Regulation  

Understanding FCA's ban on speculative mini-bonds

  • Identify the FCA's concerns about certain types of mini-bonds
  • Identify FCA's exemptions to permit promotion of speculative mini-bonds
  • Describe the implications following collapse of mini-bond issuer LCF
CPD
Approx.30min

The four arrests were of individuals connected to the small number of companies into which investor’s money was being pumped. 

LCF’s sales agent Surge Financial was paid 25 per cent commission on the funds it raised, totalling some £58m. 

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Last June, the chief executive of Surge Financial, Paul Careless, was also arrested and questioned by SFO officers. 

It’s no coincidence that the new FCA rules require that any payments to third parties be disclosed on promotional material, in certain cases.

Firms must be authorised by the FCA if they undertake any of the regulated activities listed in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. 

Authorised firms have to comply with overarching principles and rules issued by the FCA. 

However, issuing mini-bonds is not a regulated activity and so issuers do not need to be authorised by the FCA. 

LCF did not therefore need to be regulated to issue the mini-bonds. However, it did need to be regulated in order to promote them. 

The FCA has the power to bring criminal charges when an investigation reveals evidence that a crime has been committed. 

In such cases, the FCA will usually undertake a twin-track approach, with both regulatory and criminal offences being considered. 

In this case, however, the FCA referred the LCF case to the National Economic Crime Centre (NECC) and the SFO. 

The NECC has launched a parallel investigation into certain individuals connected with LCF. 

On 22 May 2019, the Treasury also used its powers under the Financial Services Act, 2012 to direct the FCA to launch an independent investigation into the relevant events relating to the regulation of LCF. 

The Treasury has directed that the investigation “must focus on whether the FCA discharged its functions in respect of LCF in a manner which enabled it to effectively fulfil its statutory objectives”. 

Outlook for LCF investors

While their findings may prove useful, the various ongoing investigations will not recompense those who may have lost their life savings as a result of the scandal. 

LCF’s administrators Smith and Williamson estimate that investors can only expect to get around 20 per cent of their investment back.

Investors’ hopes of receiving compensation from the Financial Services Compensation Scheme (FSCS) were initially dashed as mini-bonds are not regulated investments. 

The scheme can pay up to £85,000 per eligible person. 

Despite initially stating that it would not accept claims from LCF investors, the FSCS has begun exploring possible grounds for compensation.  

The FSCS has indicated that it may pay compensation if LCF is found to have provided advice when not regulated to do so. 

The FSCS issued a fact-finding questionnaire last July. 

The focus is on whether there was any “regulated advising, arrangement or other activities which may trigger compensation.”