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FCA Faces Probe Over LCF Collapse

Treasury orders investigation into City regulator's role in collapse of London Capital Finance, which left 11,000 investors £230 million out of pocket when it went under

James Gard 24 May, 2019 | 10:53AM

Cash

The Treasury has launched a review into the collapse of London Capital Finance (LCF) that will look at whether the Financial Conduct Authority failed in its statutory objective to protect consumers.

The FCA, more used to leading investigations of its own, will face scrutiny over the failure of LCF, which went into administration in January. The firm marketed and sold high-interest bonds that were not covered by the Financial Services Compensation Scheme (FSCS), which protects savers’ capital up to £85,000 per person. Some 11,000 investors lost £236 million when the company went under.

The FCA has attracted criticism for not acting quickly enough to investigate concerns over LCF. Chair of the Treasury Select Committee, Nicky Morgan said the questions over the collapse of LCF need to be answered urgently, rather than within the expected 12-month timeframe of the review. 

One of the regulator’s key tenets in authorising investment products is that of “suitability”. Companies and advisers selling products to the public must ensure they have sufficient knowledge and experience to understand the risks of what they are buying. Many of the buyers of the LCF bonds were inexperienced, elderly or low-income investors, who say they didn’t understand that their capital was at risk.

Statutory Objective

When the Financial Services Authority became the Financial Conduct Authority in shake-up of regulation after the credit crunch, it was given the statutory objective of consumer protection, as well as promoting competition, ensuring markets function effectively and ensuring the integrity of financial services.

The Treasury has used its powers under section 77 of the Financial Services Act to order this investigation.

The economic secretary to the Treasury, John Glen, has approved former high court judge Dame Elizabeth Gloster to head the review. As well as saying that “we urgently need to get the bottom of the circumstances around the collapse of LCF”, he said the Treasury will look into the sale of mini-bonds and whether investors are adequately protected. It will also look at whether current rules over their promotion are tight enough.

The Treasury is also working with HM Revenue & Customs to review the tax rules relating to Innovative Finance Isas. These Isas offer higher rates of interest through investing in peer-to-peer loans but, unlike many other Isa products, are not protected under the FSCS. 

In April, the FCA warned that Innovative Finance Isas (IFISA) were being promoted alongside traditional accounts such as cash Isas: “Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”

Innovative Finance Isas were brought in by former Chancellor, George Osborne, in the summer Budget of 2015. According to HMRC data, 31,000 of these Isas were subscribed to during the previous financial year, 2017-2018.

 

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About Author

James Gard  is content editor for Morningstar.co.uk

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