Regulator Failed on London Capital & Finance

The former head of the FCA and current governor of the Bank of England Andrew Bailey came in for particular criticisms by the report.

2CE1C1A Signage is seen outside of the law firm Dechert LLP in Washington, D.C., U.S., August 30, 2020. REUTERS/Andrew Kelly
2CE1C1A Signage is seen outside of the law firm Dechert LLP in Washington, D.C., U.S., August 30, 2020. REUTERS/Andrew Kelly

LONDON (Within the Law) - Law firm Dechert has helped on a report which criticises the FCA’s handling of the London Capital & Finance collapse. The independent report criticised the regulator for failing to supervise the company which collapsed last year amid a mini-bond scandal. 

The Independent report helmed by Dame Elizabeth Gloster was damning in its criticism of the regulator. It singled out Andrew Bailey who was then head of the FCA and is now governor of the Bank of England. 

LCF collapsed in 2019 affecting more than 11,000 people who had invested over £237 million in the company through mini-bonds. These structured allow retail investors to invest in companies but are notoriously risky. 

The report found that there were ‘significant gaps and weaknesses’ in the FCAs measures. Bondholders, they said, “were entitled to expect, and receive, more protection from the regulatory regime in relation to an FCA-authorised firm (such as LCF) than that which, in fact, was delivered by the FCA”.

Mini-bonds are unregulated. However, London Capital & Finance was regulated by the FCA. They used this to give the impression through their marketing material that the mini-bonds were regulated leading investors to believe they would be subject to the same protections.  

“The FCA’s approach to its regulatory perimeter… was unduly limited,” said the report. “This made it possible for LCF to use its authorised status to promote risky, and potentially fraudulent, non-regulated investment products. Responsibility for the failure in respect of the FCA’s approach to its Perimeter rests with ExCo (the Executive Committee) and Mr (Andrew Bailey.”

Worse still the regulator was said to have been warned about mini-bond scams similar to LCF as far back as 2013 but did nothing. 

Dechert assisted Dame Elizabeth Gloster in compiling the report which has made nine recommendations each of which has been accepted by the FCA. They include a recommendation that the regulator should consider everything a firm does, not just its main line of business. 

It also said FCA staff should be better trained at spotting fraud. 

(Written by Tom Cropper, Edited by Klaudia Fior)


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