In November 2015 Bank of England base rate was 0.5%. The emerging markets bond and global equity income fund sectors yielded an average of 3%. Money market funds generated just 0.3%, sterling corporate bonds 2.8% and sterling high yield 3.9% the same as the UK equity income and bond sector. The average savings account paid 1.4%. I don’t have a figure for 3-year fixed term bank or building society deposit accounts, but you might have got 2%.
So, when a client contacted me in November 2015 asking my opinion of LCF’s 3-year fixed-term mini-bond offering promising 8%pa it took me about a second to conclude it had to be high-risk. I spent another five minutes calling up LCF’s accounts via Companies House, along with the accounts of International Resorts Group plc and Sanctuary international PCC to which LCF was supposedly lending money at 15%. I concluded both were insubstantial and that any company paying 15% for its borrowings – when small businesses were paying around 8% – had to be a bad risk. Noting Andrew Michael Thomson was a director of LCF and IRG, I was concerned that LCF was lending to connected persons. Added to that, the dodgy-looking website and marketing material larded with convincing statements was all it took for me to nix it. I warned the FCA the same day. I knew the FCA didn’t regulate mini-bonds but that it did regulate promotions. It concerned me that LCF’s promotions were reaching individuals who were neither sophisticated nor high net worth. I told it so.
Anyone considering an investment in LCF could have taken the measures I took. They were not difficult and did not require any extraordinary deductive powers. I do not think that I did anything particularly clever. I just exercised the same reasonable prudence and due diligence as I exercise when considering any investment for my clients’ money or my own.
Having warned off my client – who wisely took my advice, saving her £60,000 – and also the FCA, I filed my notes in my ‘Crooks scams and disasters’ file, file 514 in my system. There they sat like an unexploded bomb until LCF collapsed. Since then blame and ordure has been heaped on the regulator in equal measures. Now LCF investors are campaigning for compensation, supported by some journalists. BBC Radio 4’s Money Box presenter Paul Lewis has also suggested they should be paid out. Interviewing outgoing FSCS Chief Executive Mark Neale, Mr Lewis tried putting words into his mouth, asking “You’ll be looking at the rules again and if you can interpret them to help people, you will do so?” He went on “Do you think the rules should be changed so it’s much clearer that if you were given advice of any sort that is perhaps you were sold an unregulated product, they (sic) were sold to the wrong people that all of those perhaps should be covered by rules that should be changed?”
Mr Lewis’s syntax was unclear but the clear implication was that the taking of ‘advice of any sort’ – and presumably, therefore, advice given by anyone – should qualify victims for a payout. So, if the proverbial man in the pub told his mate to invest in LCF, Mr Lewis seems to want FSCS levy payers on the hook for it. As for the latest gambit around the FSCS’s alleged misadvising of bondholders re’ their protection entitlements, that is utterly irrelevant. An alleged verbal mistake by a clerk does not entitle his bosses to write a cheque on another’s account.
The poorest and most tragic victims of LCF have been pushed to the front in the reporting of this scandal. They serve as poster boys and girls for the compensation campaign. Behind them however are a great many more wealthy people who took a chance and who were sophisticated enough to know what they were doing. I know this because many have contacted me personally. Moral hazard applies to them as much as it applies to any banker. One who called me for advice had lost £200,000 but boasted that it was “a small amount” to him. He went on to say he owned a mining company. Mining is not a risk-free business and such enterprises are not normally run successfully by the unsophisticated or incompetent. Try as I might therefore, I can’t think of a good reason why my clients should bail him out. And that, of course, is the reality. I may be the one writing the cheque to fund the FSCS and it may hit my profits this year, but if unsustainable promises of compensation are made then sooner or later I shall have to charge my clients – the people who are prudent and who do take advice – more for our services. And so will every other adviser firm. Is that what the regulator wants? Apparently not, because it’s repeatedly said that it wants advice fees to come down. It has harped on that theme for years and while denying it’s a price regulator, it has taken every other measure possible toward that goal. If the FCA really wants advice costs to come down then it, the FSCS and the FOS all need to stop picking our pockets to buy popularity. It needs to walk the walk, not just talk the talk.
As regards the FCA’s actions and inactions re’ LCF, it is not blameless, but I do not blame it to the extent it has been blamed. At the end of the day the FCA regulates businesses but it does not approve products and it does not control firms’ day-to-day behaviour and management. Nor would it be desirable or reasonable, in a free market economy, to expect it to. Anyone who doesn’t understand the difference should consider an analogy with the Driver and Vehicle Licencing Agency. The DVLA issues drivers’ licenses but it doesn’t have its officials sit beside drivers, and nor does the issue of a license give carte blanche to the holder to drive dangerously or drunk.
If there has been criminal wrongdoing then those responsible should be prosecuted to the fullest extent of the law and their assets seized to compensate victims. Not a penny, however, should be paid by taxpayers and that includes that special class of taxpayers who are arbitrarily levied to fund the FSCS. Arguing for such may boost the readership of the newspapers supporting calls for compensation. It may even add another legion to Mr Lewis’s army of adoring fans. But that doesn’t make it right. If saying so makes me unpopular, so be it. I’m in the advice business; it’s not a popularity contest.
LCF bondholders will not want to hear this, but they need to, because the lesson from this is simple: LCF was not authorised to give advice to retail investors. LCF bondholders are not owed taxpayer-funded compensation by the FSCS any more than anyone else who invests without regulated advice. Anyone who wishes to benefit from the protection of the FSCS should take such advice. Those who invest without exercising reasonable prudence, who allow the promise of way-above-market returns to blind them to risk and who choose not to take regulated advice, cannot expect others to pick up the tab.
That’s ‘Honest Advice in Plain English’ as it says on our notepaper and signage.