FCA accused of senior managers regime hypocrisy

Critical LCF report alleges watchdog has not met the standards ‘which it seeks to impose upon others’

|

The Treasury Committee has published its report into the Financial Conduct Authority’s regulation of defunct investment firm London Capital & Finance (LCF) following the mini-bond mis-selling scandal.

It found that the collapse of LCF was due to “one of the largest conduct regulatory failures of the last three decades and is one of only three that has led to a government compensation scheme”.

The committee said that, while responsibility doesn’t necessarily mean culpability for the financial watchdog, it lacked individual accountability.

“We accept that a degree of shared responsibility is desirable and necessary in an organisation such as the FCA,” it added.

“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.”

The committee said that an over-reliance on “collective responsibility” within the regulator may deny “visible accountability” and lessen confidence in the FCA 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.”

Wider regulatory scope

The Treasury committee has, however, made the case for giving the FCA greater powers to deal with issues that are outside of the perimeter of regulation.

This is because LCF was a regulated firm, but its marketing and issuance of mini-bonds was an unregulated activity, something the watchdog did not have much authority over.

This, the committee added, “led to red flags being missed”.

“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.”

The failures identified during the LCF saga proved that further action is required, the committee said.

The mini-bond scandal showed that 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”.

The committee said that while the police has limited resources and personnel to tackle fraud, the FCA does not have the same powers as a law enforcement body, something the government should take action on.

Transformation programme

A spokesperson for the regulator said: “We welcome the committee’s report and will be providing a formal response in due course. As we have said, we are profoundly sorry for the mistakes we have made over LCF and are committed to implementing the recommendations of the Gloster Report which are progressing at pace.

“The FCA has embarked on a wide-ranging transformation programme to build a data-led regulator able to make fast and effective decisions and we are providing the committee with updates on our progress.

“We agree with the recommendation that fraud via online advertising should be included in the Online Safety Bill, as online platforms are now the single biggest channel of financial scams and fraud.”

MORE ARTICLES ON