On 1 January 2021, the Financial Conduct Authority (FCA) confirmed a permanent ban on marketing mini-bonds to everyday investors.
This followed widespread criticism of the FCA’s handling of London Capital & Finance (LCF). The minibond provider went bankrupt in February 2019, owing £237m to 11,600 investors. It has since been revealed that at least £136m of investors’ money was given to companies and individuals associated with LCF’s directors.
Earlier today (6 January 2021), the governor of the Bank of England – former FCA head Andrew Bailey – appeared in front of the Commons Treasury committee to discuss the most recent Financial Stability Report.
The Times has reported that Bailey is expected to be called back to Parliament in the coming weeks, this time to answer questions about the regulation of LCF.
So how – and when – did the mini-bond crisis get so bad? We’ve put together a timeline of events…
April 2014 – LCF becomes regulated by the FCA
The regulator authorises LCF to operate in the UK market.
January 2019 – The FCA freezes LCF’s accounts
After uncovering a series of suspicious transactions, and amid concerns around the marketing of LCF’s so-called ‘fixed rate ISAs’, the regulator froze the company’s bank accounts and launched an investigation.
February 2019 – LCF goes bankrupt.
Just weeks after the FCA opened its investigation, LCF placed itself into administration.
March 2019 – The FCA discusses LCF in a board meeting
According to minutes of the 28 March 2019 meeting, FCA board members were “not able…to conclude that the conditions for a regulatory failure investigation in respect of a serious failure in the regulatory system or in the operation of that system had been met.”
September 2019 – FCA warns consumers about “high-risk baskets”
Charles Randell, chair of the FCA, warned that investors should not put all their eggs in “one high-risk basket” – using mini-bonds and P2P lending platforms to highlight his remarks. This led to an outcry from the P2P community, with industry stakeholders insisting that the risk profile of P2P lending was very different from the risks associated with illiquid securities.
In a public statement, the FCA said that the speculative debt securities offered through mini-bonds were not suitable for retail investors, and added that P2P investments may be a better fit for interest-seeking, risk-aware investors.
October 2020 – P2P sector warns about unregulated mini-bond providers
Almost one year after the marketing ban on mini-bonds was first introduced, P2P stakeholders spoke out to express their concerns over some mini-bond providers operating in the unregulated space where there is less protection for investors.
December 2020 – The FCA apologises for LCF
After an independent review found that the regulator did not effectively supervise and regulate the minibond provider, Charles Randell, chair of the FCA, said he was “profoundly sorry for the mistakes we have made”. The regulator has since set out a series of new measures designed to protect consumers from similar harm in the future.
December 2020 – The FCA outlines its ‘lessons learned’
The regulator released a nine-point plan to prevent a similar crisis happening again in the future. These lessons included enhanced fraud checks, better staff training, and the creation of a policy to deal with repeat offenders.
January 2021 – The temporary ban is made permanent
The next chapter in the mini-bond saga will likely feature the unusual sight of the governor of the Bank of England being held to account for the regulatory failings which allowed the LCF scandal to happen.
A number of P2P lending platforms have expressed their concerns that the regulator’s scorched-earth policy on speculative illiquid securities could simply force mini-bond providers into the unregulated space. Others are worried that the mini-bond controversies could stain the reputation of the entire alternative lending sector.
Whatever happens next, LCF will leave a legacy of distrust, resulting in tighter regulation for all alternative lenders – for better or for worse.