It’s been more than a decade since interest rates held any real potential for savers. As a result, any financial products that have a substantially higher rate of interest seem very attractive. London Capital & Finance plc (LC&F) offered a “Fixed Rate ISA” product with returns of 8% for those who were wiling to lock their money in for at least three years. However, the firm has now gone under and has taken most of investors’ money with it. So, what are the lessons that can be learned?
LC&F – what happened?
Essentially, what LC&F was offering was a high-risk bond scheme that generated £236 million in investments after an intensive marketing campaign that included lots of content on Facebook. The company has now collapsed and is in the hands of administrators as a result of not being able to pay its debts. Unfortunately for those who invested with LC&F it’s thought that the bondholders could get as little as 20% of their money back.
The role of search engines
Although the LC&F said that it was targeting experienced, high net worth individuals with its financial products, in reality many of those who ended up putting their money into it were actually inexperienced investors. In fact, potentially up to 50% of those who invested arrived at the product via a basic online search for terms like “best ISA.” Search engines took them to two “comparison” websites – topisarates.co.uk and bestsavingsrates.co.uk. Both of these websites rated LC&F right at the top of their comparison lists.
Both of these websites are owned by a company that is owned by Paul Careless. What’s problematic is that Mr Careless also owns another company that was paid £60 million to handle the marketing for LC&F, indicating that the “comparison” websites may actually have been nothing more than a marketing tool. The connection is of great concern to investors who have now lost their money as a result of the collapse of LC&F and many feel they were misled into believing that the investment had been independently compared and highly rated.
What are the administrators saying?
LC&F loaned the money it collected from investors to 12 companies but would have had to have seen a huge return on it in order to be able to deliver the 8% interest it advertised. According to administrators it’s going to be difficult to get much of the £236 million that was invested back. Plus, the investments weren’t regulated, which means they are unlikely to be covered by the Financial Services Compensation Scheme (FSCS) – so far there has been no indication that the scheme will pay out.
What are the lessons to be learned?
It’s always a good idea to ensure investments are covered by the FSCS, especially for inexperienced investors. For those who read the FAQs page on the LC&F website it was there in black and white that the investments weren’t regulated, even though the business itself was.
It’s important to research widely. For those who went straight through to the two websites that were connected to the company responsible for marketing LC&F, without any further research it may have seemed like the bonds were independently assessed, compared and rated. However, outside of those two websites it would have been difficult to find anything that gave the same impression.
Learn to recognise marketing speak. For example, the LC&F marketing used the term “full asset backed security,” which sounds like the bonds were a low risk option. However, the term means nothing and is pure marketing waffle. Closer inspection of the terms and conditions for the bonds makes it clear that investors could lose anything up to 100% of the investment made in the bonds – i.e. they were very high risk.
If you’re not sure about the product, don’t invest. If you find terms confusing or you’re not 100% sure about outcomes it’s better not to hand your money over.
Nothing comes for free. Another element of the LC&F advertising was to claim that there were no fees, charges or set up costs. This would be a warning sign for an experienced investor, as it normally means that those charges have been hidden. With mainstream products, such as ISAs, it’s not possible to hide charges – they must be up front – however, unregulated products aren’t as transparent.
When something seems too good to be true it probably is. Most savers could achieve around 2% interest on mainstream products at the time that the bonds were being offered – significantly less than the 8% being marketed by LC&F. It’s important to understand that big returns always come with a big risk and to be sure that you’re willing to take that risk before signing up for anything.
For those who invested in LC&F the outcome looks bleak with no compensation scheme cover and a likely recovery of just 20% per investment. Hopefully the lessons that can be learned from the debacle may prevent a similar situation arising in future.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley