FCA slammed over regulatory failings at collapsed minibond firm

An independent report has heavily criticised the Financial Conduct Authority (FCA) for failures in the regulation and supervision of London Capital & Finance (LCF), which collapsed in January 2019, impacting over 11,000 people who invested around £237m

The LCF investigation, led by Dame Elizabeth Gloster, has produced a 500-page report which is highly critical of both the FCA and its former chief executive, Andrew Bailey, who left the regulator to become governor of the Bank of England in March this year.

LCF sold risky ‘minibonds’ which promised to pay investors high rates of interest. Many bondholders were elderly, relatively inexperienced in investing and put their life savings into the high risk instruments. They are expected to receive only 25% of their money back from administrators. The FCA recently banned the mass-marketing of complex minibonds to retail investors.

The report concluded: ‘Bondholders, whatever their individual personal circumstances, 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.’

The report said the root causes of the FCA’s failure to regulate LCF appropriately were ‘significant gaps and weaknesses in the policies and practices implemented by the FCA to analyse the business activities of regulated firms.’

It identifies three key issues. First, the FCA’s approach to its regulatory ‘perimeter’ was unduly limited.

The report found that, in general, the FCA did not sufficiently encourage its staff to look outside the perimeter when dealing with FCA-authorised firms such as LCF. This made it possible for LCF to use its authorised status to promote risky, and potentially fraudulent, non-regulated investment products to unsophisticated retail investors.

Secondly, the FCA failed to consider LCF’s business holistically. Instead, FCA staff analysed LCF’s breaches as though they were isolated issues. In particular, they did not consider whether, and if so how, these issues were indicative of broader concerns with LCF’s business.

Thirdly, 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.

As a cumulative result of these failures, the FCA did not appreciate the true nature of LCF’s business or the risks that it posed to consumers. 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, the report said.


The report makes four recommendations for the government, which are accepted in full. These include support for the reform regime proposed for the FCA, and a commitment to launch a consultation in the New Year on the regulation of non-transferable debt securities.

The Treasury will also  work with the FCA and HMRC to address the recommendation about a potential gap in responsibilities in relation to Innovative Finance (IF) ISAs and look at the sufficiency of checks on IF ISA managers and the penalties regime.

In addition, the Treasury will work with the FCA to consider whether paid-for advertising on online platforms should be brought into the scope of the financial promotions regime, and with DCMS to ensure that fraudulent online advertising is addressed as a priority harm through its Online Advertising Programme.

John Glen, economic secretary to the Treasury, said: ‘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 payments in certain circumstances for some LCF bondholders.’

For its part, the FCA said it accepted the nine recommendations from the Gloster report, focusing on how they should improve their internal authorisation and supervision processes.

This includes requiring call-centre handlers to refer allegations of fraud or serious irregularity to supervision division; developing training and culture to reflect the importance of combating fraud by authorised firms; making sure senior management communicate  current or emerging risks to staff; making information and data relevant to supervision of a firm available on a single, easily accessible electronic system; and considering if regulated firms can be a source of market intelligence.

Both the FCA and Bailey, who headed up the regulator for four years, have apologies to LCG bondholders.

Mel Stride, chair of the Treasury Committee, said: ‘This report exposes a litany of failings at the FCA.

‘We will look at the detail of this important report thoroughly and the Committee plans to take oral evidence on it, as well as on any wider implications for the regulatory regime, in the New Year.

‘It is imperative that the compensation scheme announced by the Economic Secretary today delivers swiftly to LCF bondholders.

The Serious Fraud Office has an ongoing investigation related to individuals associated with LCF, while the Financial Reporting Council has opened an investigation into the auditing of LCF by three firms - PwC, EY and Oliver Clive & Co.

Useful links:

Gloster report into LCF

FCA response

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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