LCF issued mini-bonds, an unregulated investment product that typically offers high returns, reflecting the high risks involved. The FCA directed LCF to withdraw its promotional material for mini-bonds in December 2018 as it was “misleading, not fair and unclear”.

The following month, LCF entered administration. Following a request from the previous Treasury Committee, HM Treasury agreed to a request from the FCA for an independent investigation into the collapse of LCF.

Rt Hon. Dame Elizabeth Gloster DBE was appointed to lead the investigation, the findings of which were published in December 2020. The Treasury Committee launched its inquiry into the FCA’s regulation of LCF in February 2021 in order to consider Dame Elizabeth’s findings, examine the changes that have been made since the publication of her report, and to make further recommendations to the FCA and HM Treasury. The conclusions are summarised below:

The Committee supports the views of the current FCA leadership that the organisation needs to become a more “proactive”, “agile”, “decisive”, and joined-up regulator that is willing to act to protect consumers and financial markets. The FCA Board should set itself an end date for the transformation programme and create milestones at which changes in culture can be reviewed, which should be published.
It is 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. There are doubts as to whether the FCA Board has met the standards which it seeks to impose on others. An over-reliance on collective responsibility may deny visible accountability and could lessen confidence in the organisation as a result.
It is disappointing that measures to address fraud via online advertising have not been included in the draft Online Safety Bill. This is a missed opportunity to help prevent another LCF-type event. The Government must intervene urgently to include measures to address fraud via online advertising in the Online Safety Bill to prevent further harm to customers being offered fraudulent financial products.
The Committee welcomes the approach that HM Treasury has taken to compensate LCF bondholders, which has struck a balance between consumer responsibility and the FCA’s failings. If the Compensation Bill passes through Parliament, HM Treasury should ensure that eligible LCF bondholders receive payment as soon as is practicable.
A financial promotion is a communication that contains an invitation or inducement to engage in a financial product or service. The FCA is able to intervene in respect of breaches to financial promotions rules and can ban a promotion. In the case of LCF, the FCA did not have appropriate policies to allow it to intervene in LCF’s financial promotions breaches. In future, the FCA should be more interventionist and should make more frequent use of its powers rather than maintaining a culture of risk aversion.
HM Treasury’s ongoing consultation on the regulation of mini-bonds is welcome but the delay in its launch is noted. HM Treasury should proceed with its analysis as soon as the consultation closes, and publish the outcome by the end of September 2021, setting a way forward that can be implemented rapidly.
The perimeter of regulation determines what the FCA can and cannot regulate. The case of LCF illustrates how important it is that the FCA looks at a regulated firm’s activities both within and outside of the perimeter. Dame Elizabeth described the “halo effect” as the “imprimatur of respectability” that regulation gives a firm by using its FCA-authorised status to promote risky products to attract investors for an unregulated activity. This “halo effect” seems inevitable as long as authorised firms also carry out unregulated activities so we recommend that the FCA should require authorised firms to make clear explicitly the risks to customers associated with their unregulated activities. The FCA should be given the power to recommend changes to the perimeter of regulation formally to HM Treasury.

Chair's comments

Commenting on the Report, Rt Hon. Mel Stride MP, Chair of the Treasury Committee, said:

“The collapse of LCF is one of the largest conduct regulatory failures in decades.

“Dame Elizabeth Gloster identified a litany of failings at the FCA regarding its regulation of LCF, and highlighted a range of changes needed at the FCA under its new leadership.

“The Treasury Committee has made some further recommendations for the regulator and the Government to help prevent another LCF.