The Financial Conduct Authority (“the FCA”) issued a Final Notice against London Capital & Finance plc (“LCF”) for contravening regulatory requirements (pursuant to section 205 of the Financial Services and Markets Act 2000 (“the Act”)). The Final Notice contained a statement censuring LCF for failing to ensure that its financial promotions were fair, clear and not misleading.
If LCF were not in administration and insolvent the FCA would have imposed a substantial financial penalty on LCF and required the firm to pay restitution in respect of both the profit it gained from its misconduct and the losses suffered by bondholders as a result. The FCA considered that such penalties would not be appropriate in circumstances where the burden would ultimately fall on LCF creditors.
LCF was incorporated on 12 July 2012 and began conducting business in early 2015. LCF's only business was commercial lending funded by the sale of minibonds to retail investors who then became bondholders. The bonds were of terms varying between 1 and 5 years and offered high interest rates to investors (up to 11%). In total, LCF issued 16,700 bonds to 11,625 bondholders, all of which were high-risk investments, lacking FSCS protection. The finance raised from the general public through the issuance of these minibonds was then loaned to third-party corporate entities.
LCF entered into administration on 30 January 2019 which brought to the fore the extent of LCF's problems. LCF’s Administrators’ soon discovered "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".
LCF was authorised by the FCA as a credit broker and to carry out advising and arranging in relation to certain investments. However, the minibond business was unregulated and not subject to rules made by the FCA. However, financial promotions are regulated, and were required to be issued or approved by an FCA authorised firm. LCF's regulatory permissions (although otherwise unused) did entitle it to issue its own financial promotions. Each bond issue sold by LCF was accompanied by numerous financial promotions with the aim of generating at much interest as possible. These promotions were delivered in various formats including, Information Memoranda, brochures, adverts and comparison sites.
The FCA make clear in the Final Notice that LCF's financial promotions failed to be fair, clear and not misleading. The FCA set out the key ways in which LCF's financial promotions misled investors and bondholders:
- LCF targeted investors through the use of seemingly independent comparison websites that unfairly and misleadingly compared the firm's minibonds to much safer third-party investments;
- LCF claimed that it lent funds raised to carefully selected UK companies which had undergone financial review. This was untrue and misleading as LCF lent funds to companies that were not independent of LCF or carefully selected, and where no such due diligence took place;
- LCF continued to state in its promotional material the safety and security of its minibonds, including that the loans made by LCF were secured against assets of the relevant borrowing company, though conversely the loans were not secured against realisable assets held by the corporate borrowers;
- LCF financial promotions misled investors stating that there were no hidden fees, charges or deductions when in fact for every £1 invested, LCF paid fees of 25.5% to meet its online marketing and other support services costs. These fees were then passed directly to the corporate borrowers unbeknownst to potential investors;
- Minibonds marketed by LCF were marketed as ISA bonds but were not in fact qualifying ISA investments;
- LCF advertised its minibond business as if it were regulated by FCA. Highlighting authorised status in this way presented an unjust impression of integrity.
The Final Notice is a reminder that the financial promotion regulatory regime involves more than complying with technical rules regarding risk warnings and the like. Promotions have to be clear, fair and not misleading. The content of promotions must be accurate and not made misleading through the omission of key information. Firms approving promotions for unauthorised businesses, need to ensure that they fully understand the business and the products being promoted. In February 2024, authorised firms will require specific FCA permission to approve the promotions of other firms.
Many bondholders reading the Final Notice will be disappointed that the FCA's investigation focused on only one aspect of LCF's wrongdoing. However, as the FCA points out in the Notice, other aspects of the business are being investigated by the SFO, the company's administrators1 and the Financial Reporting Council.
The LCF scandal was not the FCA's finest hour and as a direct result of this case, the FCA has (amongst other things) invested significant resource into the policing of financial promotions. Each quarter the FCA publishes a summary of the activity it has undertaken, including data on the number of promotions which have been amended or withdrawn following FCA intervention. For the FCA this is a highly visible means of demonstrating its impact. In more serious cases firms may be subject to formal supervisory requirements or in the worst case enforcement, particularly where promotions are viewed as deliberately misleading.
Financial promotion rules are now closely underpinned by the Consumer Duty which was brought into effect from July 2023. The Duty requires firms to, “provide timely and clear information that people can understand about products and services so consumers can make good financial decisions”, and “focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction” – including in the marketing and communication process. This now imposes a higher standard than simply "clear, fair and not misleading".