FCA responds to independent reviews into its regulation of London Capital & Finance and Connaught

The FCA has today responded to the independent reviews of its regulation of London Capital & Finance plc (LCF) and Connaught Income Fund Series 1 and connected companies (Connaught).
The reviews, undertaken by Dame Elizabeth Gloster and Raj Parker respectively, are now available – The LCF Review and The Connaught Review.

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.

See our full responses to both reports – FCA response to the LCF Review and FCA response to the Connaught Review.

The LCF Review
The LCF Review has assessed the FCA’s actions, policies and approach when regulating LCF between April 2014 and January 2019.

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 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, said:

‘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.

‘We accept all the recommendations that have been made to the FCA and we are profoundly sorry for the mistakes we have made.

‘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.

‘The FCA has always prioritised supervising regulated activities which affect the most vulnerable in our society, who often have very limited financial choices. We also introduced measures designed to prevent harm for those consumers who had more ability to choose. 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.

‘Over the last few years we have already made significant changes in our approach to supervising firms. We have learned considerable lessons from what happened with LCF and Connaught and we will provide public updates as we implement the recommendations.

‘Consumers must have trust in the FCA to do its job properly. We need to reinforce a culture in which people at the FCA are empowered and confident to take responsibility for bold interventions. The organisation has made progress in developing this culture in the last several years, and I’m proud of what we have achieved during the current coronavirus crisis. We know we have more to do.

‘The FCA Board and I have every confidence that continuing the transformation of our organisation is the right way to bolster trust in the FCA and realise our ambitions for change.’

Nikhil Rathi, Chief Executive of the FCA, said:

‘Having joined the FCA as Chief Executive in October, these reports into historic events make sobering reading.

‘My colleagues and I are committed to implementing the recommendations and lessons learned which will require significant and necessary changes to the way we regulate, our use of data and intelligence, and our culture.

‘We know that the FCA must make faster and more effective decisions, prioritise the right outcomes for consumers, markets and firms, and reform our approach to intelligence and information sharing. Our continuing action plan, specifically on our wider transformation programme and high-risk consumer investments, seeks to do this.

‘The FCA is always going to have to make difficult risk-based choices about where to allocate resources and to strike a balance between regulatory action and consumer choice and responsibility. I hope that the mistakes the FCA made in these cases do not detract from the work and dedication of my colleagues over several years.

‘We have demonstrated that when we act boldly, we deliver for consumers, markets and firms. With the continued dedication of all at the FCA and with the support and oversight of the FCA Board, I know that we can make the changes we need in the coming months and years to respond to these reports and deliver for UK consumers and markets.’