Nearly 12,000 people lost money when London Capital & Finance collapsed earlier this year. Investors were told they wouldn’t be able to make a claim for compensation. But now there are signs that there may be a change of heart.
London Capital & Finance explained
London Capital & Finance was an investment company that collapsed at the start of 2019. It advertised its mini bonds by email and on websites. They were described as low risk, and many people thought they were taking out a cash ISA or at least a safe investment. Many thought they were putting money into low risk investments or savings, but the company took major risks with their money. Some of those involved in London Capital & Finance are being investigated by the Serious Fraud Office.
SAVVY TIP: A bond is just an IOU for a loan, and large companies and governments issue these. But a mini bond is different because it cannot be bought and sold on the stock exchange.
Cash ISAs v mini bonds
With a cash ISA, it’s just like an ordinary savings account, except that the interest you earn is always tax free and there’s a limit on how much you can pay into it each year (your ISA allowance). You won’t get much of a return on cash ISAs in terms of the interest, but you know your money’s safe.
SAVVY TIP: Banks and building society savings are protected by a safety net, called the Financial Services Compensation Scheme (FSCS). It means that if the bank were to go bust, you’d get back your savings, up to a limit of £85,000 – per bank or in some cases, that limit applies to a group of related banks.
Unlike savings accounts, these bonds aren’t protected by the Financial Services Compensation Scheme. That means that if the companies you lend money to go bust, or the company that’s lending out the money, you could lose money.
With mini bonds, you’re not saving like you are with a cash ISA. Instead, you’re lending your money. You get interest just the same as the interest you’d pay if you took out a loan yourself. But just as some people end up not being able to pay back loans they’ve taken out, it’s the same with companies. Depending on who you lend your money to, you could be taking on quite a lot of risk without realising it.
Why are mini bonds riskier?
Mini bonds are not without risk. In fact, on the risk scale, they are pretty risky. That’s because you’re lending money to a start-up or relatively young company, rather than an established name, which you may do if you were to take out a retail bond. Also, the companies issuing mini bonds don’t have to go through the same level of scrutiny as a firm issuing a corporate or retail bond.
SAVVY TIP: Unlike company and government bonds, which can be bought and sold, mini bonds cannot be traded and have to be held until the end of the term (until they mature). You generally get a higher rate of interest than you would with a retail bond
Until a few years ago, you couldn’t invest in these bonds via an ISA, but the rules changed and now you can. And one problem is that some people think that because something is in an ISA, it’s safe or it’s somehow backed by the government.
SAVVY TIP: The problem for people thinking of investing is that the companies selling them often say things like ‘100% asset backed’ or ‘100% record of paying out’. Both of these things may be true but that’s not the same as 0% risk.
What the FSCS has said about London Capital & Finance
The Financial Services Compensation Scheme had said that it didn’t think investors in London Capital & Finance would be able to claim compensation. Now it’s inviting people to register if they think they have a claim. It doesn’t mean that they’ll definitely be able to make a claim for compensation, but it is a sign that there may be a change of heart.
You can find out more about how to register if you think you have a claim, on the failed firms section of the FSCS website.
There are two different action groups for investors with London Capital & Finance: London Capital & Finance Bondholder Group on Facebook. It’s only for investors and it’s a closed group.
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