A useful sign of financial skullduggery

Bank of England governor Andrew Bailey has apologised for his role in the demise of London Capital & Finance, the investment firm that collapsed owing customers almost £240m.

OK, LCF, 8% returns on minibonds, it goes bust, old, old story. So old Adam Smith warns against it, those willing to pay really high interest rates are those you don’t want to be lending to.

But this is a grand, screaming, red neon, warning sign:

A marketing agency, Surge, was used to approve LCF promotions and help it attract new investors. Surge received a 25pc commission for each customer it signed up.

Assuming the Telegraph has that number right – arts graduates and numbers etc – then that’s actually all we need to know it’s a scam. For it means that the money invested has to make a 33% return – assuming a one year term – before it even breaks even, let alone pays 8% interest. Which isn’t one of those things that happens really……

7 thoughts on “A useful sign of financial skullduggery”

  1. Sounds as though its demise was a good thing. Why apologise? He should be telling people that if the deal sounds too good to be true, it probably is.

  2. Judging by the reports I have heard LCF’s scam was partially enabled by the uselessness of the FCA

    Apparently they were reported on more than one occasion by more responsible members of the financial investment industry

    Any heads rolling there?

  3. @Rowdy

    Why apologise?

    Because as regulator it was part of his job to shut this kind of show down. Or even if it had some underlying legitimate business case as a high risk proposition for the discerning investor – though from what I’ve heard, it didn’t – certainly to prevent it being promoted aggressively to inexperienced retail investors like it was – indeed it was marketed in a similar way to the fixed interest rate “bonds” you get from a high street back, and many of the customers saw themselves as savers not investors. Another big part of the regulatory cock-up is that these products were sold as ISAs even though they did not meet the necessary criteria, something for which at least some compensation has been doled out: https://uk.finance.yahoo.com/news/london-capital-and-finance-mini-bonds-fcsc-judicial-review-100722239.html

  4. As Doug Casey long ago pointed out the existence of SEC’s and FCA ‘s actually facilitates scams. A load of gobbldygook arrives promising a higher return than Sir Franicis Drake’s Treasure ship captures and people think “If it wasn’t legit the FCA/SECS would have put it out of business”. Whereas those groups are busy empire-building and following their own agendas–“insider trading” or “hostile takeover prevention” or whatever they find trendy.

  5. Thanks MBE. Mrs R and I noticed about 30 years ago that retail banks were no longer staid and trustworthy organisations. The bank managers, even then, were just salesmen, pushing credit at you.

    I don’t suppose anyone will actually pay with jail time, confiscation of assets etc. These bastards just seem to melt away and turn up again untouched by consequences.

  6. @Rowdy

    Behaviour of the retail banks wasn’t the issue here, they weren’t selling these products as far as I know – it was marketed direct to consumers.

    My point is that if you get a fixed interest rate three-year savings account with a high street bank, it’s often called (not unreasonably) a “three-year bond”, and can be put in an ISA – indeed lots of savers like having them in an ISA because you could often get a higher interest rate compared to a variable rate. There are lots of problems with high street bank mis-selling but this isn’t one of them. These “mini-bond” scammers were just taking advantage of the way reasonably wealthy but financially non-savvy savers were used to putting “bonds” in an ISA to bump up their long-term interest rate and were now frustrated by the kinds of returns available under a ZIRP environment. If you ever saw any adverts for these mini-bonds you’ll have noticed how misleadingly pitched they were, as if they were just the kind of “bond” (ie fixed rate savings account) you’d get from a bank. As soon as I saw one I knew it stank and it’s astonishing to me that the regulator didn’t see the need to swing into action at the time.

  7. (108-(100-25))/(100-25) = 44%

    It’s worse than that. They had to make a 44% return, as once they have paid the commission they have less capital to start with.

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