London Capital & Finance auditors face probe over 'mini bonds' scandal

Britain’s auditing watchdog has started inquiries into major accounting firms over their role in the London Capital & Finance "mini bonds" scandal that has cost investors more than £200m.

EY, PwC and Oliver Clive & Co are being probed by the Financial Reporting Council (FRC) after signing off on LCF accounts.

The company collapsed in January 2019 with a loss of around £237m for 11,000 investors. LCF was unregulated, meaning customers were not covered by the Financial Services Compensation Scheme, which covers funds up to £85,000 per saver.

EY and PwC each audited a set of annual results in 2016 and 2017, the FRC said, while Oliver Clive audited the company for a month in April 2015.

LCF administrators Smith & Williamson found that investors' cash was used to fund a small group of companies that were connected to a number of individuals with links to the investment group. Borrowers include firms involved in resort developments in Cornwall, the Dominican Republic and Cape Verde.

The Serious Fraud Office arrested five people during its investigation, all of whom were released on bail.

Simon Hume-Kendall, who was chairman of London Oil & Gas, the main company that LCF lent money to before it went bust, last year took the administrators of both businesses to court to prevent them from viewing files he claimed were private, the Financial Times reported, citing two people with knowledge of the matter.

According to the administrators, a chain of transactions resulted in millions of pounds ultimately flowing to Hume-Kendall and three other executives linked to LCF. London Oil & Gas was LCF’s biggest borrower, owing £124m.

Hume-Kendall has been a major donor to the ruling Conservative Party, giving more than £60,000 over eight years from 2009, according to Electoral Commission records, including £5,000 to the constituency of then Tory MP and former Home Secretary Amber Rudd.

The Financial Conduct Authority (FCA) last week said it was banning permanently marketing of the risky ‘mini bonds’ to retail investors in response to the LCF’s collapse.

A temporary ban was introduced without consultation in January. The ban would apply to the most "complex and opaque arrangements where the funds raised are used to lend to a third party, or to buy or acquire investments, or to buy or fund the construction of property", the FCA said.

Thousands of people who invested in a high-risk bond scheme marketed as a "fixed rate ISA" now face getting a fraction of their money back after LCF collapsed last year. Many of them were first-time investors using cash from retirement funds or inheritances and attracted by claims of high returns.

The bonds were not regulated by the FCA, which only had power over marketing and financial advice on the products.

Under the ban, products caught by the rules can only be promoted to investors that firms know are "sophisticated or high net worth", the FCA said.