The Government has published its final report on the outcome of the Independent Investigation into FCA’s regulation and supervision of London Capital & Finance plc.
Dame Elizabeth Gloster delivered her report to FCA on 23 November, and this was laid before Parliament on 17 December with FCA’s response.
The report concludes that FCA did not effectively supervise and regulate LCF and makes 9 specific recommendations to FCA on how it should improve its internal authorisation and supervision process. It also makes 4 recommendations to Treasury on the regulatory regime. Treasury will action all the points, and notes it is reviewing the regulation of non-transferable debt securities while FCA has already banned the promotion of mini-bonds to retail investors. Treasury and FCA will work together to address concerns over a potential gap in responsibilities between HMRC and FCA in relation to IFISAs.
The Government concludes that there are multiple, complex reasons why people lost money and, while the LCF administrators are working to recover money, the FSCS has compensated some bondholders and FCA will consider complaints through its complaint scheme, the Government will additionally set up a compensation scheme for LCF bondholders.
FCA’s response to the report, and the report on the Connaught companies, acknowledges its acceptance of the 9 recommendations made in the LCF review and 5 lessons in the Connaught review.
The 9 LCF recommendations are:
- that FCA staff should view firms holistically;
- contact centre staff should be better trained to refer calls on irregularities, should not reassure customers that regulated firms’ unregulated activities are safe and should not tell customers that FSCS will cover all claims;
- FCA should train its staff on analysing returns to determine irregular activity and on when to escalate cases to specialist teams;
- product and business model risks should be communicated to staff in charge of day to day supervision of relevant firms;
- FCA should have clear policies on what steps will follow repeat financial promotion breaches;
- FCA’s training and culture should recognise the importance of combatting fraud;
- FCA should improve its data capability better to access, cross-reference and determine red flags, and also include automation in alerts to staff;
- all aspects of the DES programme for flexible supervision firms should be fully embedded and operate efficiently; and
- FCA should consider whether regulated firms can provide it with better market intelligence.
In relation to Connaught:
- issues were caused by lack of clarity over roles of operators and other market participants and the extent of the regulatory perimeter;
- improvements to information sharing are needed;
- effective coordination and oversight across teams is key;
- continued investment and update to whistleblower systems is needed; and
- there were failings in the culture of the regulator.
FCA apologised for all the mistakes it made in supervision. Over the next 6 months, it will:
- restructure to join up its policy, supervision and competition functions;
- be better data-enabled;
- undertake a “use it or lose it” exercise on firms’ permissions, to reduce the risk of firms holding permissions simply to add credibility to their unregulated activities;
- take forward new measures to tackle pension scams;
- enhance training for all frontline supervisory, authorisation and enforcement staff;
- recruit additional prudential specialists;
- work with the Government to tackle scams, and work to disrupt scams.
It will consider complaints received as quickly as possible and has decided not to pay discretionary pay awards for Executive Committee members deferred in respect of the 2019/20 year.