The long-awaited review by Dame Elizabeth Gloster found the City watchdog had failed to properly regulate the now collapsed company and warned its handling of information from third parties regarding the business was "wholly deficient".
The report said it was an "egregious example" of the FCA’s failure to fulfil its statutory objectives in regulating London Capital & Finance.
HM Treasury first requested the independent investigation in May 2019 after the mini-bond provider collapsed owing more than £230m and putting the funds of some 14,000 bondholders at risk.
The review has faced numerous stumbling blocks in the meantime amid the coronavirus pandemic and the delayed disclosure of documents to the investigation by the FCA.
In today's report the investigation concluded the bondholders were "entitled to expect, and receive, more protection from the regulatory regime in relation to an FCA authorised firm than that which, in fact, was delivered by the FCA".
It also warned the permissions granted to the company were not appropriate for the business it carried out and FCA had not "adequately supervised" London Capital & Finance's compliance with the regulator's own rules.
But Dame Elizabeth's report claimed the root causes of the City watchdog's failure to regulate the mini-bond provider properly were "significant gaps and weaknesses" in the policies and practices it implemented to analyse the business activities of regulated firms.
For example, the FCA was found to have failed to sufficiently encourage its staff to look outside the regulatory perimeter when dealing with FCA authorised firms.
The report said this had allowed London Capital & Finance to use its authorised status to promote "risky, and potentially fraudulent, non-regulated investment products" to unsophisticated retail investors.
Whilst the regulator's financial promotions team had raised concerns regarding London Capital & Finance's financial promotions on six occasions, the breaches did not result in a referral to the supervision or enforcement divisions at the FCA.
Last week the regulator made preeminent its ban on the mass-marketing of mini-bonds to retail consumers.
The report said: "FCA staff who reviewed materials submitted by LCF had not been trained sufficiently to analyse a firm's financial information to detect indicators of fraud or other serious irregularity.
"Neither did the FCA appreciate the significance of an ever-growing number of red flags, which were indicative of serious irregularities in LCF's business.
"This occurred at a time when LCF’s unregulated bond business was growing at a rapid pace and substantial funds were being invested by bondholders."
Dame Elizabeth made 13 recommendations as a result of the investigation, nine targeted at the FCA’s policies and practices and four focused on the regulatory regime.