FCA criticised for lack of accountability in LCF scandal

MPs have criticised the Financial Conduct Authority for “seemingly not” adhering to the requirements of individual accountability that it expects from the companies it monitors, in a rebuke of the watchdog’s handling of the £237m collapse of mini-bond issuer London Capital & Finance.

The watchdog should examine whether it “met the standards it seeks to impose on others” through accountability rules for senior executives, a report by the Treasury select committee said.

It added that it was “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”.

The FCA was also wrong, it said, for giving Megan Butler another senior role in the organisation without conducting an external recruitment process even though she bore responsibility for “important areas of failure” in the LCF collapse in 2019, which wiped out the savings of 11,600 investors.

The FCA welcomed the committee’s report and said it was “profoundly sorry” for the mistakes it made over LCF. It said it would formally respond “in due course” and pointed out that it was “committed to implementing” the recommendations of an earlier independent review by Dame Elizabeth Gloster, a former Court of Appeal judge.

In her final report on LCF, Gloster found that the FCA had failed in its most basic objective of protecting consumers. In subsequent testimony to the committee of MPs earlier this year, Gloster went further and was highly critical of Bank of England governor Andrew Bailey’s attempts to keep his name out of her report.

Her comments triggered a public dispute with Bailey, who told the committee it was “wrong” to name individuals in a draft of Gloster’s report as it would “inevitably result in misinterpretation, leading to unjustified accusations of personal culpability”.

The committee did not make any findings on Bailey’s role in the scandal and found no evidence to dispute his reasons for seeking to keep his name out of the Gloster report. It also sought to draw a line under the dispute between the two, concluding: “We believe that it is in the wider interest to regard this issue as closed.”

Gloster’s spokesperson said she considered the matter with Bailey “closed” and “endorsed” the committee’s view that the FCA should apply the same rules to itself that it expected the firms it regulates to follow. The Bank of England said Bailey declined to comment.

In other recommendations, the committee reiterated concerns over the FCA’s regulatory “perimeter” — the line between activities it does and does not police — which it first raised two years ago. LCF went bust after marketing high-risk, unregulated mini-bonds to savers and promising returns of up to 8 per cent. Although the company was authorised by the regulator, the mini-bonds it sold were not.

“The FCA’s failure to consider issues raised in LCF’s unregulated bond business led to red flags being missed,” said the committee, while acknowledging that the FCA’s resources precluded it from monitoring activities outside its remit.

The committee also reiterated a call made two years ago for the regulator to be given formal powers to lobby the government for changes to its perimeter, in order to prevent consumer harm. 

It added that cultural change was needed at the FCA and called on the watchdog to set an end date for its transformation programme as well as setting up milestones in order for progress to be evaluated. 

The FCA said it had “embarked on a wide-ranging transformation programme to build a data-led regulator able to make fast and effective decisions” and was providing the committee with updates.