Making sense of London Capital & Finance

  • Describe what the problems were with London Capital & Finance
  • Identify some of the regulatory consequences of the collapse of LCF
  • Describe how the authorities have responded

In such cases, the FCA will usually undertake a twin-track approach, with both regulatory and criminal offences being considered.

National Economic Crime Centre and Serious Fraud Office

In this case, however, the FCA referred the LCF case to the National Economic Crime Centre (NECC) and the SFO.

The NECC has launched an investigation into certain individuals connected with LCF. That investigation will run alongside the FCA’s own enquiries.

Following the collapse of LCF, the FCA issued warnings about the risks of investing in peer-to-peer lending or mini-bonds.

Although the investigation into LCF was opened following a referral from the FCA, the regulatory authority itself has also been burnt by the scandal.

It has emerged that the FCA had failed to adequately regulate the firm, despite receiving warnings some three years prior to LCF’s collapse.

In March of this year, the FCA Board launched an independent investigation into issues raised by the failure of LCF.

The investigation is to examine whether the existing regulatory system adequately protects retail purchasers of mini-bonds from unacceptable levels of harm and the FCA’s supervision of LCF.

HM Treasury

However, on 22 May 2019, HM Treasury used its powers under the Financial Services Act, 2012 to direct the FCA to launch an independent investigation into the relevant events relating to the regulation of LCF.

The Treasury stated that, “it is in the public interest that the Financial Conduct Authority should undertake an investigation into the relevant events relating to the regulation of London Capital Finance plc and it does not appear to the Treasury that the FCA has undertaken or is undertaking into those events”.

The Treasury considers “relevant events” to be the events and circumstances surrounding the failure of LCF and the supervision of LCF by the FCA during the relevant period.

The Treasury has directed that the independent investigation “must focus on whether the FCA discharged its functions in respect of LCF in a manner which enabled it to effectively fulfil its statutory objectives”.

Among several specified issues, the investigation is required to look into whether “the FCA adequately supervised LCF’s compliance with its rules and policies” and “whether the FCA had in place appropriate rules and policies relating to the communication of financial promotions by LCF.”

The investigation must also examine whether the FCA received relevant third party information relating to LCF; whether the FCA had “appropriate policies” to respond to such third party information and whether any processes were properly applied.

The Treasury’s direction also sets out detail as to how the investigation should be conducted.

In particular, it specifies that the investigator must liaise with the SFO and the FCA to ensure that the investigation does not prejudice the ongoing joint investigation and any subsequent prosecutions or regulatory actions by the SFO and FCA.