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The UK’s Serious Fraud Office has opened an investigation into London Capital & Finance, which collapsed with £236m of investors’ money, after it emerged that its “fixed-rate Isa” was in fact a high-risk mini-bond scheme.

About 11,500 customers who put their money into the company, which was promising up to 8 per cent returns on the mini-bonds, fear they will lose most or all of their investment.

LCF was barred from touching any funds in its bank accounts and ordered to stop promoting the product after the FCA raised concerns in December over the company’s marketing, which it said was “misleading, not fair and unclear”. The company went into administration at the end of January.

Instead of individual savings accounts, LCF was in fact selling mini-bonds to make loans to small companies, which is a much riskier investment. Indeed, according to the FCA, the mini-bonds “do not qualify to be held in an Isa account”.

The SFO said on Monday that four people had been arrested on March 4 in Kent and Sussex but had been released pending further investigation. The four people were not named. The anti-fraud agency also said it had opened its investigation after the FCA referred the matter to the National Economic Crime Centre. It added it was encouraging those who had invested in the scheme between 2016 and 2018 to get in touch. LCF was authorised by the financial regulator.

However, the mini-bonds are unregulated and therefore unlikely to be covered by the Financial Services Compensation Scheme. In a letter to bondholders dated February 21, administrators Smith & Williamson said LCF had paid a marketing company, called Surge Financial, to promote the mini-bond for a fee of roughly £60m.

To repay LCF’s investors after it made the £60m outlay, the mini-bonds would have had to make 44 per cent returns from their borrowers for the one-year bond and 24.5 per cent returns annually for the three-year bonds, the administrators stated.

The administrators have estimated that the investors could get back as little as 20 per cent of the amount invested. They have not yet identified the borrowing companies on the other side of the scheme, but said they had not received any returned loans or interest since being appointed.

“This does not mean that we won’t in the future and we are in detailed discussions with a number of them about the return of funds soon,” they wrote in a FAQ sheet published last week.

On Monday London Oil & Gas Ltd, an energy investment company that received financing from LCF, also appointed administrators. London Oil & Gas lists two “strategic partners,” Independent Oil & Gas, listed on the small-cap AIM market, and Atlantic Petroleum, a Faroese company listed in Oslo and Copenhagen.

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