The collapse of London Capital & Finance, leaving investors out $312.2 million, has exposed the risks of so-called mini-bonds and the market for amateur investors.
Reports in the Financial Times this week said LCF’s collapse has left 11,600 retail investors in the U.K. with the losses, with Smith & Williamson administrators finding some of the funding by those investors were used in “highly suspicious transactions involving a small group of connected people which have led to large sums of bondholders’ money ending up in their personal possession or control.”
LCF used funds from retail investors, or nonprofessional investors, to lend to companies, which went on to use the money for, in one case, the purchase of a helicopter. In another case, a company used the money to procure land in the Dominican Republic, while another bought a holiday property in the U.K. Administrators found that “many of these companies were unlikely to repay their loans,” the news report said.
Further, analysts have pointed to warning signs in LCF’s business model, which promised returns of up to 8 percent for some of the investors, many of whom were entering the mini-bond market for the first time.
Mini-bonds are already a high-risk investment area, reports noted, because they are used to finance small businesses, which have a high failure rate. They are unregulated, meaning the Financial Services Compensation Scheme cannot be used for investors to recoup their losses.
According to Smith & Williamson, investors may only be able to recover one-fifth of what they invested.
The Financial Conduct Authority has launched an investigation into the firm’s collapse, while the Serious Fraud Office has already arrested four men in connection with a criminal probe of the matter, reports said.
The scandal has also shed light on the effectiveness of financial watchdogs, which have come under fire in recent months following collapses and fraud schemes at other high-profile businesses. Some MPs are now urging the FCA to investigate itself and consider whether it should include mini-bonds in its regulatory scope.