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London Capital & Finance scandal: How the gun-shy regulator was left shooting blanks


Two years before London Capital & Finance collapsed into administration, the Financial Conduct Authority received a tip-off about the minibond firm.

An anonymous source sent a letter to the Metropolitan Police and copied it to an individual at the City regulator in January 2017 to warn that LCF had raised £30 million and “have just ‘lent’ the money to related companies controlled by the main players”. The source wrote: “Hopefully between you things will happen.”

While the FCA contacted the detective constable at the Met who had also received the letter, the watchdog subsequently closed the matter.

This turned out to be one of a number of warnings received by the FCA that went unheeded. These missed opportunities and the failures that led to them were catalogued in devastating detail by Dame Elizabeth Gloster in her report into the regulator’s handling of the LCF scandal, which was published on Thursday.

The FCA’s slowness to take action meant 11,625 savers had poured £237 million into the toxic minibonds sold by LCF by the time of its administration in January last year. A Serious Fraud Office investigation into LCF is under way.

Dame Elizabeth’s review is excoriating in its criticism of the FCA. Many in the City and beyond will be asking whether the regulator is up to the task of tackling financial crime and investment scams.

  • “It raises very important questions about the fitness of the regulator,” Mel Stride, the Conservative MP who chairs the Commons treasury select committee, said.

Thomas Donegan, a partner at the law firm Shearman & Sterling, said that what was

  • “Really astonishing is the express tip-offs which were ignored” by the regulator.

Mr Donegan, who focuses on financial regulation, has taken a special interest in LCF because a relative lost money in the scandal. He is working pro bono on a judicial review against the decision by the Financial Services Compensation Scheme not to make pay-outs to many LCF investors.

Dame Elizabeth’s investigation identified numerous examples where the FCA failed to appreciate “red flags” about LCF.

These included at least 15 calls by one individual alone between July 2016 and February 2018 who raised concerns about potential fraud. The report by Dame Elizabeth concluded that the watchdog’s handling of information from third parties about LCF was “wholly deficient”.

Simon Morris, a financial services partner at the law firm CMS, called the LCF review “a real shocker”, adding:

  • “It was a very, very disappointing read because it showed really numbskull regulation.” Yet he argued that the FCA, which oversees about 60,000 financial businesses in total, is nevertheless fit for purpose.
  • “The FCA’s sweet spot is regulating large firms that are 100 percent within the rules and with whom it has a relationship,” Mr Morris said.

  • “You’ve got an enormous ecosystem of small firms that can cause enormous damage and they’re inherently more difficult to regulate. Each of them will have an idiosyncratic business model and different marketing methods.”

Dame Elizabeth’s report also shed light on the lack of training among some FCA staff.

Mr Donegan said that an issue for the regulator was high staff turnover. The authority cannot compete with City firms on pay and many banks want to hire people who have the regulator on their CVs for their compliance departments.

Read more at The Times