Lewisballs Edition 1, Money Box, Saturday 30th March 2019 (Repeated Sunday 31st)
Paul implies that any ‘advice’, regulated or not, should qualify for compensation. He’s wrong and we explain why.
On 30 March 2019 BBC Radio 4’s Money Box presenter Paul Lewis suggested that those who invested in LCF Minibonds promising an 8% annual rate of interest should be bailed out by the Financial Services Compensation Scheme funded by financial advisers whose advice they chose not to take. You can listen to the programme here: https://www.bbc.co.uk/sounds/play/m0003sml. LCF is the first item on the programme.
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 his reference to “advice of any sort” implies advice given by anyone whether regulated or not, should qualify LCF bondholders for a compensation payout. On that basis, if the proverbial man in the pub told his mate to invest in LCF, Mr Lewis implied that FSCS levy payers should pick up the bill. As for the FSCS’s supposed misadvising of bondholders re’ their protection entitlements, an alleged verbal mistake by a clerk does not require or entitle his bosses to write a cheque on somebody else’s account, especially not ours.
So, what is the reality of LCF?
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 our numbered and indexed general filing system. There they sat like an unexploded bomb until LCF collapsed in early 2019. Since then, blame and ordure has been heaped on the regulator in equal measures, in particular on Andrew Bailey, with a particularly nasty hate campaign organised by, amongst others, Gina Miller. Whereas the FCA is not blameless I do not believe it should be liable to make good LCF investors’ losses and I do not blame Mr Bailey at all; he was not even in post when I wrote to the FCA. 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 speed, to drive dangerously or drunk or to act as a getaway driver for a gang of bank robbers.
The poorest and most tragic victims of LCF have been pushed to the front in the reporting of this scandal to 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. Not one – NOT ONE – invested on the advice of an IFA firm, so why should the FSCS pay? This débâcle had zero to do with regulated advice. Other advisors I know warned their clients off LCF and some like me also warned the FCA. LCF is a direct-to-consumer Ponzi. Among the LCF investors who have contacted me was one who had invested £200k. He boasted that it was a ‘small amount’ to him. He then went on to ask me for “a list of the mini-bonds you approve so [he would] be protected by the FSCS”. Needless to say, I declined to supply him anything of the sort. Another who contacted me explained that he’d previously owned a mining company. The last time I checked, mining was not generally regarded as a risk-free business, such enterprises are not normally run successfully by the unsophisticated or incompetent, and it is fair to say that the former owner of such a company is unlikely to be a babe in arms incapable of understanding the risk that he was taking on with LCF. Having chosen to not take advice from the advisors they look down on, and in many cases openly disparage, they now want those same advisors to fund their compensation through the FSCS. My Jewish friends call that ‘chutzpah’.
Moral hazard applies to LCF’s DIY non-advice-taking-investors as much as it applies to any banker. I do not see why I or my clients should bail them out. That of course is the reality. I may be the one writing the cheque to fund the FSCS and it will hit my profits, but if the state it to require unrealistic levels of FSCS protection for the reckless and greedy then sooner or later we shall have to charge our clients more and so will every other adviser firm. Why should they have to pay more? They have been prudent and have taken advice and have not gone chasing fantasy rates.
So does the FCA want us to raise our fees? Apparently not, because it has repeatedly said that it wants advice fees to come down. It has harped on that theme for years and whilst simultaneously denying it is 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.
LCF bondholders do not want to hear this, but they need to, because the lesson is simple: LCF was not authorised to give advice to retail investors. A Wolf of Wall Street style sales pitch by a telesales conman is NOT advice. Minibond ‘victims’ who invested without regulated advice are not owed taxpayer-funded compensation by the FCA or FSCS any more than anyone else who invests in anything without regulated advice and anyone who wishes to benefit from FSCS protection should take such advice. Those choosing not to do so and greedily chasing rates of return that are way above market, utterly eschewing reasonable prudence, cannot expect others to pick up the tab if it all goes wrong.
Those responsible for criminal wrongdoing 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 – advisers – who are arbitrarily levied to fund the FSCS. Arguing the case for advisers to pay may boost the readership of the newspapers supporting calls for compensation. It may even add another legion to Paul Lewis’s army of adoring acolytes, but that does not make it right. If saying that makes me unpopular, so be it. I’m in the advice business; it’s not a popularity contest. Anyone who wants to accuse me of ‘victim blaming’ can take it as read that I’m accusing them of ‘truth-shaming’ and ‘theft-justifying’, because all they are doing is ramping up indignation at the truth and seeking to steal money from IFA Peter to pay reckless greedy LCF investor Paul. On that basis, calumniate away, I can take it.
Neil F Liversidge Dip PFS