The BBC’s Panorama programme last night did a good job of pointing out the failure of the Financial Conduct Authority (FCA) to prevent fraud on investors in “mini-bonds”. In this case the focus was on the collapse of Blackmore Bond where 2,000 people lost £46m when the company collapsed. But there have been several other similar cases.
Mini-bonds are unregulated investments so should only be sold to “sophisticated” investors who might understand the risks. In this case people who clearly were not were persuaded to invest in property developments with “guaranteed” returns of up to 10%. Who was providing the guarantees? A company based in Costa Rica. A lot of the investors’ money was wasted on marketing costs and management fees paid to the directors. The investors were lured into putting money in via boiler rooms and internet advertising.
The FCA were told about the abuses but apparently did very little to stop it. Andrew Bailey who headed the FCA at the time failed to act. He subsequently has been made Governor of the Bank of England – a reward for failure it seems.
For more details see: https://www.bbc.co.uk/news/business-62504445
Comment: It is surely wrong for the FCA not to have taken action on this matter when it was first brought to their attention. Many investors put money in after that and when it was obviously a dubious investment scheme.
The FCA simply says it was outside their remit to step in as it was not a regulated business registered with the FCA but that is not good enough. In fact the promotion of mini-bonds is a regulated activity. But any action taken by the FCA was too little and too late. See https://commonslibrary.parliament.uk/research-briefings/cbp-9272/ for more background.
This is in essence another example of the managerial incompetence of the FCA in the same way that it has failed to prevent a number of frauds on stock market investors, or tackle them when they have become apparent. Likewise the promoters of the Blackmore Bonds do not appear to be facing any legal penalties.
SNP MP Peter Grant said this in Parliament: “in 50 years from now or 100 years from now, our successors will be in the successor to this Parliament bemoaning the fact that billions of pounds have been taken out of the pockets of hard-working people and used to fund a luxury lifestyle for charlatans, crooks and conmen”. That’s a fair summary of the reality.
How to ensure you don’t fall victim to such promotions? I suggest the following:
- Don’t put all your life savings into unregulated investments and diversification is the key.
- Don’t fall for promises that are unlikely to be achieved – such as promising a “safe” return of near 10% when big financial institutions are offering much less. This tells you that they are high risk investments.
- Make sure you have widespread investment experience before you dabble in unregulated investments such as in mini-bonds and EIS companies.
- Don’t trust anyone, however glib they are. Make sure they have a track record of managing money responsibly.
- Flashy web sites and glossy literature are warning signs, not positive endorsements.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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The FCA are perfectly happy to investigate un-regulated businesses when it suits them. The emphasis is on the last 3 words; I suspect they will tend to shy away from really ugly situations.
Fundamentally I have never been convinced a national regulator, operating in parallel to the law, is a positive thing and my observation is that ours has grown into a huge bureaucracy, mostly devoted to self preservation.
Much better to extend statute law as necessary, reinforced by government agency as required, perhaps an extension of the police.
The more one learns about the Blackmore Bonds case the more it shows how easily investors can be duped into investing in unsuitable high-risk investments.