A damning report into one of the biggest investment scandals in decades has heavily criticised the Bank of England governor for failing to do more while in charge of Britain’s financial watchdog.
Andrew Bailey is named and shamed in the long awaited independent report into the London Capital & Finance (LCF) collapse, despite pleading with investigators for the report to be anonymised.
LCF collapsed at the start of 2018 after raising £237m ($322m) from almost 12,000 investors, many of them pensioners. Investors have been told they could get as little as 25% of their money back. LCF is subject to ongoing criminal investigations by both the FCA and the Serious Fraud Office.
The independent report by Dame Elizabeth Gloster into the collapse concluded the Financial Conduct Authority (FCA) failed to properly regulate LCF and suggested the watchdog may have inadvertently contributed to losses by dropping the ball so badly. Bailey was in charge of the FCA from 2016 until 2020.
“In all the circumstances, the Investigation concludes that the Bondholders, whatever their individual personal circumstances, were entitled to expect, and receive, more protection from the regulatory regime in relation to an FCA-authorised firm (such as LCF) than that which, in fact, was delivered by the FCA,” Dame Elizabeth wrote.
Mel Stride MP, chair of the Treasury Select Committee, said: “The report exposes a litany of failings at the FCA.”
‘One of the most serious cases of financial wrongdoing’
The FCA authorised LCF to sell a limited number of products but the company used that authorisation to pretend the FCA backed its “mini-bonds” — high-risk debt products that ultimately went bad.
“Investors in LC&F thought they were buying secured income bonds in a highly regulated environment,” said Thomas Donegan, a partner at law firm Shearman & Sterling, which is advising some of the LCF victims. “Instead, they were victims of one the most serious cases of financial wrongdoing this country has seen.”
The FCA has always argued it was powerless to do anything because mini-bonds are unregulated. Dame Elizabeth rejected this view and said management misunderstood the FCA’s regulatory “perimeter.”
“Responsibility for the failure in respect of the FCA’s approach to its Perimeter rests with ExCo and Mr Bailey,” the report said.
The report, which runs to nearly 500 pages, concluded that there were “significant gaps and weaknesses in the FCA’s policies and practices” that meant opportunities to stop LCF were missed and red flags ignored.
Most damningly, Dame Gloster said it was “self evident” the scandal could have been much smaller had the FCA done its job properly.
“It is, at the least, possible that the FCA’s actions would have prevented LCF from receiving the volume of investments in its bond programmes which it did,” the report said.
“The Investigation considers that the FCA’s failures may be relevant to arguments that the FCA in some real sense ‘caused’ Bondholders’ losses.”
BOE’s Bailey apologises
The report is a damning indictment of Bailey’s leadership of the FCA between 2016 and 2020. It concludes he was too slow to reform the organisation and too slow to get a grip of the scandal.
Bailey — governor of the Bank of England since March —lobbied to have names taken out of the document but Dame Elizabeth said this was inconsistent with the level of accountability expected by public officials.
The governor apologised to LCF bondholders in a statement on Thursday.
“When I was asked to lead the FCA in July 2016 it was clear that a substantial reform programme to the supervision of many of its 60,000 firms was essential,” he said.
“We took immediate steps to change the approach. The required changes in culture, mind-set and systems was a major programme of work across the organisation, which took some time to put into effect. I am sorry those changes did not come in time for LC&F bondholders.”
Government review of compensation
Dame Gloster’s conclusions mark a vindication for LCF investors, who have repeatedly claimed Bailey and the FCA failed them. Investors unsuccessfully lobbied against his appointment at the Bank of England last year.
“The FCA were perhaps deceived as much as investors, but this report confirms that our regulators should have acted more effectively and sooner and, if they had, millions of pounds of investors’ money could have been saved,” Donegan said.
John Glen MP, economic secretary to the Treasury, said the government would look at whether LCF investors should be given some form of compensation. The Financial Services Compensation Scheme (FCSC) has already awarded £50m to LCF investors but ruled that most are ineligible under its terms.
“The government will set up a scheme to assess whether there is a justification for further one-off compensation payments in certain circumstances for some LCF bondholders,” Glen said.
Glen and the FCA both accepted Dame Elizabeth’s nine recommendations for reform of the watchdog. These include making FCA staff review regulated firms holistically and a wholesale overhaul of training and handbooks.
“We accept all the recommendations that have been made to the FCA and we are profoundly sorry for the mistakes we have made,” said Charles Randell, FCA chair.
Nikhil Rathi, who took over as chief executive of the FCA in October, said the report made “sobering reading”. He announced a serious of reforms aimed at improving the organisation.
The report makes clear that problems persist. Publication of the review was delayed in part because of continued errors and shortcoming by the FCA in providing information.
“I hope that the FCA and other UK regulatory bodies will put their own position to one side and focus on protecting consumers and restoring trust in our regulatory system,” said Donegan.
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