personal finance

LCF’s failure casts light on shadow savings


The collapse of the UK savings company London Capital & Finance, swallowing most of the £236m entrusted to it by 11,500 people, is one of the most troubling investment scandals of recent years. The failure requires not only an inquiry into how so much cash could vanish, but regulatory reform to prevent savers being so easily deceived by the aggressive marketing of risky financial products.

Administrators this week revealed “a number of highly suspicious transactions” at LCF, including loans to companies that bought a helicopter and land in the Dominican Republic. The loans were linked to four men, including its chief executive and the chairman of its largest borrower; the Financial Conduct Authority and the Serious Fraud Office are both investigating.

The company persuaded retail savers to invest tens of thousands each in “mini-bonds”, a form of unregulated high-risk lending to small companies, promising fixed-rate returns of up to 8 per cent. It used its status as an FCA-registered firm for other activities to give an air of security to financial products that, even if they had been well managed, involved big risks.

The LCF case may have involved malfeasance, but it is not unusual for savers to be drawn to such high-yield investments without fully grasping the dangers they involve. In the decade since the financial crisis, low interest rates have led many to seek out high returns from products that are lightly regulated, if at all. A shadow savings sector has flourished as a result.

Those risks are exacerbated by the growing role of direct marketing on the internet. Much of the money invested in LCF bonds was raised through price comparison websites linked to the company itself, which displayed its high returns at the top of tables of safer products. It was misleading to compare them at all, let alone without making clear the connection.

A practised investor would know that any offer of an 8 per cent yield must involve a higher risk of default than a standard savings product. But LCF targeted individuals with little expertise or experience, who were eager for an alternative home for their long-term savings. It is an old lesson, which is often learnt to its cost by a fresh generation of savers.

The government and regulators also have to learn lessons. One is to impose a clear line between protected and unprotected savings products. That boundary has been blurred by vehicles such as Innovative Finance Isas, which were established in 2016 to allow tax-free investment in peer-to-peer loans. These are FCA regulated but not protected by the UK Financial Services Compensation Scheme.

The distinction between firms being authorised for some activities and not others also needs to be clarified. Those savers who checked whether LCF was on a register of regulated firms found that it was, and can hardly be blamed for not realising that this meant little for their own security. It has been too easy for the unscrupulous to abuse official status for false comfort.

This does not take away from the ethical responsibility of LCF’s inner circle to make amends to investors, some of whom have few other financial resources. The administrator has asked both them and Surge, the online marketing company that charged a 25 per cent commission on the cash it raised, to return any profits and they should all co-operate fully.

But it is clearly a moment for reflection both for the savings industry and regulators. The UK benefits from having an open investment market, but it cannot permit the unscrupulous to abuse that freedom.



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