£236 million.The cost of ignoring financial literacy and behaviours



Let me start by stating for the record, that I am supporter of principles-based regulation. It would be in no-ones interest, and a terrible development, if the regulator took a much firmer stance and in doing so, became more draconian in the way in which it oversees financial regulation.

However, the problem with operating in a principles-based environment, is that it allows unscrupulous people to slip through the net, and take advantage of the system; to flaunt the rules in full view of everyone, and sadly, get away it. Their attitude is one of “if others are doing it and getting away with it, then we may as well try!

The most recent case in question will have a negative, potentially life-changing impact on over 11,000 people. People who any decent Compliance Officer would have fought tooth and nail to protect. People who deserved better from an industry that still needs to improve the overarching relationship we have with consumers. People who had their unconscious behaviours and their financial literacy exploited for the good of someone else.

Of course, the case in question, is London Capital And Finance and their mini-bond product.


11,605 real people. £236m lost!


In this article, I don’t want to focus on the obvious and now well-documented problems that led to London Capital And Finance’s demise. Instead, I want to focus on the first thing that a customer will have seen. Their advertisement!

You only need to look at the advert that was used by London Capital And Finance in its financial promotion, to realise that it absolutely prays on those people who the regulator would NOT classify as vulnerable, but who are absolutely vulnerable when their financial literacy and behavioural biases are caught in the cross-hairs of a deliberate and focused marketing campaign.

Even with a basic understanding of cognitive and affective biases, it is crystal clear that the advert pushes all the right behavioural buttons to get people to invest their hard-earned cash.

At least ten behavioural biases are exploited in this advert, such as:

400+positive reviews from existing investors” is framed in a positive way, but also exploits authority bias since it uses the word ‘investors’ and not ‘clients’.

“Full asset backed security” requires a decent level of financial literacy to even understand this, and we know from ongoing research at Be-IQ, that most people, when tested correctly, have limited financial literacy.

Finally, because our attention is drawn to the bullet points and not the footnotes (see 100% track record in repaying investor capital & interest*, it means that we can be further exploited in terms of both information bias and selective perception.

We will go into how they exploit Herding, Anchoring, Confirmation Bias, Optimism Bias, and Probability Neglect in a future article.


Re-thinking ‘vulnerable’


Four years ago, in March 2015, I wrote an article where I called on the FCA to re-think their definition of the word vulnerable, used in relation to vulnerable clients, in order to prevent people getting caught up in yet another mis-selling scandal.

As it currently stands, ignoring financial literacy and behaviour, makes over half of the population susceptible to sophisticated scammers and ill-designed products such as the mini-bond product from London Capital And Finance.

Someone with poor financial literacy, poor numeracy skills, overconfidence, and a mis-guided sense of optimism, could easily fall foul to people promoting a product that promises the earth, but delivers nothing but pain and sorrow.

Ignoring financially vulnerable people means that they are at a higher risk of losing some, if not all, of their life savings. Sadly, we know from research that this can lead to anxiety and fear, cause mental and physical health problems, affect relationships, and leave people feeling out of control and clinically depressed.

So, 4-years on from when I first suggested a terminology change, and with another mis-selling scandal under our belts, perhaps it’s time for the conversation to start again. Let’s put proper measures in place to protect all of those people in society who are vulnerable, that is, financially vulnerable, and in doing so, give them the best possible chance at a bright financial future.