Blackmore Bonds has been making a number of changes to its website recently to improve its compliance with the FCA’s “clear, fair and not misleading” rules.
Around a year ago, the top of Blackmore’s website prominently featured the headings “Capital Protection” and “Income Certainty” below its interest rates. Immediately below this, in letters half the size, were the words “Capital at risk | Please read our risk section. Illiquid and non-transferable. Not FSCS”.
By including risk warnings in text half the size of headlines saying “Capital Protection”, this old version of the website put Blackmore potentially afoul of the FCA’s regulations that “balancing statements” such as these must be displayed with equal prominence to be clear, fair and not misleading.
Blackmore’s new version of its website is a considerable improvement in this regard, with the “Capital Protection” and “Income Certainty” headings gone, and a risk warning “The products on this site offer a high return on your investment, it is important to understand that as with all investments of this type your Capital is at Risk” displayed in 27-point font, the same size as its headlines.
The FCA-regulated firm responsible for approving Blackmore’s website has recently changed from NCM Fund Services to Northern Provident Investments.
One of the most notable changes is that Blackmore’s website now includes the following text prominently at the top: “Up to twenty percent of your money will go towards paying for the cost of raising capital & the overheads of Blackmore & adds to the risk of capital not being returned.”
For Blackmore to disclose the extremely high commissions paid to its introducers out of investors’ money is a refreshing change. Indeed, its own website stated as at March 2018 “Blackmore Plc [sic] does not have any set-up charges or management fees“. How this earlier statement can be reconciled with the new disclosure of up to 20% of your money being paid out in commission is not clear to me.
That Blackmore Bond paid out up to 20% in commission is already known from Blackmore’s December 2017 accounts, which disclosed that £25.4m had been raised in the period (covering July 2016 to December 2017) and that £5.1m had been paid to Surge Financial for “sourcing investors loans and front and back office operations” – almost exactly 20%.
However it is a safe bet that not many investors will have read the accounts on Companies House, and this is the first time Blackmore has disclosed the upfront commissions it pays on its website. Indeed, it is one of the few companies offering unregulated bonds than does so. Which is refreshing, if slightly depressing that Blackmore is the only company with this level of commitment to transparency.
Effect on risk
As Blackmore’s notice says, the fact that up to 20% of investors’ money is paid out to Surge or other parties “adds to the risk of capital not being returned”.
Indeed, the commissions paid to Surge by London Capital & Finance were recently identified as a contributor to the company’s insolvency by LCF’s administrators.
It should be emphasised that unlike London Capital & Finance, there are no reasons to doubt Blackmore’s current solvency. It showed net liabilities of £7 million on assets of £18 million in its last accounts of December 2017, but that was a year ago and the position could have changed significantly. To my knowledge Blackmore continues to make all its interest payments on time.
That balancing statement comes with the caveat that Blackmore Bonds plc was incorporated in July 2016 and its bonds have a minimum term of 3 years, so its first capital repayments will not fall due until the second half of this year.
Blackmore has nothing to do with London Capital & Finance other than sharing the same marketing agent and call centre provider, but it is subject to the same laws of mathematics that mean that – as it says – the higher the commissions it pays out, the higher the risk of capital not being returned.
In slightly simplified terms, if Blackmore raises £10,000 from an investor in its 3 year bonds paying 7.9% per year, and pays out 20% in commission, it now needs to turn £8,000 into £12,370 to repay the investor in full, representing a 55% return over 3 years – or 15.6% per year.
For its 5 year bonds paying 9.9%, the return required to turn £8,000 into £14,950 is 87% over 5 years, or 13.3% a year.
Any investment targeting a return of 15.6% or 13.3% a year will inevitably be extremely high risk – and while Blackmore can diversify over many such projects, some of its projects will fail, which will lower the overall return.
Blackmore’s website states that it pays up to 20%. However, as its last accounts disclosed that it raised £25m and paid Surge £5m, it seems fair to assume the maximum commission payable in the above calculation.
Despite Blackmore’s commendable new-found appetite for transparency and risk disclosure, I have to say I’m still not getting a sense of the very high risk of its projects not delivering returns of 13%+ per year from its website.
Risk of “investor appetite” waning
There is one last new risk warning on Blackmore’s website to comment on. Under the “Risks” page, one section states:
Failure of bond marketing
There can be no guarantee of investor appetite for the Bonds to the extent predicted by the Company or, indeed, at all. In such circumstances investors may lose some or all of their investment.
How a decrease in investor appetite (i.e. new investment) could lead to existing investors losing some or all of their investment sorely needs clarification.