Financial Conduct Authority  

Effectiveness of the regulator

Despite regulation by the FCA, LCF practices went largely unnoticed as it sold unregulated mini-bonds.

‘Mini’ may be a misnomer here, as the combined losses from this activity totalled £237m by the time LCF went into administration in January 2019.

With 11,500 investors unlikely to ever reclaim more than 20 per cent of their money, the mini-bonds had a rather large effect.

By May 2019 HM Treasury announced a review into whether mini-bonds should be regulated, but it must be questioned why it took such a collapse to prompt this scrutiny.

Following close on the heels of regulator ignorance are the devils of inertia and hesitation.

In the case of LCF, this took the form of uncertainty in communications with investors – in April some bondholders accused the Financial Services Compensation Scheme of misleading them over their rights to compensation – and then a furore a month later over the predicted 12-month timeframe for the regulator’s investigation, which was lambasted by MPs in parliament.

It turns out, the answer to ‘who watches the watchmen?’, is the watchmen themselves. And they do not hurry, either.

Lack of options

The repeated failings of the regulator to act decisively and bare its teeth when dealing with financial predators, such as PPI mis-sellers and fraudulent companies such as LCF, leave consumers with few options.

Faith in a system that plods along due to its own inertia does not seem widespread, so perhaps the answer lies in personal litigation?

Just as claims companies prompted harsher action by the regulator against PPI-slinging banks, they also provided the most commonly used method by which consumers received redress, albeit without the company’s cut.

Regulatory effectiveness

In a similar fashion, when investment companies such as LCF collapse, are consumers better off jumping straight to the claim, rather than trusting the regulator to act?

Against a backdrop of regulatory inefficiency, quick action and the threat posed by litigation are strong points in favour of pursuing personal claims when aggrieved by fraudulent, misleading or mis-selling institutions.

In light of this, the questions surrounding the effectiveness of the regulators are more important than ever.

While the regulators are undoubtedly an essential tool in keeping markets consistent and preventing a runaway wild west economy, and are staffed by men and women doing a stellar job, they simply do not hold enough threat to act as a deterrent to mis-sellers.

Without the necessary teeth, do they really hold up their end of the bargain that sees them as arbiters of our financial ecosystem, especially when smaller private companies are more effective at achieving redress for consumers?

Open to negligence

The recent announcement by the government seems to follow along these lines: Allowing the FCA to set its own boundaries might allow them to react to the ‘grey areas’ of regulation more quickly, but it also gives them a larger territory to potentially leave almost as if it were unregulated.