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Report of the independent investigation into the events relating to the FCA’s regulation of London Capital & Finance (“LCF”) is published

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management


On 17 December 2020, the report of the independent investigation into the events relating to the FCA’s regulation of London Capital & Finance following the firm’s failure (the “LCF Investigation”) was published. On the same day, the FCA also published its background to the review and its response to the recommendations.

The FCA and its senior management are heavily criticised in the report, which concludes that the FCA did not discharge its functions in respect of LCF in a manner which enabled it to effectively fulfil its statutory objectives. The report contains nine recommendations for the FCA and a further four recommendations targeted at the wider regulatory regime.

Our observations

The FCA is currently undergoing a period of significant change under the leadership of its new CEO, Nikhil Rathi. This includes its significant transformation programme, part of which will involve the restructuring of the organisation to integrate competition and policy functions with supervision functions. The FCA will also be refreshing its data strategy, setting out its transformation plan to become a highly data-driven regulator, which will be overseen by a new Director of Technology who will report directly to the CEO.

These changes are relevant to the findings of the LCF Investigation which set out the need for change and provide some stark examples of failures across the organisation. As we set out below, the FCA’s failures occurred across different FCA teams, including the Contact Centre, the Authorisations and Supervision Divisions and the Financial Promotions Team. There are also criticisms in relation to the way the FCA handled information received from third parties as well as the confusing nature of the FCA Register. Notably, the FCA teams whose work was commended by the investigation were the Intelligence and Listing Transactions teams – both specialist teams with highly skilled staff.

The recommendations will require a number of significant changes to be made to the way the FCA goes about its business of supervising regulated firms, including in relation to the way in which it collates, assesses and acts on information about potential misconduct both inside and outside its regulatory perimeter. It is highly likely that changes resulting from the review will lead to an increase in the workload for staff involved in the authorisation and supervision of firms, particularly those in specialist teams across the FCA who are better placed to analyse relevant information. Staff in the Contact Centre will either need to undergo specialist training or the department will need to recruit individuals with particular skill sets otherwise there will be an inevitable increase of referrals from staff who will be less willing to make judgment calls, particularly in relation to allegations of serious irregularities and fraud across a wider range of products.

Making the changes required to adopt the review’s recommendations will be a significant challenge for the FCA, in a period in which it will need to continue to prioritise its finite resources and prioritise risks, at the same time as continuing with its business as usual workstreams, undertaking key projects such as the planned structural changes and managing its Brexit-related work. Staff morale will be low following these findings as well as those contained in the separate review into the failure of the Connaught Income Fund Series 1 and questions being raised over the FCA’s role in relation to the collapse of the Woodford Equity Income Fund.

The FCA made representations to the investigation about the “single regulator” approach, which it said is not found in other national regulatory regimes with a comparable financial services sector. One of the recommendations invites HM Treasury to consider the optimal scope of the FCA’s remit, including whether the remit should be restructured or even reduced. We are at key point for the FCA in terms of its structure and the way in which it regulates firms. This investigation highlights some further complex issues that will need to be considered by the FCA, HM Treasury and Parliament.

Background to the LCF Investigation

LCF marketed unregulated, high-risk investment products, sometimes referred to as “mini-bonds”, directly to retail investors. Following the identification of serious concerns regarding LCF’s conduct, the FCA intervened in December 2018 and imposed various requirements on LCF, including restrictions preventing LCF from issuing or approving further financial promotions. A month later, LCF entered into administration. By this time, LCF had raised in excess of £237 million from approximately 16,700 investment products issued to 11,625 bondholders. The FCA and the Serious Fraud Office are currently conducting criminal investigations into the circumstances surrounding the collapse of LCF. To date, the Financial Services Compensation Scheme has paid out just over £50.9 million in compensation to customers, but many bondholders face the prospect of seeing little of their investment returned.

In July 2019, Dame Elizabeth Gloster was formally appointed to investigate relevant events relating to the FCA’s regulation of LCF between April 2014 and January 2019. On 17 December 2020, the findings of the review were published in which Dame Elizabeth concluded that the FCA “did not discharge its functions in respect of LCF in a manner which enabled it effectively to fulfil its statutory objectives” and that investors “were entitled to expect, and receive, more protection from the regulatory regime…than that which, in fact, was delivered by the FCA.”

Overview of LCF Investigation findings

The LCF Investigation found that the root causes of the FCA’s failure to regulate LCF adequately were significant gaps and weaknesses in its policies and practices, which cumulatively meant that the FCA did not appreciate the true nature of LCF’s business or the risks that it posed to consumers.

The deficiencies were grouped into three categories:

1. The FCA’s unduly limited approach to its regulatory perimeter. The LCF Investigation found that staff were not encouraged to look outside the perimeter when dealing with authorised firms. As a consequence, LCF was able to use its authorised status to promote risky, and potentially fraudulent, non-regulated investments to unsophisticated retail investors.

2. A failure to consider LCF’s business holistically. The FCA was aware that LCF had repeatedly breached the financial promotions rules. However, it failed to consider whether the issues indicated wider concerns across the business, including whether LCF might have obtained, or used, its authorised status to attract investors to its unregulated bond business.

3. Inadequate training of staff. The LCF Investigation found that FCA staff in the Authorisation and Supervision Divisions, as well as the Financial Promotions Team, had not been trained sufficiently to analyse a firm’s financial performance to detect indicators of fraud or other serious irregularity. It was in fact staff in the Listing Transactions Team and the Intelligence Team, with relevant backgrounds relating to analysing financial information, who identified the concerns in relation to LCF in late 2018.

Specific LCF Investigation questions

The LCF Investigation considered five specific questions regarding the FCA’s regulation of LCF. We have summarised the conclusions below.

(1) Were the permissions granted to LCF appropriate for its business activities?

The review concluded that the permissions granted to LCF were not appropriate for the business that it carried on. In particular, LCF held permissions for regulated activities that it did not carry on. The FCA received documents which evidenced that LCF was not generating any revenue from regulated activities and had no clients in relation to its regulated activities. This was not considered in conjunction with the nature and scale of LCF’s unregulated business and the FCA did not reconsider the firm’s permissions. Many investors said that, but for the firm’s regulated status, they would not have invested in LCF.

(2) Did the FCA adequately supervise LCF’s compliance with its rules and policies?

The FCA adopted a limited strategy towards supervising the approximate 50,000 consumer credit firms which transferred from the jurisdiction of the Office of Fair Trading to the FCA in April 2014. As a result, firms like LCF were not subject to any proactive supervision. Whilst the FCA had recognised the need for an effective programme of proactive supervision, it had failed to embed one as at January 2019. In any event, the FCA’s limited reactive approach in relation to the supervision of LCF was insufficient.

(3) FCA’s handling of information from third parties regarding LCF

The LCF Investigation found that the FCA’s handling of information from third parties was “wholly deficient” and “an egregious example of the FCA’s failure to fulfil its statutory objectives”. In particular, the FCA’s Contact Centre and Supervision Division failed to respond to repeated allegations by third parties that LCF might be engaged in fraud or serious irregularity. The root cause of this was the absence of appropriate internal policies in relation to how such information was to be treated when it related to the unregulated activities of a regulated firm.

(4) Did the FCA have in place appropriate rules and policies relating to the communication of financial promotions by LCF?

Whilst the review found that the FCA had appropriate rules in place to monitor LCF’s financial promotions and had sufficient powers under the relevant legislation to monitor and intervene in LCF’s promotions, it found that the FCA did not have appropriate policies in place. The LCF Investigation concluded that the FCA’s policies relating to intervention in connection with the financial promotion rules were too cautious and lacked clarity, which resulted in the FCA failing to take appropriate action in response to LCF’s repeated breaches of the financial promotion rules in a timely fashion.

(5) Other matters

The LCF Investigation was also asked to consider whether there were any other matters relevant to the question of whether the FCA discharged its functions. It made six additional findings:

1. Investors were attracted to the LCF bonds by the fact that they could be purchased in an ISA wrapper. However, a lacuna in the way in which ISAs are regulated resulted in neither the FCA nor HMRC considering the fact that LCF’s bonds did not comply with the relevant legislative requirements. The LCF Investigation did not criticise either body in relation to this.

2. The FCA’s failures are not excused or mitigated by the risk associated with LCF’s products. In particular, the FCA had access to information that investors did not which suggested the bonds were riskier than the high rates of return suggested.

3. Rather than informing investors about the potential risks, the FCA Register in fact gave an appearance of respectability to LCF through its authorised status, which extended to its unregulated bond business. Investors took comfort from this status. LCF was not listed in the FCA’s Warning List or on the FCA’s ScamSmart website.

4. The fact that LCF’s accounts were audited did not change the conclusions that the FCA’s regulation of LCF was deficient, particularly as the FCA had received information that was unlikely to be unavailable to the auditors, including clear warnings from third parties.

5. The FCA needs to raise awareness among its staff of the important role it plays in combatting fraud.

6. The FCA ought to have intervened much earlier and its later intervention does not excuse its earlier failures. However, the review noted the commendable work carried out by the Listing Transactions and Intelligence teams.


The LCF Investigation made nine recommendations, all of which the FCA accepted. In summary, the recommendations, which are targeted at the FCA’s policies and practices, set out that:

1. the FCA should direct staff responsible for authorising and supervising firms to consider a firm’s business holistically, where appropriate;

2. the FCA should enhance the Contact Centre’s policies in relation to allegations of fraud or serious irregularities as well as in relation to communications with consumers in respect of unregulated businesses and products;

3. the FCA should provide appropriate training to staff in the Authorisations and Supervision Divisions in relation to identifying fraud and serious irregularities and when to escalate concerns to specialist teams;

4. senior management should ensure that they communicate appropriate information to staff who are involved in the day-to-day supervision or authorisation of firms in relation to product and business model risks, which are identified by the FCA in its internal or external publications as being current or emerging and of sufficient seriousness to require ongoing monitoring;

5. the FCA should have appropriate policies which clearly set out the steps that should be taken when a firm repeatedly breaches the financial promotion rules;

6. the FCA should ensure that its training and culture reflect the importance of the FCA’s role in combatting fraud committed by authorised firms;

7. the FCA should, to the fullest extent possible, have an single electronic system in place in which all data relevant to the supervision of firms is stored and allows for red flags or other key risk indicators to be accessed and cross-referenced;

8. the FCA should take urgent steps to ensure that all the key aspects of the Delivering Effective Supervision programme that related to the supervision of flexible firms are fully embedded and operating effectively; and

9. the FCA should consider whether it can improve the way it uses regulated firms as sources of market intelligence.

The LCF Investigation also made four recommendations targeted at the regulatory regime as follows:

10. HM Treasury should consider addressing the lacuna in the allocation of ISA-related responsibilities between the FCA and HMRC;

11. HM Treasury should consider whether Article 4 of MiFID II or section 85 of FSMA should be extended to non-transferable securities such as LCF bonds;

12. HM Treasury should consider the optimal scope of the FCA’s remit, including whether the remit should be restructured or even reduced; and

13. HM Treasury and other relevant Government bodies should work with the FCA to ensure that the legislative framework enables the FCA to intervene promptly and effectively in marketing and sale through technology platforms, and unregulated intermediaries, of speculative illiquid securities and similar retail products.

External links

FCA press release

Report of the LCF Investigation

FCA Response to the Report of the LCF Investigation


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