he Financial Conduct Authority was today slammed by an independent investigation into its behaviour on the London Capital & Finance scandal, which has put thousands of pensioners at risk of losing £236 million.
Judge Dame Gloster’s report into the regulator, which was then run by now-Bank of England governor Andrew Bailey, found it repeatedly failed those who bought the bonds by repeatedly missing red flags that should have alerted them to major problems with the firm.
Victims of LCF’s collapse, the report says: “whatever their individual personal circumstances, were entitled to expect, and receive, more protection from the regulatory regime”.
It accused the FCA of failing to regulate LCF properly due to “significant gaps and weaknesses” in its policies.
The FCA was, the report said, “unduly limited” in the scope of its duties, known as the Perimeter, in regulatory jargon.
This meant it paid too little attention to elements of LCF’s business which were not technically regulated. So, when it received an anonymous letter warning it of allegations of fraud and other irregularities, it failed to investigate further, assuming it to be a police matter.
Call handlers at the FCA receiving allegations of fraud as early as 2016 regularly failed to refer them to the supervision division. On one day, in July 2016, they received three calls but none were referred on.
“The FCA’s flawed approach to the Perimeter resulted in LCF being able to use its FCA-regulated status to present an unjustified imprimatur of respectability to the market, even in relation to its non-regulated bond business,” the report states.
The FCA also failed to consider LCF’s operations as a whole, looking at individual breaches but failing to put them together into a bigger picture of danger. Regular breaches of financial promotions rules were never referred up the chain for a holistic review of the business.
FCA staff taksed with reviewing LCF’s paperwork had not been trained sufficiently to spot indicators of fraud or other serious irregularity, the report says.
One had no accountancy or other relevant qualifications, saying his learning had been “on the job”.
Another told the investigators: “I don’t believe…that there is much training around how to identify financial crime.”
The FCA failed to spot an “ever growing number” of red flags indicating serious irregularities.
The LCF case is now being investigated by numerous agencies including the Serious Fraud Office, who have requested certain redactions into her 500 page report.
The report says Andrew Bailey had attempted to stop the report blaming individuals’ failings at the FCA, particularly if they were to be personally identifiable.
Other FCA officials said effective naming and shaming would put other people off taking difficult jobs at the organisation in future.
The FCA also said the report was not fair as it was supposed to examine “lessons learned” rather than individual failures. Gloster refuted all those requests and claims.
Many of the 11,000 people who lost money to LCF did so after seeing advertising online which were misleading, particularly around the description of the underlying investments, which were a tiny number of companies associated with the directors of LCF and those close to them.
Gloster found the FCA had no reason not to intervene as its brief under the law which says promotions must be “fair, clear and not misleading.”
The FCA should also have been alive to the fact that the risks LCF must have been carrying out with bondholders’ money was high because of the exorbitant interest rates it was offering them.
The report was deeply critical of the FCA’s register of approved and regulated people, because LCF appeared on it even though it was only partly regulated.
“LCF’s appearance on the Register encouraged investors’ belief that LCF had a badge of respectability… including in respect of its unregulated bond business.”
It said the FCA had to take far greater efforts to alert its staff of its important role combating fraud.
The FCA finally intervened in December 2018 but “should have intervened much earlier.”
In the event, Gloster said, its intelligence team “stumbled across” possible irregularities in an unrelated search on an external intelligence database on 15 October.
“If the report didn’t mention LCF, it’s entirely possible that nobody would have looked at it,” the staff member told Gloster’s team.
When the FCA finally raided LCF’s offices, it did not consider asset freezes or other actions against connected persons “given the risk of dissipation of assets,” the report says.
The FCA responded to Gloster’s inquiry that it was short of resources and had to prioritise, but the report says that does not negate the failure to act on the “extreme case” of LCF and the numerous red flags.
Gloster set out four recommendations, which the FCA has accepted.
1) Order staff authorising and supervising firms to view them holistically
2) Make sure contact centre staff refer fraud allegations to the Supervisory Division, even when the allegations are against the non-regulated activities of a firm
3)Train supervisory and authorisation staff how to spot potential fraud or other serious irregularities
4) Make sure staff are aware of the risks of business models such as minibonds
5) Have clear policies on how to respond to repeated breaches
6) Create a culture of combating fraud by authorised firms
7)Make sure IT systems at the FCA collate all information so red flags can be centrally viewed and a broader picture built of a firm
8)Ensure its supervision programme relating to flexible firms is operating effectively
9)Consider improving the FCA’s use of market intelligence.
Gloster also recommended the Treasury review the scope of the FCA’s remit and review the way it works with HMRC and other government bodies.
In March 2017, a seemingly well informed reader wrote the following to the FCA: “[LCF]
is claiming to charge small businesses 10-20% interest
on loans, and offers up to 8% interest for 3 year bonds
of a minimum of £5000. I feel that this has to be a
scam. I checked the FCA register and the company has
been registered since July last year – a big red flag in
my opinion that they are such a new company. They
are not covered by the FSCS and do not adhere to antimoney laundering regulations. They claim to offer
asset backed securities that will give people the
impression that the ‘bonds’ they are buying are safe
investments, yet a quick look at the risks they state at
the bottom of their page reveal these are highly risky
investments with no guarantees, no assets (or at least
quality ones) to back them up so far as I can tell. My
guess is that they will take peoples money and will go
out of business before the bonds are redeemable. In
addition, they also claim to have a ‘withholding tax’
on the interest paid of 20%, which also speaks for
itself. There are red flags all over their literature”
Another wrote: ““[t]headvert has no mention that capital is at risk and makes
it seem like this is a deposit account. It isn’t, it’s a loan
to the company when the investor could lose all their
money. There is nothing to indicate that to the
In January 2017, another wrote:
“Re.London Capital and Finance Group
I wrote a few back regarding the above company. Just by way of
an update. They have raised £30m now and as far as I can see
they have just “lent” the money to related companies controlled
by the main players… [the letter then lists two individuals,
neither of whom were obviously connected to LCF (i.e. they
were not LCF’s Approved Persons)].
[The letter then includes a sentence alleging that one of the
individuals had been making lavish purchases.]
They trade on the fact that they are FCA regulated well they have
a consumer credit license, they are not authorised for investment
purposes or dealing with the general public re investment… the
product is being heavily mis sold […]
I have copied in [an FCA employee in the Unauthorised Business
Department] at the FCA too… hopefully between you things will
This letter was not acted upon because the FCA failed to make the connection between LCF and “London Capital and Finance Group”, as the correspondent described the company.
Dame Gloster adds that the FCA could not establish whether it did or did not receive a now-famous letter warning the FCA of LCF’s red flag behaviour by IFA Neil Liversidge. She concluded that it did receive the email, but its complaints procedures were in such disarray that it would not have acted on it anyway.