An independent investigation into the Financial Conduct Authority's handling of the London Capital & Finance mini-bond scandal has rebuked the regulator for "significant gaps and weaknesses" in its policies and practices.
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."
Recommendations
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.
Working points for the FCA included providing appropriate training to teams in its authorisation and supervision divisions and a call for the regulator to consider whether it can improve its use of regulated firms as a source of market intelligence.
The FCA accepted all of the report's nine recommendations, with FCA chairman Charles Randell admitting there were a "number of things" the regulator could have done better in its supervision of London Capital & Finance. The regulator will work with the Treasury and wider government in relation to the remaining four recommendations.
Mr Randell added: "We accept all the recommendations that have been made to the FCA and we are profoundly sorry for the mistakes we have made.
"The collapse of LCF has had a devastating effect on many investors and we will do everything we can to conclude our investigations as quickly as possible and support the recovery of further funds for investors.
"These reports not only highlight operational mistakes; they also indicate that the measures we introduced may not have been as effective as we wanted and challenge the balance that we struck at that time."
One-off compensation for investors
John Glen, economic secretary to the Treasury, said he welcomed the FCA's apology and its commitment to implementing all of the report’s recommendations.
Mr Glen added: "LCF’s failure had a significant impact on the bondholders who have lost their hard-earned savings and the government will take forward the report’s recommendations to ensure our regulatory system maintains the trust of the consumers it is there to protect.
"Taking into account the various channels through which people affected can seek compensation, the government will also set up a scheme to assess whether there is a justification for further one-off compensation."
rachel.mortimer@ft.com
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