In the regulator's response to the Treasury Committee's report into its handling of the London Capital & Finance debacle, published today (September 13), Nikhil Rathi said tackling more effectively the issue of fraud risks that are outside the perimeter of regulation but involve authorised firms "will be a key aspect of the FCA’s surveillance, triage and interventions work as it evolves".
He said the FCA would be taking steps to improve its partnerships with government and law enforcement but warned the success of this work would depend upon the extent to which tackling fraud is a collective effort at a national level.
"We need law enforcement partners to step in and step up. They have the necessary jurisdiction, and need to be supported with adequate resources if we are to work effectively together," he said.
He added: "We appreciate that these are difficult issues. With police forces now spending less than 1 per cent of its resources on fraud investigations when, according to Action Fraud, fraud accounts for 1 in 3 crimes, we can understand the desire to look to regulators for a greater contribution."
But he warned reconfiguring the FCA to prosecute serious and volume frauds would involve "major up-front investment and
significant time to operationalise, and would require an ongoing source of funding".
All this could lead to the FCA spending time and money prosecuting cases "when those resources could have greater impact through prioritising measures which protect consumers of financial services, and prevent fraud by authorised firms".
The report by the committee, titled the Financial Conduct Authority’s Regulation of London Capital & Finance plc, had labelled the FCA’s handling of LCF as “one of the largest conduct regulatory failures in decades”.
At the time, it urged the FCA to implement a change in culture to protect consumers and financial markets.
The MPs argued there was an “over-reliance on collective responsibility” at the regulator which might "deny visible accountability".
In response Rathi repeated the apology made previously by its chairman for the errors the FCA had made.
He said: “We know that London Capital & Finance’s (LCF’s) collapse has had a significant impact on the lives of many individuals who invested money they could not afford to lose. My colleagues and I will learn from the mistakes that have been made.”
'Significant weaknesses'
A Treasury-commissioned independent investigation into the collapse of LCF, led by Dame Elizabeth Gloster, had also rebuked the regulator for "significant gaps and weaknesses" in its policies and practices in December 2020.
Rathi told the MPs the FCA had committed to implementing the recommendations made by Dame Elizabeth, including on staff training, strengthening processes and policies, and improving how it shares and uses information.
“Alongside these targeted steps, we are also taking forward wider changes in our structure, culture and strategic investment programme to ensure that we are able to identify and assertively tackle misconduct in the financial services sector,” Rathi said.
The MPs in their own report criticised the FCA for seemingly not applying the standards it expects from the industry through its Senior Managers Regime to its own practices and culture.
But Rathi urged that although the FCA was not within the scope of the SMR, it had applied the principles of the regime to its senior managers, “as we expect those individuals to meet standards of professional conduct as exacting as those required in regulated firms, and for those individuals to be held accountable for functions they personally direct”.
Another area was around the culture at the FCA, with the Treasury Committee recommending the FCA board to set an end date for its transformation programme, which the FCA chief said would take about three years.
He also said the FCA had published changes in light of these matters in its business plan and set out a transformation programme to be better placed in the figure.
sonia.rach@ft.com
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