Financial watchdog failed to properly regulate collapsed mini-bond scheme

The Financial Conduct Authority (FCA) failed to properly regulate and supervise mini-bond operation London Capital & Finance (LCF) before it went into administration leaving 11,600 investors facing losses of £237 million.

The findings were made in an independent report for the Government of the financial regulator’s actions. It makes nine recommendations for the FCA and a further four for the Government.

Dame Elizabeth Gloster said in her delayed report, which had been due in November, that the FCA must focus on improving their internal authorisation and supervision processes.

The Government and FCA said they have accepted the recommendations in full.

The Treasury will also set up a new compensation scheme for LCF bondholders who lost out from the collapsed scheme.

In August, the Financial Services Compensation Scheme (FSCS) said it had paid out just over £20 million in compensation.

The report comes a week after the FCA said it would ban the mass-marketing of speculative illiquid securities to amateur, or retail investors.

It means that so-called mini-bond schemes will be unable to put adverts in front of normal pension savers, and makes permanent a ban that has been in place since January.

Following the report, the Government said it was committed to launching a consultation in the new year on the regulation of non-transferable debt securities.

Ministers will also work with the regulator and HM Revenue and Customs to work on ways to fill potential gaps in responsibilities for certain investments.

The Department for Culture, Media and Sport will also be told to prioritise fraudulent online advertising of fake investment schemes to avoid investors being caught out.

Charles Randell, chairman of the FCA, said: “We accept all the recommendations that have been made to the FCA and we are profoundly sorry for the mistakes we have made.

“The collapse of LCF has had a devastating effect on many investors and we will do everything we can to conclude our investigations as quickly as possible and support the recovery of further funds for investors.”

Nikhil Rathi, chief executive of the FCA, added: “We know that the FCA must make faster and more effective decisions, prioritise the right outcomes for consumers, markets and firms, and reform our approach to intelligence and information sharing.

“Our continuing action plan, specifically on our wider transformation programme and high-risk consumer investments, seeks to do this.”

He said the FCA would be restructuring its policy, supervision and competition functions under two new executive directors and hire a data chief.

Bankers on the FCA’s register will lose their regulatory permissions if they fail to earn any regulated income for at least 12 months, to avoid confusing investors in unregulated schemes.

New measures to tackle pension scams will be raised with the Department for Work and Pensions and improved training for staff will also take place, he added.

John Glen, Economic Secretary to the Treasury, added: “I would like to thank Dame Elizabeth for her work and welcome the FCA’s apology to LCF bondholders and their commitment to implement all of the report’s recommendations.

“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.”