlikely to be covered by the Financial Services Compensation Scheme, raising doubts as to whether investors will be able to get their money back.

The Financial Services Compensation Scheme covers loss of client capital in certain circumstances, with a safety net of up to £85,000 which is the highest of any national government-run compensation scheme, however there are certain cases in which firms operate outside the guidelines for cover and therefore capital, as well as profits are not covered.

The company lent money to small and medium-sized businesses, funding that lending through bonds paying between 3.9 per cent and 8 per cent a year.

Smith & Williamson LLP was appointed joint administrators yesterday after being called in by the company directors. A statement on the website of the FCA said that: ‘The directors of the company received independent advice and determined that the company was insolvent.’

A statement from the administrators said: ‘Investors in London Capital & Finance’s mini-bonds were retail clients who were UK taxpayers and who fall into the category of either high net worth individuals, sophisticated individuals, self-certified sophisticated individuals or restricted investors, as noted on its website.’

One administrator, Finbarr O’Connell, told the Evening Standard: ‘It is early days, but our role will be to work with LCF’s borrowers, staff, the security trustee for the bondholders, the FCA and other stakeholders to ascertain what needs to be done in order to maximize the returns to the bondholders.

Ironically, should an FX or CFD firm go to the wall, which is a very rare occurrence indeed in developed financial markets centers such as London, many of the firms having been in existence for over 30 years and are publicly listed with a very large capital base and dedicated customers, the FSCS would pay out, however for some reason the traditionally inclined financial lawmakers tend to favor bond issuers and stockbrokers, even in this age of new crowdfunded startups without the resources or wherewithal to get it right.

The new age of retail investment opportunities is a welcome one, but it is not the gold-edged road to easy riches that as it is sometimes viewed.