Bank of England governor Andrew Bailey has apologised after an independent report severely criticised the City regulator that he led at the time of a £237m investment scandal.
The report found the Financial Conduct Authority (FCA) was “wholly deficient” in the oversight of minibond provider London Capital & Finance (LCF).
Former Court of Appeal judge Dame Elizabeth Gloster found there had been “significant gaps and weaknesses” in the FCA’s practices and policies.
The FCA’s oversight was “wholly deficient”, a damning report found
LCF’s demise in early 2019 left 11,600 investors in mini-bonds facing losses of up to £237m.
Mr Bailey was chief executive of the FCA, which regulates thousands of financial firms, from 2016 to 2020 before taking over from Mark Carney at the Bank of England.
In response to the report, Mr Bailey issued a statement apologising to LCF investors.
He said when he took over at the FCA in 2016 it was clear that “substantial reform” in the way it supervises many firms was needed and that immediate steps were taken “to change the approach”.
“The required changes in culture, mind-set and systems was a major programme of work across the organisation, which took some time to put into effect,” Mr Bailey said.
“I am sorry those changes did not come in time for LC&F bondholders.”
New FCA boss Nikhil Rathi said the report made sobering reading
LCF was regulated by the FCA but the mini-bonds it sold to raise funds for small companies was not, leaving investors with no recourse to compensation.
The Treasury said it would now examine the case for a compensation scheme that would make payments to some of the affected customers.
The report into the scandal found that flaws in the watchdog’s approach to its regulatory “perimeter” meant the firm was able to use its FCA-regulated status as an “unjustified imprimatur of respectability” even in relation to its non-regulated bond business.
“Responsibility for the failure in respect of the FCA’s approach to its perimeter rests with the executive committee and Mr Bailey,” it concluded.
Dame Elizabeth also pointed to flaws in the watchdog’s training of its staff and inaction in the face repeated warnings about LCF’s activities.
“As a cumulative result of these failures, the FCA did not appreciate the true nature of LCF’s business or the risks that it posed to consumers,” the report said.
The FCA regulates thousands of financial firms
“Neither did the FCA appreciate the significance of an ever-growing number of red flags, which were indicative of serious irregularities in LCF’s business.”
Sky News revealed that the findings have prompted senior parliamentarians to call for two top executives at the FCA, Megan Butler and Jonathan Davidson, to repay £90,000 in bonuses awarded for the 2018/19 financial year.
The FCA said it did not have a scheme in place to claw back the bonuses. Bonuses to the pair for the 2019/20 financial year, which had been deferred, will not be awarded.
New FCA chief executive Nikhil Rathi said the report made “sobering reading” and that he was committed to implementing its nine recommendations.
“We are very sorry for the errors we made in our handling of this case,” he said.
Pat McFadden MP, Labour’s shadow economic secretary to the Treasury, said: “This scandal represents a shocking failure of supervision in which some people lost their whole life’s savings.”