Harsh lessons from the collapse of London Capital & Finance (LCF)

Attractive headline yields, an ISA wrapper, and FCA authorisation do not equal easy money. The collapse of LCF is a lesson for us all.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Harsh lessons from the collapse of London Capital & Finance (LCF)

It has been three months since London Capital & Finance, a firm offering 8% returns, went into administration,1 leaving thousands of investors out of pocket to the tune of £236 million.

Last month, administrators Smith & Williamson said that only around £38 million2 was expected to be recouped – meaning that investors stand to lose approximately 84% of their capital. For any investor, this would be considered a worst-case scenario. However, there are a few lessons which can be learned in the aftermath of the fiasco.

Lesson 1: diversify your portfolio

One of the most heart-breaking details of the London Capital & Finance disaster is that the majority of its 11,500 savers were income-seeking pensioners who had invested all or most of their life savings in the hopes of getting a generous tax-free return.

The first rule of investing is to diversify, and the London Capital & Finance debacle is the perfect example of this.

When you put all your money into one or two accounts, you risk losing everything if those accounts do not deliver. Instead, financial experts advise investors to spread their money across a range of investments, always keeping a small amount in easy-access cash holdings.

Rather than placing all of their money into the London Capital & Finance ISA, those investors should have kept some funds in a diversified stocks and shares portfolio as well.

Lesson 2: do your own due diligence

Due diligence is a crucial part of any investor journey, as it tells you whether or not the company you are about to invest in is viable.

When investing through a relatively new company such as London Capital & Finance, it is especially important for investors to do a deep dive into the firm’s background.

Start by checking its credentials on Companies House, then look up the named directors to get a sense of their expertise and credibility.

In the case of London Capital & Finance, one of the directors (Paul Careless) also ran Surge Financial, a media firm which owned two popular savings rates comparison websites. Surge promoted London Capital & Finance heavily, and took 20% from every investment that was made to the firm through these sites – a clear conflict of interests that a cursory background check would have revealed.

Lesson 3: build your financial knowledge

One of the first red flags with London Capital Finance should have been the fact that it was offering a so-called 'Fixed Rate ISA'. In fact, no such ISA exists.

Some Cash ISA providers do offer fixed returns to savers who lock their money away for several years, but these returns are rarely higher than 2% per annum.3 Likewise, Innovative Finance ISA (IFISA) providers offer target rates, where fixed returns are targeted over a set period of time. However, most IFISA managers are very clear about the risks involved – primarily, that loan defaults and missed payments could impact on the returns received, and may result in a loss of capital.

It appears that what London Capital & Finance claimed to be offering was an IFISA. However, an expansive advertising campaign compared the returns offered by its ‘Fixed Rate ISA’ with Cash ISA returns, misleading customers who believed that they were putting their money in a similarly low-risk savings account.

London Capital & Finance was actually using the money to fund unregulated mini-bonds, which have a very different risk profile to cash savings. Furthermore, it has since been revealed that London Capital & Finance was not an authorised ISA manager, rendering all of its ISA claims erroneous.

All investors and would-be investors should feel confident in their understanding of the different types of ISAs and investment portfolios on the market before committing any of their money to them.

Lesson 4: trust your instinct

If an investment seems too good to be true, it probably is. London Capital & Finance was offering a massive 8% in fixed returns, and the advertising suggested that this income came with no strings attached.

However, that 8% was being offered at a time when the average instant-access Cash ISA was paying less than one per cent. That should have sounded a few alarm bells for investors, or at least encouraged them to ask a few more questions before handing over their savings.


Everything is clearer in hindsight, and it is easy to point out the warning signs that London Capital & Finance investors should have noticed. However, the current low-interest rate environment means to make inflation-beating returns, even conservative investors have to be prepared to take on a little bit of risk. London Capital & Finance made those risks seem negligible, when they were actually substantial – but they weren’t the first investment firm to do this, and they won’t be the last.

There are no shortcuts when it comes to investing, and there are no guarantees. But if you diversify your portfolio, do your due diligence, and build your financial knowledge over time, you can reduce your chances of making a bad investment decision.


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