FCA pledges crackdown on fraud following LCF minibond scandal

·3-min read
Nikhil Rathi, CEO of Financial Conduct Authority. Photo: Tolga Akmen/AFP via Getty
Nikhil Rathi, CEO of Financial Conduct Authority. Photo: Tolga Akmen/AFP via Getty

The boss of the UK's chief financial regulator pledged changes following concerns the Financial Conduct Authority (FCA) may have fallen short on standards in its handling of the £237m London Capital & Finance scandal.

Nikhil Rathi, FCA CEO said in a report released by the Treasury Committee that the regulator is "taking forward wider changes in our structure, culture and strategic investment programme to ensure that we are able to identify and assertively tackle misconduct in the financial services sector."

He also said the regulator would take a tougher stance on fraud outside of its remit, but said this would come at a cost.

Pushing back on accusations against managers that the scandal has left the regulator open to accusations of hypocrisy, he said that even though the watchdog is not held to rules known as the 'Senior Managers Regime' the FCA has "adopted and applied its principles to our senior managers, as we expect those individuals to meet standards of professional conduct as exacting as those required in regulated firms, and for those individuals to be held accountable for functions they personally direct."

The response follows a tense back and forth between investors, LCF, the government and the FCA in recent years.

In 2019, it emerged that LCF raised more than £237m ($328m) selling what many investors believed were fixed rate ISAs. The investment products, which were actually high-risk bonds, were advertised alongside savings accounts on comparison sites and were advertised on Google alongside searches for “best ISA.”

LC&F collapsed at the start of 2019 and administrators had warned that investors could get as little as 25% of their money back. The administrators warned in August 2019 that they are facing a “concerted and very likely co-ordinated” attempt to frustrate the administration process and investors are likely to face long delays in getting any money.

Read more: 'Perfect storm' blamed for scandals like London Capital Finance

More than 12,000 investors have been facing uncertainty over how much they will get back and when. Regulators and lawmakers have been criticised for their slowness to act and lawyers acting for some of the bondholders previously accused them of frustrating attempts to claim compensation.

The FCA has always argued it was powerless to do anything because mini-bonds are unregulated.

It resulted in criticisms of the regulator and an investigation led by Dame Elizabeth Closter, a retired judge. She found the FCA had missed a series of warning signs and singled out managers including former head Andrew Bailey. Bailey now heads up the Bank of England.

A near-500-page report released in December last year concluded that there were “significant gaps and weaknesses in the FCA’s policies and practices” that meant opportunities to stop LCF were missed and red flags ignored.

In June, LCF investors also submitted complaint about the FCA to the Independent Financial Regulators Complaints Commissioner.

It detailed alleged avoidance of compensation claims for victims of financial crime.

Submitted by a group of LCF investors, the document was overseen on a pro bono basis by law firm Shearman & Sterling.

Shearman & Sterling said that over 1,000 LCF investors have complained to the FCA concerning its conduct in failing to supervise LCF.

In July, the FCA published documents setting out progress to date following the scandal, including on staff training, strengthening processes and policies, and improving how is shares and use information.

Read more: What is inflation and why is it important?