FCA boss vows transformation after MPs slam historic ‘culture’ failings over mini-bond collapse
The Financial Conduct Authority said it was embarking on a “wide-ranging transformation programme” after MPs lambasted it for historic failings relating to the collapse of London Capital & Finance (LCF).
A report from the influential Treasury Select Committee of MPs said that a change in the FCA’s “culture” was required to protect consumers from a similar scandal in the future.
LCF sold so-called mini-bonds to investors, claiming to have invested in hundreds of high-growth SMEs. Many customers believed they were investing in regulated ISAs rather than unregulated mini-bonds; though LCF was authorised, the product itself was not.
The FCA failed to investigate LCF until late 2018, eventually banning the firm’s aggressive and misleading advertising, despite financial advisers flagging concerns with the regulator several years earlier.
The mini-bonds firm went into administration a month later, having issued 16,706 mini-bonds to a total value of £237,207,497. Bondholders were told to expect a return of around 20 per cent, before a Treasury compensation scheme was launched.
An independent report by the Rt Hon Dame Elizabeth Gloster published last year found “the FCA did not discharge its functions in respect of LCF in a manner which enabled it effectively to fulfil its statutory objectives.”
Read more: FCA boss says regulator will crank up post-Brexit checks on foreign firms
Treasury Select Committee chair Mel Stride described the LCF collapse as “one of the largest conduct regulatory failures in decades.”
The Committee’s report concluded that the FCA needed to set itself “milestones at which changes in culture can be reviewed” and that there were “doubts as to whether the FCA Board has met the standards which it seeks to impose on others.”
The MPs also found that an “over-reliance on collective responsibility” could lead to a lack of accountability.
It also suggested that recruitment pools should be expanded, after the watchdog’s Head of Supervision was appointed the boss of transition programme in an internal appointment.
New broom
New FCA CEO Nikhil Sathi told the Treasury Committee during their inquiry that the organisation needed to become more “proactive” and “agile” in a fast-moving digital climate, a conclusion with which the Committee agreed.
Last night an FCA spokesman said “we are profoundly sorry for the mistake we have made over LCF and are committed to implementing the recommendations of The Gloster Report at pace.”
Rathi’s appointment has been part of a major shake-up at the top of the FCA. City PM understands that by next year some seven of ten members of the firm’s Executive Committee will have joined after the LCF scandal.
Last night David Anthony Scott was appointed as Interim General Counsel ahead of a wider global search in line with the Committee’s recommendation that the watchdog looks further afield for top talent.
Former boss Andrew Bailey, now the Governor of the Bank of England, has also apologised for the FCA’s failure to safeguard consumers.
An FCA source said Rathi’s transformation programme would allow it become a “digital and data-led regulator, to act quicker, prevent harm quicker and further help ensure the best firms can thrive in the UK.”
Read more: FCA looks into high risk investment promotion amid Bitcoin boom and TikTok ‘finfluencer’ trend
Doubling down on digital
One of the key recommendations of the report was for the Government to include measures to address fraud via online advertising – where firms like LCF market their products – in the coming Online Safety Bill.
The Treasury Committee described its current absence as a “missed opportunity to help prevent another LCF-type event.”
The FCA has called for a similar inclusion, dealing as it is with the growth in social-media friendly advertisements – including addressing the so-called ‘FinTok’ influencers who recommend certain shares and investment products to thousands of followers.
Celebrity influencers have also been the subject of the FCA’s opprobrium in recent years for hawking financial products on social media, including crypto trading platforms.
The FCA has published proposals to strength financial promotion rules for high-risk investments to help retail investors make more effective decisions.
Read more: Rishi Sunak vs Boris Johnson: to spend or not to spend?