This article represents the views of its author and not necessarily those of Sharesoc.
The BBC’s Panorama programme last night (on 16/8/2022) 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 )
Please note these are my personal views and not necessarily the views of ShareSoc. I would like to add some comments to Roger’s excellent report.
I too watched the Panorama programme. The people covered in the report were certainly sad cases and deserve our sympathy for what has happened to them. Those who have (allegedly) stolen investors money need to be brought to justice as soon as possible.
However, I thought the BBC programme was very one sided. I suspect that those investors who opened their hearts and exposed their wounds to the BBC and its viewers are not very representative of most of the 2,000 plus investors in Blackmore Bonds. We do not know, and were not told, how many of the investors had well diversified portfolios and only a small part of their wealth in Blackmore Bonds. And the BBC failed to stress the importance of diversification and financial education. It could have been a much better programme.
I think some people need to take more personal responsibility and should not invest without thinking about it hard. To invest all or most of your savings in one investment is foolish. Diversification is a key message (in plain english do not put all your eggs in one basket). These investors were greedy (one of the 7 deadly sins we were taught as children) and should not have expected to get a ‘guaranteed’ 10% return without risk. We should not feel too sorry for such people.
I also have some sympathy that the FCA should not use the FSCS to pay out to such people as it increases the cost of the FSCS levy for all the other investors who have not been greedy or stupid. These are hard messages that many (including those at the BBC) will not want to read and will not like.
Baroness Altmann in our 19 July Woodford Webinar highlighted the problems of the FCA scope and recommended its remit was reformed. The Blackmore Bonds case is further evidence that such reform may be necessary.
Roger’s 5 point action plan is great, but I would add at least two more action points:
1. Financial Education including savings and investment should be part of the school curriculum.
2. ShareSoc’s Investing Basics (soon to be launched) videos should be disseminated throughout the UK, so that everyone can learn the basics of investing.