FundingSecure: Investors angry as FCA close investigation

Members of the public who invested in the failed peer-to-peer lending company FundingSecure, who stand to lose millions of pounds as a result of lax business practices, have expressed “total, complete and utter ANGER” after the FCA conclude their 5-year-investigation – with no public action taken.

The mouseinthecourt has complied a list of some of the most egregious failures at the firm which appear, in the view of this humble blogger, to have warranted intervention by the city regulator, including:

£4.3m of “false and fraudulent” loan entries on the platform, according to court documents
£2.5m of missing funds from the company client account
Legal action against investors by a disgruntled creditor – said to have been caused by the £2.5m black hole
A property belonging to the wife of the director ending up on the platform – leading to a complete loss of £195k after the paperwork was found to be defective
A written statement from a major FundingSecure mortgage broker that the platform “had a very relaxed approach to lending…I do not believe they do credit checks“
Fraudulent misrepresentation that loans were secured
The use of the word ‘secure’ in the company name

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Reporting by Daniel Cloake.

FundingSecure were an FCA-regulated online peer-to-peer lending company which was incorporated in 2012.

They operated an online platform which allowed members of the public to collectively crowdfund loans used to fund the purchase and development of property. As well as pawn-broking style loans secured on “anything with a value including fine wines and comic books”.

Its website described itself as “the UK’s leading alternative investment and lending platform“ whose “peer-to-peer lending opportunities were carefully selected, appraised in detail, robustly structured and professionally managed by teams of proven sector specialists.“ As will become apparent that wasn’t always the case.

The firm collapsed in 2019 amid serious financial problems. Investors stand to make significant losses across a wide range of loans.

Issues with the firm were revealed in the ‘Notice of Administrator’s Proposals’ dated 12th November 2019. The joint administrators’ undertook their own investigations and…

“…also undertook a review of the FCA findings in respect of the management of the Client Accounts operated by the Company.“

We are told that:

…based upon our initial review and following advice received from our solicitors it is clear that: –

The management and operation of the Client Account function does not accord with the stated Terms and Conditions (Version 2.4) published on the Company’s website;

There was a significant failure by the Company to properly manage all Client Account funds;

Loans to Borrowers funded by the Company with monies received via the Company investment Platform were (from time to time) a mixture of Client and Company monies;
and

The status of some of the assets held by the Company is lacking in clarity in terms of defining “who owns what”.

These are all serious problems.

The Client Account

A client account holds client money – these are funds owned by its customers, and not the business. Client accounts are subject to strict FCA rules.

According to documents filed at Companies House by the Joint Administrators’ “In October 2018 a top tier business advisory firm conducted a review of the Company’s operation which identified deficiencies in the Company’s Client Accounts operated for the benefit of Investors“.

FundingSecure say they had identified the source of the deficiencies as a result of the fraudulent behaviour of its then director Richard Martin Luxmore, 59, of Reading.

The firm having stated in court documents that in some instances Mr Luxmore had simply given away £2.5m of customer money, and in others created £4.3m of “false and fraudulent” loan entries on the platform.

“Richard Luxmore procured the payment of monies from the Claimant’s client account …in the absence of (1) a Loan Entry [on the website]; (2) any security; and (3) any loan agreement with the recipient.“

Truly astonishing.

What makes this claim all the more extraordinary is that Richard Luxmore admitted to doing it, describing the activity in his defence statement as an “established practice” of the business:

“[FundingSecure’s] established practice was that it did repay monies to lenders using client account funds prior to the new Loan Entry being fully funded on the platform and then subsequently advanced loans to borrowers using client account funds prior to the lending being matched to lenders on the platform. This was practiced by both Nigel Hackett and Richard Luxmore.“

The company replied in no uncertain terms saying Mr Luxmore had “no legitimate basis to lend client monies to any borrower without that client (i.e. the lender’s) consent. The conduct which is admitted by RL is fraudulent.“

Further details can be seen in our documentary “FundingInSecure – Part 2 – The London Claim” and in this High Court judgment.

It is understood Mr Luxmore and FundingSecure settled by means of a confidential agreement in November 2020.

The fake Reading loan

One loan that turned out to be a sham was this terraced property in Reading.

A loan totalling some £195,000 was taken out in June 2017 said to be secured by a first legal charge.

This was a lie.

According to the title deeds the security in the form of a charge was only registered on the property some 19 months later in January 2019 – the same month Richard Luxmore left the company.

This legal protection – the charge – ultimately turned out to be defective.

The mouseinthecourt has been shown updates given to the members of the public who invested in this loan – they were told in October 2020 that:

“Following a formal review … the documentation is insufficient to effect a recovery.”

The loan was closed with no funds returned. A 100% loss.

What makes this ‘loan’ extraordinary is that the owner of the property is Ms Elsa Luxmore, the wife of director Richard Luxmore.

She works as a Parish Administrator in a Roman Catholic Monastery and lists management of this property on her LinkedIn page.

It must be stressed – we have seen no accusations of wrongdoing against Ms Luxmore and we have seen no suggestions that she benefited from the £195,000 that was ultimately unrecoverable.

We approached Ms Luxmore for comment in September 2022 and received no response.

The hole is filled in

The gaping £2.5m black hole in the client account was filled in with money from at least two sources.

A High Court judgment reveals that Rajinder Kumar, 57, “agreed to lend £1.5 million to the Company (secured by a debenture) in order to regularise the position“. He subsequently became a director and a controlling shareholder of FundingSecure.

It now appears that FundingSecure also obtained circa £500,000 from a BVI Registered company called ‘JC Starr Holdings Limited’. According to draft legal documents, seen by the mouseinthecourt, it is said the £0.5m was paid into the companies client account on 12th April 2019.

The money was said to have been lent “for the sole and exclusive purpose” of underwriting loans and it is claimed that this created a so-called Quistclose Trust, named after the defendant in a leading 1968 court case.

Instead, the document claims that the Joint Administrators’ of FundingSecure had revealed that the money had been used inter alia:

“to repay investors whose investment returns had been applied towards the operational costs of the Defendant (in other words, to repay losses created by the historic misapplication of client account monies)“

Unfortunately for the investors ‘JC Starr Holdings Limited’ wants its money back and is seemingly prepared to target the investors on the platform to do so by threatening them with a High Court claim.

All investors funds on the platform were frozen in December 2021 pending resolution of the claim. A significant sum remains frozen.

One investor told us he had tens of thousands of pounds on the platform when it collapsed — money he had saved up to buy a house — he explained that the Quistclose issue had left him “in limbo with little explanation” and that he was suffering “massive anxiety from checking several times daily… the collapse meant that a house purchase fell through and I cannot see myself moving up the ladder now.”

The issues with the client account have had, and continue to have, serious ramifications on retail consumers.

The FCA has three statutory objectives, which include ‘securing an appropriate degree of protection for consumers‘ and ‘preserving the integrity of the UK’s financial market‘.

After the members of the public who had invested were threatened with legal action by JC Starr we approached the FCA in August 2022 to ask them whether they “intend to provide support or assistance to the lenders?” they refused to comment and gave no reasons for doing so.

Read more about the Quistclose claim in “FCA silent on client account cash grab“

Shoddy business practice

During a court hearing in October 2022 a mortgage broker who had generated a significant proportion of the loans on the FundingSecure platform, Mr Moksud Alom, 49, gave evidence.

We were told that Mr Alom had met the directors of FundingSecure at a roadshow in Birmingham in the summer of 2015. “Since then, they have arranged over 250 loans for my clients which is borrowing in excess of some £60M“.

In written submissions to the court Mr Alom was critical of the “relaxed approach to lending” said to exist at FundingSecure.

“from my experience with other lenders … FundingSecure had a very relaxed approach to lending. In my experience with them I do not believe they do credit checks or Registry Trust searches (for County Court judgments) as lenders do as part of their due diligence.

“All FundingSecure do is look at the valuation, see what is outstanding and then make a decision to lend up to 70 or 75% of the value.

“A number of lenders with whom I work conduct phone interviews with borrowers to discuss the terms of lending and to satisfy themselves that the borrower is aware of what they are doing. In my experience FundingSecure do not do this. In fact the first communication is often after the loan has already been drawn down.

“At the time of this loan, FundingSecure were growing rapidly, in order to speed up the process, they were even prepared to waive the requirement for permission from the first charge holder and proceed on the less secure option of registering an equitable charge”

It is important to consider the above comments in the context of the ultimate findings of the Judge as to Mr Alom’s motivation in those proceedings.

The Name

The name FundingSecure, it could be said this goes without saying, contains the word Secure. Many investors have found their hard earned money placed on the platform was anything but.

Another peer-to-peer company, the failed lending firm Lendy Ltd, initially traded under the name SavingStream. The FCA objected to this.

In a document, exclusively obtained by the mouseinthecourt, the FCA demanded that Lendy drop the label on the basis “that the use of the trading name ‘saving stream’ is misleading“.

“You have said ‘Saving Stream is a peer to peer Investment platform’, which in itself is contradictory and unclear for consumers to be told that it is for saving yet also investment.“

The document specifically goes onto consider the use of the word ‘secure’ in online promotional material. The FCA told Lendy:

“There are various references to peer to peer crowdfunding as ‘secure’, ‘secured’ and ‘safe’ in the sponsored link and in your website. We do not consider that it is a fair description of loan-based crowdfunding to describe it as secure or safe, when in fact you make the contradictory point that the capital is at risk (for example, if borrowers do not repay loans).“

The FCA concluded that “If the consumer could lose some or all of the investment then, in our view, the investment should not be described as ‘safe’ or ‘secure’.“

Fraudulent Misrepresentation

We’ve had investors tell us about loans they participated in, which have subsequently failed because, it is said, of fraudulent misrepresentations made by the platform.

The so-called art loans are a classic example.

This site has been covering the litigation surrounding these loans for a number of years. Our long read “Great Green Art Fraud – How FundingSecure lenders were scammed” contains the full details.

In short, £2.3m of funds were advanced by some 1,400 investors “many of whom were ordinary consumers investing their personal savings”. Each had contributed an average of £1,668.

Despite assurances to investors, the platform failed to take the assets into its possession. The borrower subsequently sold the assets, spent the money, and fled to Spain.

Investors almost faced a complete write-off of their investments after the borrower declared bankruptcy – but four investors stepped up to the plate to buy the rights to the litigation which resulted in a lengthy pursuit through the courts, eventually ending with success at the Court of Appeal.

This came at a price though with the four tenacious individuals set to receive some 75% of the proceeds of any eventual settlement.

The loan manager at FundingSecure was one Mr Richard Luxmore.

The processes and procedures at FundingSecure which allowed £2.3m of funds taken from members of the public, secured against nothing, is a question that needs answering.

The FCA Responds

An FCA spokesperson told us that “I can confirm that the investigation has been closed. There will be no public outcome“

We asked, under the Freedom of Information Act, for information about the FCA investigation including how much it had cost.

Out application was refused on the basis “that making this information public would be likely to prejudice the exercise by the FCA of its regulatory functions under the Financial Services and Markets Act“.

They added:

“There is a strong public interest in the FCA being able to carry out its functions in the most effective manner possible. Disclosing the information we hold falling within scope of the request would be likely to lead to widespread speculation which could hinder and prejudice the progress of future FCA enquiries, considerations and/or actions.“

You can read the FCA’s full reasons for refusal here.

An FCA spokesperson also told us:

“When considering whether to take action, the FCA considers a range of factors including the strength of the evidence, the public interest in taking action, and the potential benefit for consumers. As a result, not all investigations result in a public outcome.

“Last year we issued almost £215 million in fines, delivered 1,800 scam warnings and we had 603 open investigations into misconduct.“

Our attention was drawn to the recent convictions of Andrew and Peter Currie, operators of another failed P2P firm Collateral UK Limited.

In an FCA press release Steve Smart, Joint Executive Director of Enforcement & Market Oversight is quoted as having said:
“Peter Currie fraudulently amended the Register to entice investors in, and together with Andrew, stole client money once they knew the game was up. Unfortunately, the investors will now be left to pick up the tab for the loans that have turned bad. The FCA has begun confiscation proceedings to recover the financial benefit obtained by the defendants, as well as compensation proceedings to recover investor funds. We welcome these significant sentences which show we will take every enforcement action at our disposal to pursue criminals and protect consumers.”

Whilst the Currie brothers were convicted by a unanimous decision, on the question of whether the FCA will in every case “take every enforcement action at our disposal to pursue criminals and protect consumers” the jury is still out.

Comment

The confidentially of investigations carried out by the FCA means we are unlikely to ever officially know the full background of what occurred at FundingSecure – or the steps taken by the city regulator.

There is of course a strong public interest in favour of transparency and in the public being reassured about the effectiveness of the FCA’s approach.

In ‘Did internal politics and a culture of confusion at the FCA fail P2P investors?‘ we questioned whether the FCA had ignored the warning signs in the sector as a result of undue influence from the treasury — the FCA is supposed to be independent.

We wrote that the so-called peer-to-peer lending industry was touted in 2015, by the then City Minister Harriett Baldwin, as a:

…brilliantly innovative new form of finance – which we want to see continue to grow and evolve.

The then Chancellor George Osborne had said the previous year that he wanted to “make the UK the FinTech capital of the world“.

The technologies being developed today will revolutionise the way we bank, the way we invest, the way companies raise money. It will lead to new products, new services, new lenders.

It means being able to bypass traditional banks altogether, and lend money directly – through peer-to-peer platforms like Funding Circle and Zopa, both represented here today.

My message today is simple:

We stand at the dawn of a new era in banking.
From the speech of the Rt Hon George Osborne 6th Aug 2014

Internal FCA e-mails, exclusively reported on by this blog, talk of the potential reputational risks to the authority when platforms collapse.

“this is a matter of public confidence and execution risk … However, when things go wrong the FCA will be held responsible first and foremost“
July 2016

“should/when some of the financial risks currently held by lenders/investors crystallize it will look – particularly in retrospect – that customers were not being given an adequate level of consumer protection“
July 2016

“We therefore see this area of ‘innovation’ as very risky to our objectives and reputation.”
August 2016

“If a major P2P provider implodes or a number of smaller players fail then there is an integrity issue for the sector and for “alternative finance” in general. Likewise, the FCA is likely to be closely scrutinised for “allowing” the “poster-boy” of alternative finance to fail/hurt consumers/Kill the dream.“
November 2016

The P2P industry is a shadow of its former self. Investor confidence in the sector is low and most of the big firms are either embroiled in drawn out insolvency proceedings, or have pivoted away from the crowd and are now targeting institutional money.

One has to ask — is it simply easier for the FCA to sweep these issues under the rug?

A FundingSecure investor, who wishes to remain anonymous, thinks so. We asked them for their reaction to the FCA investigation having ended with no public action being taken. In rather brash terms they told us they felt…

“Total, complete and utter ANGER, Lender Investors have been hung out to dry. The FCA are not pursuing prosecutions purely because their own failings, gross incompetence’s and arrogance will come to light and the FCA always covers it’s own backside, at the expense of their Basic Remit, which is to “Protect Financial Consumers”!“

One downside to the elongated investigation period can be eloquently summed up by barrister Derrick Dale KC in submissions made in litigation involving an unrelated firm. Mr Dale…

“drew attention to the evidence in relation to an investigation that was being carried out by the FCA but in relation to which the PLS Claimants had little visibility. He said that this may have caused many potential claimants — and there were more than 100,000 retail investors in the Fund altogether — to sit on their hands, anticipating that they may achieve compensation as a result of that investigation.“

With the Financial Ombudsman Service refusing to consider complaints of a company in administration, and the investments not having been covered by the FSCS — the compensation scheme that traditionally covers bank deposits — it’s difficult to see how anyone other than the FCA could take action.

We protect consumers from harm caused by bad conduct in financial services.
An FCA objective: ‘Protecting consumers’

The fully authorised status of FundingSecure is said to have been a major factor for investors who have been in touch with us. One told us:

“The only reason I invested money in this was due to it having FCA approval when other platforms didn’t. It was rational to assume that the FCA did detailed checks and were satisfied that this company was worthy of their accredited when all the other companies were not.“

Another said the platform having FCA approval was a “major reason” for their investment in the platform…

“because the backing of the FCA was synonymous to me that FundingSecure meant what it meant, namely that the Funding was Secure, i.e. directors acting with honesty and vetted (I was shocked that some big loans were faked, given to friends/acquaintances, that paintings were not in FS possessions, LTV over-estimation were systemic , or in the event that FS has to wind-up the plan to put in place a third party to cost effectively windup the p2p platform was cleared by the FCA, or that the FCA knew a lot about things going wrong with FS but did not react to stop further the damages against investors.“

Lord Myners, the former City minister, is quoted in the FT as having said that the FCA’s authorisation of Lendy, another failed peer to peer lending company, gave it “a sense of regulatory approval and endorsement, which encouraged people to feel they had been vetted” adding: “The FCA should, in my view, have been more alert”.

Funding Secure Action Group

In February 2022 members of the FundingSecure Action Group called on John Glen MP to order an “Independent Review of the FCA” citing “Public Interest that the Treasury acts to prevent any cover up of the FCA regulatory and supervisory failing“.

In a letter sent by the group it is claimed that:

the FCA regulation and supervision was substantially defective for the purpose of regulating and supervising Peer to Peer companies to ensure a relatively safe investment environment for the general public, ultimately resulting in significant losses for the clients/lenders.
FundingSecure letter dated 25th February 2022

In response, John Glen MP, in his capacity as City Minister and Economic Secretary to the Treasury, said:

There are currently no plans for the Government to establish an independent review of the FCA’s conduct in relation to the administration [of FundingSecure]

Anyone directly affected by the way in which the FCA has exercised, or failed to exercise, its functions (other than its legislative functions) under the Financial Services and Markets Act 2000 (FSMA) may complain using the Complaints Scheme
Response to FSAG dated 17th March 2022

It is understood a number of complaints have indeed been made and are under consideration.

The Victims

Following a request on the ‘FundingSecure Action Group’ Facebook page the mouseinthecourt received a number of submissions. If you’re an investor you can send us your story using the ‘Contact Us‘ page.

One investor told us he had been “absolutely destroyed” and “completely ruined” by the collapse of the platform. “What they have done to me and others is nothing short of criminal behaviour…I had all my money ready for my retirement and they halved it overnight”

The relative of one investor also got in touch. She told us:

“My mother in law, in common with many women of her generation, gave up working when she had her children. She had been a secretary before that. Her wealth was inherited from her late husband who was a college lecturer. He died in 2000 and his widow entered a nursing home in 2015.
The money invested in FS belonged to my late mother- in-law. It was intended to provide an income to help pay her nursing home fees. The company folded just before she died and we worried about how to pay her fees. At the time of her death she had £185K invested; about £53K has been recovered.
While not leaving us personally out of pocket, we have lost a large chunk of our inheritance. My MIL would have been horrified had she known that her husband’s hard earned cash , which was intended to provide for her and which represented her life savings, was lost.“

Another investors told us the collapse affected them “Enormously. This lead me to borrow money from credit cards and being in debt by about £10K”.

When asked about the Quistclose issue they told us it had affected their ability to pay back the debt and avoid the recent interest rate rises.

Another investor told us she has lost “5k plus interest since the collapse of Funding Secure”, although “over the years I had invested quite a large sum of money. It was a coincidence I was starting to wind down my investments”.

When asked about the role of the FCA she said:
“The FCA was very important when deciding to invest with Funding Secure and presumed (perhaps wrongly) that it was a safe investment. As an example and discovered later was the value of security of the loans was very much exaggerated. Surely such a basic system should be spot checked by the FCA and its main description gives the impression all financial institutions affiliated with FCA are checked. Obviously, this isn’t the case and feel so much more angry with the FCA for mis-leading their role. Especially as it’s a government backed organisation”

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