London Capital and Finance

rr755507

londoninvestor wrote: »

Can you point us to the source of this please?

h t t p s://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/other/14128144.html

londoninvestor

rr755507 wrote: »

h t t p s://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/other/14128144.html

Thanks. So that's a press release from the FSCS itself. Full text from there is:

FSCS wrote:

London Capital & Finance (LCF) Update: FSCS investigations reveal there are protected claims that may result in compensation for some LCF investors

· After reviewing LCF business practices, including the role of Surge Financial Ltd (Surge), which was acting on behalf of LCF, FSCS has concluded that, in some cases, misleading advice was provided to customers

· Advising is a regulated activity for which FSCS may pay compensation

· Further investigations are needed to establish the exact nature of this advising and how many customers this will impact - this will take a number of months

· In the meantime, FSCS is inviting LCF customers to complete a pre-application questionnaire to help them better understand the facts of investors' cases

· It is too early to say what the amount of compensation or the impact on levy-payers will be

The Financial Services Compensation Scheme (FSCS) has today announced that its investigation into London Capital & Finance (LCF) leads it to believe there are protected claims that may result in compensation for some of its investors.

Following an extensive review of LCF's business practices, FSCS believes that Surge Financial Ltd, acting on behalf of LCF, provided a number of LCF clients with misleading advice. As this is a regulated activity, this means FSCS protection would be triggered and that there may therefore be customers with eligible claims for compensation.

At this stage though, FSCS does not have access to all the information needed to determine the nature and extent of this misleading advice and is still working with the relevant parties on gaining access to this.

FSCS has therefore launched a pre-application questionnaire on its website for investors to complete in order to help build a better picture of this advising. The information gathered through this process will help FSCS better understand individual investors' circumstances and therefore the number of customers that may have been impacted.

A spokesperson for FSCS stated:

"Throughout our investigation into LCF we have been as transparent as possible so that both LCF investors and our levy payers know where they stand. Having established that there are customers who were given misleading advice and therefore may be eligible for compensation, we now need to determine the full extent of this advising activity.

"We would therefore urge LCF investors to complete the pre-application questionnaire on our website as this will help us enormously in the next stage of our investigation. We expect this will take a number of months, but we will do all we can to come to a decision as quickly as possible.

"If we do start accepting claims, it is important for investors to remember that if they come to us directly there will be no charge to pay as we are a completely free service."

The questionnaire is available on the dedicated London Capital & Finance section of our website here.

masonic

I must be missing something. Surge Financial gave the advice. Surge Financial is still trading and has not been put in administration. So why wouldn't Surge Financial foot the compensation bill?

AnotherJoe

masonic wrote: »

I must be missing something. Surge Financial gave the advice. Surge Financial is still trading and has not been put in administration. So why wouldn't Surge Financial foot the compensation bill?

Could it be that Surge was acting as an agent for LC&F and thus the buck stops at LC&F ?

GDB2222

AnotherJoe wrote: »

Could it be that Surge was acting as an agent for LC&F and thus the buck stops at LC&F ?

I think that's exactly right. Surge were probably supposed to be quite limited in what they said, but it's in the nature of these sales organisations that the salesmen go off script.

It could be that Surge have some liability, but it's a limited company, so the amount that can be extracted from them may be very small. The company was entitled to pay past profits as dividends to shareholders.

masonic

AnotherJoe wrote: »

Could it be that Surge was acting as an agent for LC&F and thus the buck stops at LC&F ?

GDB2222 wrote: »

I think that's exactly right. Surge were probably supposed to be quite limited in what they said, but it's in the nature of these sales organisations that the salesmen go off script.

It could be that Surge have some liability, but it's a limited company, so the amount that can be extracted from them may be very small. The company was entitled to pay past profits as dividends to shareholders.

In previous cases where mini-bonds were sold to investors with an advisory firm acting as agent, it has been the adviser whom investors have lodged a complaint about, taken to the FOS and ultimately to the FSCS when the adviser was driven into insolvency as a result of the claims. A good example is Independent Portfolio Managers Limited who advised on mini-bonds issued by Secured Energy Bonds plc.

This case is slightly different in that Surge Financial Limited was carrying on a regulated activity without permission. But this is a criminal activity that invalidates any limited liability and would make the directors personally liable to investors once company assets ran out, so if anything it is a better situation as far as recovering bondholder money is concerned. I don't believe LCF can be held liable for criminal activity conducted by Surge that was outside of their brief, so personal liability would not extend to the directors of LCF unless it can be shown they behaved contrary to the Companies Act in some other manner.

So on the one hand the FSCS could be merely topping up claims against a company with substantial assets backed by directors with substantial personal wealth, thus limiting the amount of money being paid out of funds collected from innocent financial services firms and ultimately their customers. On the other hand they could sift through the carcass of the 'lame duck' company set up so as not to have any assets and which can ostensibly deny any wrongdoing so that the corporate veil cannot be lifted. I don't understand the reasons behind their choice to go for the 'lame duck' company, when precedent (IPML and SEB amongst others) suggests they should be going for the company that gave the advice and in this case also creamed off all of the profits.

This appears to be playing out exactly as those involved in the scam intended, with consumers of financial services like you and me footing all of the bill and Captain Careless and his merry men riding off with bondholders cash unimpeded.

GDB2222

masonic wrote: »

In previous cases where mini-bonds were sold to investors with an advisory firm acting as agent, it has been the adviser whom investors have lodged a complaint about, taken to the FOS and ultimately to the FSCS when the adviser was driven into insolvency as a result of the claims. A good example is Independent Portfolio Managers Limited who advised on mini-bonds issued by Secured Energy Bonds plc.

This case is slightly different in that Surge Financial Limited was carrying on a regulated activity without permission. But this is a criminal activity that invalidates any limited liability and would make the directors personally liable to investors once company assets ran out, so if anything it is a better situation as far as recovering bondholder money is concerned. I don't believe LCF can be held liable for criminal activity conducted by Surge that was outside of their brief, so personal liability would not extend to the directors of LCF unless it can be shown they behaved contrary to the Companies Act in some other manner.

So on the one hand the FSCS could be merely topping up claims against a company with substantial assets backed by directors with substantial personal wealth, thus limiting the amount of money being paid out of funds collected from innocent financial services firms and ultimately their customers. On the other hand they could sift through the carcass of the 'lame duck' company set up so as not to have any assets and which can ostensibly deny any wrongdoing so that the corporate veil cannot be lifted. I don't understand the reasons behind their choice to go for the 'lame duck' company, when precedent (IPML and SEB amongst others) suggests they should be going for the company that gave the advice and in this case also creamed off all of the profits.

This appears to be playing out exactly as those involved in the scam intended, with consumers of financial services like you and me footing all of the bill and Captain Careless and his merry men riding off with bondholders cash unimpeded.

If you talk to the call centre person at one of the big insurance companies, it's quite likely the person is actually employed by an outside company. The person may be carrying out regulated activities, but he is doing so on behalf of the insurers. I think this situation with Surge is analogous. So, the advice given by Surge may be deemed to be advice given by LCF, and it's LCF who have the problem they inadvertently gave unauthorised advice.

Clearly, I don't claim to be an expert in this highly unusual and complicated case. In practice, for those lucky investors who received what amounted to advice, it doesn't really matter. FSCS may well compensate them, and then it's up to FSCS whether they try to recoup the cost and from whom.

masonic

GDB2222 wrote: »

If you talk to the call centre person at one of the big insurance companies, it's quite likely the person is actually employed by an outside company. The person may be carrying out regulated activities, but he is doing so on behalf of the insurers. I think this situation with Surge is analogous. So, the advice given by Surge may be deemed to be advice given by LCF, and it's LCF who have the problem they inadvertently gave unauthorised advice.

Well, if you are right this is a massive loophole that was clearly exploited by those perpetrating the fraud to ensure that there was no way for the regulator or authorities to claw back the stolen bondholder money. I think I may have suggested a similar explanation when we were discussing how those involved thought they were going to get away with it, but I didn't really believe it.

Any dodgy outfit can perpetrate a similar scam and get away with it in three simple steps:

1) Set up a worthless company (Company A) that claims to issue some worthless bonds to punters. This company will be the one that takes the fall, but will not have the capacity to cough up any money.
2) Outsource the actual sales of these bonds to another company (Company and embezzle the money received through fees and commissions. Company B will be engaged in unlawful activity on behalf of Company A, but will be immune to prosecution, because it is acting on behalf of Company A.
3) Continue siphon off investor's money until the FCA finally catches up with Company A and shuts it down.

And the consequences....
Worthless Company A is shut down, but claims it engaged with Company B in good faith and had no knowledge of any unlawful activity in the sale of the bonds. It therefore has limited liability and no assets to satisfy any claims. Company A goes into administration, but its directors get off scot free.

Company B is immune to being held liable because it only acted on behalf of Company A and will also claim it acted in good faith. Company B gets off scot free.

So it's nobodies fault and the cost will be absorbed by the industry (who will pass it on to customers through higher charges for financial services). In the end it was all just a big misunderstanding.

The sad thing is, this is probably the correct answer. Can somebody remind me what is the point of regulating the financial services sector?

In practice, for those lucky investors who received what amounted to advice, it doesn't really matter. FSCS may well compensate them, and then it's up to FSCS whether they try to recoup the cost and from whom.

To them it doesn't. To everyone else, and those who fall for similar scams in the future (which will happen, because this one worked), it matters quite a lot.

...and I don't think the FSCS is at liberty to attempt to recoup the cost from any firm other than the one considered insolvent and unable to meet its financial obligations to consumers, which triggered the payout.

Uxb1

They (the government) just recoup the cost from increasing the annual levy the FCA impose on financial firms

GDB2222

I agree that it is thoroughly unsatisfactory. If there has been fraud, that's a matter for the police. Their, the CPS's, and the SFO's, performance in other matters does not inspire much confidence unfortunately.