LCF branded 'one of largest conduct regulatory failures in decades'

In a report published today (June 24), it urged the FCA to implement a change in culture to protect consumers and financial markets.

The MPs argued there was an “over-reliance on collective responsibility” at the regulator which might "deny visible accountability".

They said: "It is not readily justifiable for the FCA to require the firms that it regulates to adhere to the principles of the Senior Managers Regime but seemingly not to apply similar principles internally when there are failings of practice and culture in the organisation.

"There are doubts as to whether the FCA board has met the standards which it seeks to impose on others.

"An over-reliance on collective responsibility may deny visible accountability and could lessen confidence in the organisation as a result."

The report comes following an independent investigation into the FCA’s handling of LCF by Dame Elizabeth Gloster, published in December last year.

Gloster rebuked the regulator for "significant gaps and weaknesses" in its policies and practices and said the watchdog had failed to properly regulate the now collapsed company and that its handling of information from third parties regarding the business was "wholly deficient".

Following this the Treasury committee launched its own inquiry into the FCA’s regulation of LCF in February 2021 in order to examine the changes that have been made since the publication of her report, and to make further recommendations to the FCA and HM Treasury. 

The whole saga dates back to December 2018, when the regulator directed LCF to withdraw its promotional material for mini-bonds as it was “misleading, not fair and unclear” and the following month, LCF entered administration.

In their report the MPs also said it was “disappointing” that measures to address fraud via online advertising have not been included in the draft Online Safety Bill. 

Last month, the government announced measures to tackle some online scams in the bill but stopped short of including fraud via advertising, emails or cloned websites.

The Treasury committee said: “This is a missed opportunity to help prevent another LCF-type event. 

“The government must intervene urgently to include measures to address fraud via online advertising in the Online Safety Bill to prevent further harm to customers being offered fraudulent financial products.”

The committee also urged the FCA to intervene and ban a financial promotion where it breaches its rules.

It said: “In the case of LCF, the FCA did not have appropriate policies to allow it to intervene in LCF’s financial promotions breaches. 

“In future, the FCA should be more interventionist and should make more frequent use of its powers rather than maintaining a culture of risk aversion.”

The report added the committee supports the views of the current FCA leadership that the organisation needs to become a more “proactive”, “agile”, “decisive”, and joined-up regulator that is willing to act to protect consumers and financial markets. 

It said the FCA board should set itself an end date for the transformation programme and create milestones at which changes in culture can be reviewed, and that this should be published.

Commenting on the report chairman of the Treasury committee Mel Stride said: “The collapse of LCF is one of the largest conduct regulatory failures in decades.

"Dame Elizabeth Gloster identified a litany of failings at the FCA regarding its regulation of LCF, and highlighted a range of changes needed at the FCA under its new leadership.

“The Treasury Committee has made some further recommendations for the regulator and the government to help prevent another LCF.

“This includes setting deadlines and milestones for the FCA’s transformation programme, expediting HM Treasury’s consultation into the regulation of mini-bonds, and including measures to address fraud via online advertising in the Online Safety Bill.”

LCF compensation

In April, it was announced that the FCA is expected to pay compensation to a small number of LCF investors who complained about the regulator’s handling of their case.

This came as the government set up a compensation scheme for LCF victims through which it will reimburse individual bondholders up to £68,000.

The government-funded scheme is available to all LCF bondholders who have not already received compensation from the Financial Services Compensation Scheme and represents 80 per cent of the compensation they would have received had they been eligible for FSCS protection.

The FSCS has already paid out more than £57m to around 2,800 LCF bondholders where it found investors had been advised by the firm. Anyone without evidence of advice has so far missed out.

In the report published today, the committee said it welcomed the approach taken by HM Treasury to compensate LCF victims, saying it had “struck a balance between consumer responsibility and the FCA’s failings”.

But it said the HM Treasury consultation on mini-bond regulation should be expedited. 

“The perimeter of regulation determines what the FCA can and cannot regulate. The case of LCF illustrates how important it is that the FCA looks at a regulated firm’s activities both within and outside of the perimeter,” it said.

“Dame Elizabeth described the 'halo effect' as the 'imprimatur of respectability' that regulation gives a firm by using its FCA-authorised status to promote risky products to attract investors for an unregulated activity. 

“This 'halo effect' seems inevitable as long as authorised firms also carry out unregulated activities so we recommend that the FCA should require authorised firms to make clear explicitly the risks to customers associated with their unregulated activities.”

It concluded that the FCA should be given the power to recommend changes to the perimeter of regulation formally to HM Treasury.

sonia.rach@ft.com

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