FCA makes major changes following LCF and Connaught review
The Financial Conduct Authority (FCA) will implement major changes following the independent reviews of its regulation of London Capital & Finance (LCF) and Connaught Income Fund Series 1 and connected companies (Connaught).
The reviews, undertaken by Dame Elizabeth Gloster and Raj Parker respectively, assessed the FCA’s actions, policies and approach when regulating LCF between April 2014 and January 2019.
The FCA has accepted the nine recommendations addressed solely to the FCA in the LCF Review and the five lessons identified by the Connaught Review.
The LCF review
LCF issued non-transferable securities, known as mini-bonds, to 11,625 investors, with a value of over £237 million.
In December 2018, the FCA ordered LCF to withdraw its promotional material. On 30 January 2019, LCF entered administration.
The Financial Services Compensation Scheme (FSCS) has paid out just over £50.9 million in compensation to LCF customers and is continuing to assess outstanding claims.
The recovery of assets by the administrators continues. The FCA is investigating whether LCF’s collapse was caused by serious misconduct by individuals and third parties related to the firm. Criminal investigations and regulatory investigations by the Serious Fraud Office and the FCA into fraud are continuing.
The Connaught review
The Connaught Review has assessed the Financial Services Authority’s and the FCA’s approach and response to intelligence, and the FCA’s approach to and involvement in the mediated negotiations before the launch of enforcement investigations in March 2015.
Connaught – a fund operated by Capita Financial Managers Limited (CFM) between April 2008 and September 2009, and Blue Gate Capital Limited between September 2009 and December 2012 – was an unregulated collective investment scheme which provided short-term bridging finance to commercial operators in the UK property market.
On 3 December 2012, Connaught entered liquidation. At that point, the outstanding principal invested by investors was £79 million. Since then, investors have received more than £80 million, including £58 million in redress under the settlement the FCA secured from CFM.
The FCA response
Charles Randell, chair of the FCA, says: “There are a number of things we could have done better in our supervision of these two firms and both reports highlight the need for the FCA to continue to change to better protect consumers from harm.”
“The collapse of LCF has had a devastating effect on many investors and we will do everything we can to conclude our investigations as quickly as possible and support the recovery of further funds for investors.”
Randell notes that these reports “not only highlight operational mistakes; they also indicate that the measures we introduced may not have been as effective as we wanted and challenge the balance that we struck at that time”.
Nikhil Rathi, newly appointed CEO of the FCA, notes how these reports into historic events “make sobering reading”.
Rathi states that the FCA is ready to take make changes over the course of the next six months.
A major change for firms is in relation to permissions – undertaking a “use it or lose it” exercise. Firms that have not used their regulatory permissions to earn any regulated income for the last 12 months are at risk of having their authorisation revoked, to reduce the risk of firms having a permission to carry out regulated activity purely to add credibility to their unregulated activities.
Rathi wants the FCA to become a more data-enabled regulator through the recruitment of a chief data, information and intelligence officer and the establishment of a separate programme of change that “transforms the way we handle and prioritise information and intelligence”.
There will also be new measures to tackle pension scams with Department of Work and Pensions (DWP), once the Pension Schemes Bill has received Royal Assent.
The regulator will recruit additional prudential specialists to act as quality assurance and assess firms with complex business models, including where they combine regulated and unregulated activity, within its Authorisation Division.
It will also work with the government to tackle scams advertised and promoted on Google and other online platforms; and disrupt scams and warn consumers of the risks by stepping up our own consumer campaigns, including ScamSmart and targeted digital activity.
The FCA will also ensure that its Contact Centre policies clearly state that call-handlers: (i) should refer allegations of fraud or serious irregularity to the Supervision Division, even when the allegations concern the non-regulated activities of an authorised firm; (ii) should not reassure consumers about the non-regulated activities of a firm based on its regulated status; and (iii) should not inform consumers (incorrectly) that all investments in FCA-regulated firms benefit from FSCS protection.