London Capital Finance Bonds - What are the Risks?
It's incredibly frustrating that LCF have ripped so many people off by investing in unsuitable, unregulated and risky products. I reported London Capital Finance to the FCA back in 2017 yet it took them nearly 2 years to take action. I could see the potential disaster unfolding and warned on this blog about London Capital Finance Bonds before reporting them but sadly action was too late. Other companies have also been reported so hopefully the FCA news yesterday will lead to some action before more savers get duped into investing beyond their risk tolerance.
There have been lots of questions on MSE & BondReview website from people who don't seem to be aware of the risk profile of the bonds that LCF offered and the differences between bonds and ISAs. There are 3 main types of ISA - cash, stocks and shares and IF (Intelligent finance P2P Lending). Many people seem to assume if the word ISA is used then it means cash ISA and LCF have used that confusion to their advantage by offering investment ISAs claiming they are fixed rates. They key words visible are CAPITAL AT RISK which seem to be overlooked. A cash ISA is fully protected and cannot be capital at risk as it is covered by FSCS (Financial Services Compensation Scheme).
It's also quite misleading to claim the rate is fixed. It is only fixed if the loans made perform and the company makes sufficient profits. Loans at 12%-20% are likely to have a high default rate or the borrower would use a bank at 5%. If LCF get into difficulty or go bust then the rate isn't fixed and the income may be zero as explained below as well as losing your capital.
As a bond holder you are loaning money to London Capital & Finance and are an unsecured creditor. You are entirely reliant on them to correctly assess the risk of the loans they are making. As a bondholder you have no knowledge at all of the details of where your money has gone and on what terms. It is clear that a high percentage was paid as commission before LCF even lent it out possibly as much as 25% of the value of the bonds investors bought. This meant they need to charge even more for their loans to companies to recover that money.
Some investors in LCF bonds still seem to be unaware about the severity of the situation. Anyone investing in these bonds whether via an ISA or not has bought an unregulated product that has a risk higher than shares. Fraud or not is irrelevant, these are incredibly high risk unregulated investments that risk you losing ALL your money which is why they are not meant to be for more than 10% of your savings if you are high net worth. One of the companies loaned money lost £10 million last year, how will that affect investors?
They are far more risky than investing money in stock market funds and more than investing in some individual company shares. The activity shown already by London Capital Finance to entice unwary savers would tend to increase rather than decrease the risks. Payment of interest for a few years is not a sign of a successful business and can be maintained for some time by using new investors money to fund redemptions.
It's very clear from the posts on Money Saving Expert since 2015 that a lot of investors had no idea what they were getting in to and either ignored the warnings or were misled by LCF about the risks of unregulated investments. Sadly ticking a box saying you are high net worth investor will allow you to buy this product.
What are the risks with London Capital Finance Bonds?
These risks are taken from the Memorandum issued to all investors. These are the known, declared risks, there is also the risk of poor performance or fraud at the companies loans made to. Although described by LCF sales people as being boring reading to put in the bin if LCF investors read these before putting their money in then they may have had second thoughts about handing over their hard earned savings that could be completely wiped out even if the company was being well run. If it's being mismanaged or made poor decisions then that makes the situation even worse.
These are some of the more critical risks that show how the claims of security for the London Capital Finance Bonds were false. Unregulated investments can make claims that are not the same as regulated ones. Terms like "guaranteed" have no meaning for unregulated investments.
LC&F’s fees and running costs will be paid ahead of distributions to Bond Holders. Consequently in the event of default these fees and running costs may reduce the amount available for distribution to Bond Holders.
Insolvency
In the event LC&F becomes insolvent the amounts payable to Bond Holders may be deemed to be part of LC&F’s assets and,therefore, available equally to all creditors, notwithstanding any priority payment rankings established by LC&F.
No repayment guarantee
It is intended that LC&F will redeem the Bonds at the relevant Maturity Date. There is, however, no guarantee that LC&F can facilitate this redemption. There may be circumstances including legislative change or new and prohibitive tax regimes in which such capital
realisation may not be successful.
LC&F is dependent on Borrowing Companies to repay loans
LC&F makes loans to Borrowing Companies and is reliant on these Borrowing Companies to repay the loans LC&F grants in order for LC&F to be able to make payments of principal and interest to Bond Holders. If a significant volume of loans falls into default, LC&F may not have sufficient funds to be able to pay principal and interest to Bond Holders within the timescales of the Bond.
Proceeds of the realisation of security
The Bonds are secured by a debenture over the assets of the Company. There can be no assurance that, in the event that this security is realised, the amounts realised will be sufficient to satisfy the obligations to repay principal and accrued interest under the Bonds.
Identification of sufficient Borrowing Companies
There is no guarantee that sufficient Borrowing Companies will be identified in time for sufficient loan interest payments to be achieved prior to maturity of the Bonds. In this event, there is unlikely to be sufficient capital to enable LC&F to repay the principal from its reserves alone. Such delays in identifying Borrowing Companies may reduce or delay returns to Bond Holders.
Changes in market conditions
Changes in market conditions during the term of the Bonds may have an adverse impact on the Borrowing Companies and LC&F's operational or exit strategies from such Borrowing Companies.
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| London Capital Finance Bonds - What are the Risks? |
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| London Capital Finance ISA Bonds - What are the Risks? |
As a bond holder you are loaning money to London Capital & Finance and are an unsecured creditor. You are entirely reliant on them to correctly assess the risk of the loans they are making. As a bondholder you have no knowledge at all of the details of where your money has gone and on what terms. It is clear that a high percentage was paid as commission before LCF even lent it out possibly as much as 25% of the value of the bonds investors bought. This meant they need to charge even more for their loans to companies to recover that money.
Some investors in LCF bonds still seem to be unaware about the severity of the situation. Anyone investing in these bonds whether via an ISA or not has bought an unregulated product that has a risk higher than shares. Fraud or not is irrelevant, these are incredibly high risk unregulated investments that risk you losing ALL your money which is why they are not meant to be for more than 10% of your savings if you are high net worth. One of the companies loaned money lost £10 million last year, how will that affect investors?
They are far more risky than investing money in stock market funds and more than investing in some individual company shares. The activity shown already by London Capital Finance to entice unwary savers would tend to increase rather than decrease the risks. Payment of interest for a few years is not a sign of a successful business and can be maintained for some time by using new investors money to fund redemptions.
It's very clear from the posts on Money Saving Expert since 2015 that a lot of investors had no idea what they were getting in to and either ignored the warnings or were misled by LCF about the risks of unregulated investments. Sadly ticking a box saying you are high net worth investor will allow you to buy this product.
What are the risks with London Capital Finance Bonds?
These risks are taken from the Memorandum issued to all investors. These are the known, declared risks, there is also the risk of poor performance or fraud at the companies loans made to. Although described by LCF sales people as being boring reading to put in the bin if LCF investors read these before putting their money in then they may have had second thoughts about handing over their hard earned savings that could be completely wiped out even if the company was being well run. If it's being mismanaged or made poor decisions then that makes the situation even worse.
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| London Capital Finance Bonds - What are the Risks? |
- LCF was not regulated or authorised by FCA for selling bonds to retail investors
- 100% track record is not permitted for regulated investments. Even bad investments are 100% until they go bust. Regulated investments have to include the disclaimer about past performance - unregulated don't which is why they are for high net worth investors
- Asset backed is irrelevant if the assets are worth nothing
LC&F’s fees and running costs will be paid ahead of distributions to Bond Holders. Consequently in the event of default these fees and running costs may reduce the amount available for distribution to Bond Holders.
Insolvency
In the event LC&F becomes insolvent the amounts payable to Bond Holders may be deemed to be part of LC&F’s assets and,therefore, available equally to all creditors, notwithstanding any priority payment rankings established by LC&F.
No repayment guarantee
It is intended that LC&F will redeem the Bonds at the relevant Maturity Date. There is, however, no guarantee that LC&F can facilitate this redemption. There may be circumstances including legislative change or new and prohibitive tax regimes in which such capital
realisation may not be successful.
LC&F is dependent on Borrowing Companies to repay loans
LC&F makes loans to Borrowing Companies and is reliant on these Borrowing Companies to repay the loans LC&F grants in order for LC&F to be able to make payments of principal and interest to Bond Holders. If a significant volume of loans falls into default, LC&F may not have sufficient funds to be able to pay principal and interest to Bond Holders within the timescales of the Bond.
Proceeds of the realisation of security
The Bonds are secured by a debenture over the assets of the Company. There can be no assurance that, in the event that this security is realised, the amounts realised will be sufficient to satisfy the obligations to repay principal and accrued interest under the Bonds.
There is no guarantee that sufficient Borrowing Companies will be identified in time for sufficient loan interest payments to be achieved prior to maturity of the Bonds. In this event, there is unlikely to be sufficient capital to enable LC&F to repay the principal from its reserves alone. Such delays in identifying Borrowing Companies may reduce or delay returns to Bond Holders.
Changes in market conditions
Changes in market conditions during the term of the Bonds may have an adverse impact on the Borrowing Companies and LC&F's operational or exit strategies from such Borrowing Companies.
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