The Financial Conduct Authority’s Regulation of London Capital & Finance plc Contents

Conclusions and recommendations

Individual responsibility of FCA senior management

1.It is not immediately clear that Mr Bailey’s concerns about the distinction between “responsibility” and “culpability” in Dame Elizabeth’s draft report would have “compelled” him to make his “free-standing” objection. However we accept that it is likely that his strong concerns over the “responsibility” vs “culpability” point may have led him to make his “free-standing” objection to the inclusion of named responsible individuals, and that in the absence of his concerns about the distinction between “responsibility” and “culpability” he might not have put forward his “free-standing” objection. We cannot of course be certain about this and if we were satisfied that there was strong and clear evidence that Mr Bailey had misled the Committee on this point, it would be a serious matter. But the evidence does not support that particular conclusion, and we do not believe that Mr Bailey misled the Committee. We note that the revisions made by Dame Elizabeth to the draft report, clarifying that an identification of responsibility was not an attribution of culpability, met the essence of Mr Bailey’s request, and we believe that it is in the wider interest to regard this issue as closed. (Paragraph 31)

2.We welcome the FCA’s approach to recruitment for some senior executive roles, which involved global searches, but we believe that the FCA was wrong not to have engaged in a fuller recruitment programme for the Executive Director for Transformation role, including the consideration of potential recruits from outside the FCA. It appears that there was a missed opportunity to consider fresh leadership for the Transformation programme. We also question whether there would have been a significant slowdown in the progress of the Transformation programme had Megan Butler not been recruited to oversee it. Another recruit might have been supported by Megan Butler for at least a period to help assist with this role, or Megan Butler might have taken on that role on a temporary basis whilst the recruitment process was conducted. (Paragraph 41)

3.Given that Dame Elizabeth’s report cited Megan Butler as bearing responsibility for important areas of failure and that her recruitment was conducted internally with just one alternative candidate, we understand why many will feel that “a buck that does not stop with an individual stops nowhere” when it comes to the personal consequences for those involved with the failings at the FCA in relation to LCF. (Paragraph 42)

4.We recommend that the default position should be that the FCA take a holistic approach when recruiting for critical roles, rather than engaging in a restricted recruitment process. For time-critical appointments, the FCA should consider appointing on an interim basis until a wider search, considering where appropriate both internal and external candidates, has been completed. (Paragraph 43)

5.We accept that a degree of shared responsibility is desirable and necessary in an organisation such as the Financial Conduct Authority. However, 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. The FCA Board should reflect on whether it has, in this case, met the standards which it seeks to impose upon others. We believe that there are doubts as to whether it has. (Paragraph 48)

6.We recognise that the demands of some of these senior executive positions at the Financial Conduct Authority are heavy, and that individual accountability for organisational failings may deter strong candidates from applying for them. But an over-reliance on collective responsibility may deny visible accountability and could lessen confidence in the organisation as a result. We are not wholly persuaded that the balance struck by the FCA on this occasion has strengthened its standing in the eyes of those it regulates or the wider public. (Paragraph 49)

Culture at the FCA

7.The FCA plays a vital role as the UK’s financial conduct regulator and prudential regulator for most financial services firms. Its work affects millions of financial services customers and it is important that it has the right culture to facilitate its objectives. We support the views of the current FCA senior leadership team that the organisation needs to become a more “proactive”, “agile”, “decisive” and joined-up regulator that is willing to act, including in the face of uncertainty, to protect consumers and financial markets. (Paragraph 63)

8.We welcome the FCA’s ongoing transformation programme which has cultural change as one of its priorities. We however note that the FCA has undergone numerous structural and operational changes since its inception, with more changes expected as part of the ongoing transformation. We recognise that culture change takes time but recommend that the FCA Board sets itself an end date for the transformation programme and that it creates milestones at which improvements and evidence of changes in culture can be reviewed. These milestones and reviews should be put into the public domain. At the completion of the transformation programme, the FCA should ensure it has in place measures that will ensure that its improved culture is maintained and embedded. (Paragraph 64)

9.The FCA accepts that there were failings in the contact centre during the Relevant Period as identified in Dame Elizabeth’s report, and has begun taking steps to address these. We welcome the operational improvements that have been made since the publication of Dame Elizabeth’s report, including the training of call-handlers and changes to contact centre policies. (Paragraph 75)

10.The FCA should ensure that it keeps its contact centre policies and training up to date to ensure clarity and consistency, not just in relation to firms such as LCF but to the wider organisation. (Paragraph 76)

The regulatory perimeter and the scope of the FCA’s remit

11.The case of LCF illustrates how important it is that the FCA looks at a regulated firm’s activities both within and outside the perimeter of regulation. The FCA’s failure to consider issues raised in LCF’s unregulated bond business led to red flags being missed. (Paragraph 92)

12.The “halo effect” appears to be inevitable as long as authorised firms also carry out unregulated activities. We reiterate the recommendation made by our predecessors that the FCA should ensure that it requires authorised firms to make clear explicitly the risks to customers associated with their unregulated activities. (Paragraph 93)

13.In future, the FCA should set out in its annual perimeter report how its supervisory strategies and policies reflect the activities of authorised firms both within and outside the perimeter. (Paragraph 94)

14.The perimeter is complex, and while the FCA has some limited powers to act beyond the perimeter, it does not have the remit to actively monitor or intervene outside the perimeter. We recognise the need for the FCA to make prioritisation decisions as its resources are finite. (Paragraph 95)

15.We welcome the ongoing dialogue between the Treasury, the FCA, and other financial regulators on the perimeter, but the failings in the FCA’s regulation of LCF and constant movement of the perimeter are signs that further action is required. (Paragraph 96)

16.We therefore reiterate a recommendation made by a previous Treasury Committee, that the FCA be given the formal power and remit to be able to recommend formally to the Treasury changes to the perimeter of regulation, where that would enhance its ability to meet its objectives, in particular to prevent consumer harm. The FCA should set out any costs, both to firms and consumers. It would then be for the Treasury to consider such a recommendation promptly. All such recommendations and Treasury responses should be publicly disclosed. (Paragraph 97)

17.Both the FCA and the Treasury accept that the scope of the FCA’s remit is broad and continues to increase. The breadth of the scope has had some operational impacts on the FCA’s ability to carry out its work. We note that the Treasury’s intention is to consider the scope when the ongoing FCA transformation programme has been delivered; but the timescales for delivery of the transformation programme are unclear. (Paragraph 103)

18.If the FCA Board were to set itself an end date for the transformation programme, as we recommend in Chapter 2, the Treasury would have a clear indication of when to begin its consideration of the scope of the FCA’s remit. (Paragraph 104)

19.Any changes to the perimeter must be matched with appropriate changes in the FCA’s resources, and the FCA should republish its priorities. The Treasury should publish a policy statement on how it will analyse changes to the FCA’s perimeter and what factors it will take into account. (Paragraph 105)

20.The FCA recognises that it has a statutory duty to protect customers from fraud. In the case of LCF, the regulator fell short, due to a culture that saw fraud as principally a matter for the police, and its lack of enthusiasm to look beyond the perimeter. Dame Elizabeth recommended that “the FCA should ensure that its training and culture reflect the importance of the FCA’s role in combatting fraud by authorised firms.” We note the steps the FCA has taken to address the culture of dealing with fraud, including training staff and launching another phase of its Scamsmart campaign. (Paragraph 122)

21.The FCA should develop a strategy for how it will approach fraud risks that are outside the perimeter of regulation but involve authorised firms. That strategy should be set out in the next perimeter report. (Paragraph 123)

22.The FCA’s work to prevent fraud is done in partnership with other bodies such as the National Crime Agency and Serious Fraud Office. But the police have limited resources and personnel devoted to tackling fraud, and the FCA currently does not have the full powers of a law enforcement body. (Paragraph 124)

23.There may be scope for the Government to consider whether the FCA should be given more powers to enable it to investigate fraud and financial crime. We will continue to consider this as part of our Economic Crime inquiry. (Paragraph 125)

24.The unusual way in which LCF used mini-bonds and the high level of risk associated with any such investments highlight the need for the Treasury’s intervention. We welcome the Treasury’s ongoing consultation on the regulation of non-transferable debt securities but note the delay in its launch. (Paragraph 138)

25.In light of the recent failings of several mini-bond issuers and the nature of the existing regulatory arrangements, the Treasury should proceed with its analysis as soon as the consultation on the regulation of non-transferable debt securities closes, and it should aim to publish the outcome by the end of September 2021. In publishing its response, it should also publish a way forward that can be implemented rapidly. (Paragraph 139)

Consumer responsibility and compensation

26.The FCA should consider how it can improve its customer information so as to help equip customers with the ability to deal with the important financial decisions that they will have to take, and the risks that are attached to those decisions. (Paragraph 145)

27.The collapse of LCF brought about a huge degree of uncertainty for bondholders, some of whom were faced with an anxious wait for the publication of Dame Elizabeth’s report and further details of the Government’s compensation scheme. We welcome the approach that the Treasury has taken to compensate LCF bondholders, a scheme that we believe will provide substantial assistance to a very large proportion of those who have lost out and who have not qualified under other forms of compensation available. The Government has taken a reasonable approach in striking the balance between consumer responsibility for their investment decisions and recognising the FCA’s failure to discharge its functions in respect of LCF such that it fulfilled its statutory objectives. We support the principle of the Bill to provide compensation to LCF bondholders. (Paragraph 157)

28.The Government has taken a positive step by introducing the primary legislation necessary to establish the LCF compensation scheme. If the Bill has a successful passage through Parliament, the Treasury should ensure a smooth running of the compensation scheme, without any further delays, making sure that eligible LCF bondholders are clear about the process, and can receive payment as soon as practicable. (Paragraph 158)

29.We note that there are other ongoing discussions and channels by which LCF bondholders can seek compensation, such as through the FCA complaints scheme and through LCF administrators. The Treasury and the FCA should ensure that these discussions and channels are coordinated to the best extent possible, in order to prevent any detriment to customers. The Government should ensure that it is satisfied that the FCA’s complaint scheme is working appropriately. In our work scrutinising the FCA, we will consider the results of the ongoing consultation on the regulators’ complaints scheme. (Paragraph 159)

30.The FCA should provide us with an update on its resolution of LCF complaints by 30 September 2021. (Paragraph 160)

Financial promotions

31.We welcome the Treasury’s ongoing consultation on approving financial promotions. We trust that the results of the consultation will be published swiftly and the conclusions implemented as soon as possible. (Paragraph 167)

32.We welcome the steps taken by the FCA to change its approach to financial promotions, as well as introducing the “use it or lose it” programme. 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. (Paragraph 173)

33.The Financial Promotion Order would benefit from reform due to the increasing risks associated with the exemptions that allow customers to self-certify as high net worth or sophisticated. (Paragraph 179)

34.The Treasury should—as a matter of priority—re-evaluate the Financial Promotion Order exemptions to determine their appropriateness and consider what changes need to be made to protect consumers. (Paragraph 180)

35.It is very disappointing to see that despite the numerous representations made to the Government, measures to address fraud via online advertising have not been included in the draft Online Safety Bill. This is a missed opportunity to act and potentially help prevent another LCF-type event. The increasing frequency of fraudulent activity online that leads to scams and financial harm is alarming, and the Government must intervene as a matter of urgency. (Paragraph 190)

36.We note the Government’s intention to consider additional legislative and non-legislative solutions to tackle fraud via advertising, emails or cloned websites, including the online advertising programme, but we believe quicker action is required to protect consumers and help the FCA address the issue adequately. (Paragraph 191)

37.We recommend that the Government should include measures to address fraud via online advertising in the Online Safety Bill, in the interests of preventing further harm to customers being offered fraudulent financial products. (Paragraph 192)

38.Pending any legislative changes, the FCA should continue to work with online platforms such as Google to remove misleading and fraudulent adverts as quickly as possible, to protect customers from scams. (Paragraph 193)

Published: 24 June 2021 Site information    Accessibility statement