Thursday 17 December 2020 3:25 pm

FCA failed to properly regulate London Capital & Finance, inquiry finds

The UK’s financial watchdog did not effectively supervise and regulate mini-bond scandal company London Capital & Finance (LCF) before it collapsed last year, an independent investigation has found.

The inquiry singles out Andrew Bailey, who was the Financial Conduct Authority’s boss at the time, and who is now Governor of the Bank of England.

LCF went into administration in January 2019, impacting over 11,000 people who invested around £237m in the company through mini-bonds. They are non-transferable assets that let retail investors invest in a company, but can be very risky.

The government launched an investigation into the Financial Conduct Authority’s handling of the case in the spring of last year. It has been led by former judge Dame Elizabeth Gloster.

Today, the investigation’s hard-hitting report concluded that the FCA did not effectively supervise and regulate LCF during the relevant period. It found there were “significant gaps and weaknesses” in the FCA’s policies and practices.

It said the mini-bondholders “were entitled to expect, and receive, more protection from the regulatory regime in relation to an FCA-authorised firm (such as LCF) than that which, in fact, was delivered by the FCA”.

The verdict is embarrassing for Bank of England governor Andrew Bailey, who led the FCA from 2016 to 2020.

Responding to the investigation’s report, FCA chair Charles Randall said: “There are a number of things we could have done better in our supervision.”

He added: “We accept all the recommendations that have been made to the FCA and we are profoundly sorry for the mistakes we have made.”

Report finds ex-FCA boss Andrew Bailey at fault

LCF marketed its mini-bonds as offering returns as high as eight per cent, erroneously describing them as fixed-rate ISAs. The mini-bonds helped fund loans LCF was making to small businesses.

Although LCF was an FCA-regulated company, mini-bonds are unregulated investments. This “perimeter” was at the heart of the findings of the Gloster investigation. 

It found that “the FCA’s approach to its regulatory perimeter… was unduly limited”. 

“This made it possible for LCF to use its authorised status to promote risky, and potentially fraudulent, non-regulated investment products.”

The report said: “Responsibility for the failure in respect of the FCA’s approach to its Perimeter rests with ExCo [the Executive Committee] and Mr [Andrew] Bailey.”

It made nine recommendations, which the FCA accepted. They included that the FCA should start thinking about everything a firm does, not just regulated activities. This would help it spot suspicious activity, the report said.

Gloster’s report also said FCA staff need to be better trained in spotting fraud and problems in financial filings and documents.