Ex-FCA authorisation head admits ‘mistake’ in not scrutinising LCF application
Appearing before a Treasury Select Committee yesterday (March 25), Jonathan Davidson – now senior adviser at the Financial Conduct Authority – explained he had concerns about the number of applications his team was already having to deal with at the time.
“My view on the authorisation process was considerable concern about the sheer scale,” he said. “The application from LCF – which I don’t want to get into the details of [due to the ongoing SFO investigation] – but it was put into a high-risk category where it was getting more scrutiny where it would have been about investigating and interrogating.
“It was put back down into one that was more about confirming. That was a mistake.”
When pressed for an explanation, Davidson explained that LCF had initially applied to hold client money and therefore would have attracted further scrutiny.
“The firm withdrew its application for that permission,” he added. “I can’t say what would have happened if it had stayed at that higher risk.”
Although LCF was authorised by the FCA, it derived no revenue from regulated practices and instead made its money through the sale of unregulated minibonds.
The firm had used its authorisation to persuade people to invest as a kind of “halo effect”, according to a damning 494-page independent review by Dame Elizabeth Gloster, which listed a litany of failings by the FCA.
A mindset problem
Davidson was named in the report alongside former head of supervision Megan Butler who, now holding the role of executive director of transformation, also appeared before the committee.
She explained how the regulator had been transitioning to a new supervisory model but had been too slow in the case of LCF.
Here, Butler blamed a “compliance mindset” of staff working at the FCA for failing to take a more holistic view.
“As we moved through 2016, we became aware that what we came across in our people was a compliance mindset,” she explained.
“A narrow, rules-based and permission-driven way of looking at individual cases.
“When we designed delivering effective supervision, we did not do so as a big bang. Throughout the course of 2017 that structure changed, developed and improved. It clearly did not move fast enough to catch LCF. We are extremely sorry for that.”
In the fallout both Butler and Davidson had their £45,000 bonus — which was awarded on top of their £311,000 salary — deferred.
Over 11,600 members of the public lost a total of £237m on unregulated mini bonds sold by LCF which collapsed in 2018.
Butler, who essentially heads up the same division that was found at fault during the LCF saga, insisted to MPs she was the right person for the job and that she had not considered her position.
In an evidence session earlier this month (March 1) TC chairman Mel Stride said responsibility for the LCF failings rested with the senior management of the supervision division, who he partly identified as Butler, and questioned her appointment into her current role.
“I did not consider resigning,” she said yesterday. “I sincerely regret the losses suffered by bondholders as a result of the collapse.
Together with Jonathan [Davidson] I take full responsibility for the supervision model that was designed and rolled out. I also take full responsibility for the judgements and decisions taken by individuals within my areas of responsibility.
“Having said that, so much of what we do at the FCA is a collective endeavour and so the responsibility is a collective responsibility.”
The Financial Services Compensation Scheme has so far paid £56m in compensation to LCF investors, contributing to a £78m supplementary levy on the industry.
HM Treasury first requested the independent investigation into the FCA's handling of the scandal in May 2019 and, following several stumbling blocks, it was delivered in December.
Jon Yarker is a freelance reporter for FTAdviser
