The bonds on offer from London Capital & Finance looked highly seductive: the interest was a table-topping 6.5% to 8%; they were authorised by the Financial Conduct Authority; and HMRC had granted the bonds tax-free ISA status. Yet after more than 11,000 investors poured £236m into the bonds – only for the company to collapse earlier this year – the FCA is now accused of its worst failure as a regulator for more than a decade.

Little of the money went into safe interest-bearing investments. Around £58m was taken as commission by the Brighton-based marketing company, Surge Financial, that promoted the bonds. As the administrators set out in clinical detail this week, much of the rest went into highly speculative property developments, some in the Dominican Republic, oil exploration off the Faroe Islands, and even a helicopter bought for a company controlled by LC&F.

As little as 20% of the money may ever be recovered, said Smith & Williamson, the administrators. “There are a number of highly suspicious transactions involving a small group of connected people which have led to large sums of bondholders’ money ending up in their personal possession or control,” the report said.

Last week the Serious Fraud Office arrested and later released four individuals in the Kent and Sussex area as it confirmed it was investigating LC&F.

Now the FCA has to decide how much fault lies in its handling of the company. At a crisis meeting of the FCA board on Thursday, the regulator discussed a demand from Nicky Morgan, chair of the Treasury select committee, for a formal independent investigation into regulatory failure. If it goes ahead, it will be only the second time that the FCA has been investigated this way – the first being the review of the watchdog’s handling of the Co-operative Bank crisis.

Central to any investigation will be evidence that the FCA’s enforcement department was made aware of the risks at LC&F as early as November 2015, but failed to act.

Yorkshire-based financial adviser Neil Liversidge was approached by a client who was about to put £60,000 into the LC&F bonds. But after a few cursory checks Liversidge – who has a long history of informing regulators about potential scams – wrote to the client saying that underlying investments in the bond were worth “the square root of bugger all”.

Liversidge added that he would not recommend the bonds “in a million years” and immediately contacted the FCA with his concerns.

In a letter to the FCA dated 29 November 2015 – before the bulk of investors had placed their money with LC&F – Liversidge called the bond’s promoters unprofessional, and the investment unsuitable. “This promotion gives me cause for concern as to how safe or otherwise will be any funds placed with them.” The FCA did not respond.

In the following years investors, many of them elderly, ploughed their money into the bonds. For some the cash represented their life savings.

The woman behind a Facebook group dedicated to fighting for justice for LC&F victims says her own losses – of around £40,000 – pale into comparison with others. “Some people stand to lose six-figure sums. Some put [in] all the lump sum money from their pensions. Remember, this was something that said it was Isa-ble and regulated.

“I’m 41 and can make up the money in future,” she added. “But a lot are elderly and completely devastated. This is the one of the biggest financial scandals around.” She requested anonymity before speaking to the Guardian.

Another private investor, also speaking on condition of anonymity, examined the bonds in 2017 and went on to forums on MoneySavingExpert to warn others of the dangers.

The investor wrote to the Advertising Standards Authority to say LC&F were misleading investors, but was told to contact the FCA instead. So the regulator was contacted – but the complainant heard nothing back.

“It just seemed to bat back and forth between the FCA and the ASA. And the thing is, there are similar promotions out there at the moment, without risk warnings, but nothing is being done about them,” the investor said.

The Financial Conduct Authority acknowledges that LC&F became a FCA-regulated entity on 7 June 2016. However, the regulation only extended to the promotion side of the business, not the actual products.

It was not until 10 December 2018 that the FCA ordered LC&F to stop promoting the bonds because it deemed the investments ineligible for ISAs, and on 13 December froze its assets because of “serious concerns about the way the firm was conducting its business.”

The LC&F products were structured as “mini-bonds” that carry zero protection from the Financial Services Compensation Scheme, but which have in recent years been heavily promoted to investors.

The Guardian warned investors in 2015 to “just bin” any mini-bond promotions after a series of earlier scandals. The lack of FCA regulation of mini-bonds, considered to be at the “perimeter” of financial supervision, is likely to be at the core of any investigation.

Meanwhile, in a statement, Surge Financial said its fees were standard and that everything it did was signed off by LC&F.

A spokesperson for Surge Financial said: “LC&F was an FCA regulated business and it signed off all marketing materials and financial promotions prior to publication. Surge … did not handle client money and had no involvement in the deployment of funds to borrowing companies.”

Surge is run by Paul Careless, a Brighton entrepreneur whose LinkedIn page lists his earlier career as founder of Henheaven and The Stag Company before setting up Surge in 2015.

In its initial report, the administrators said once the £58m to Surge was paid, returns of up to 44% would be required in order for LC&F to make good on its promises. It added: “Bondholders unsurprisingly thought they were dealing with employees of LC&F when they were, in fact, dealing with LC&F branded operatives of Surge. For the above services, Surge charged 25% of the gross investment.”

The administrators this week wrote to Surge asking it to return the profit it made from LC&F. Surge said it had received the letter but has not yet responded.

Meanwhile questions will be asked about the role of HMRC and how it granted ISA status to LC&F. In their report, the administrators said: “Our understanding is that the necessary requirements to qualify for ISA manager status are fairly limited and that it is not a rigorous application process. We understand that ISA managers are not routinely monitored by HMRC.”

HMRC said it does not approve any ISA investment that an ISA manager may offer. In a statement, it said: “ISA managers must administer the ISA scheme in accordance with the ISA legislation. HMRC has a range of powers to tackle non-compliance with the rules, including withdrawing permission to act as an ISA manager, voiding non-compliant ISAs and reclaiming any incorrectly paid tax relief.”