Under the Microscope: FCA forced to conduct a full-blown investigation into their regulatory failures after LC&F’s collapse

July 10, 2019

3 min read

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What's going on here?

Calls for an investigation into the actions of the Financial Conduct Authority (FCA) emerge after the collapse of the financial company, London Capital & Finance (LC&F).

What does this mean?

Dubbed one of the biggest collapses of its kind in the UK, LC&F’s recent collapse into administration has left 14,000 investors out of pocket. Many of these unlucky investors were first-time investors who could recover as little as 20% of their money. 

LC&F were offering bonds that they advertised as innovative finance ISAs. This is because ISAs are given preferential tax status compared to other investments. However, despite being marketed as investments and packaged as ISAs, the bonds were in effect loans to property developers and loans for other risky investments. 

How does the FCA tie into all of this? They are the ones who authorised LC&F to offer those bonds. It had initially looked like a safe and profitable investment as the bonds had been awarded a special tax status by HM Revenue & Customs and they had a high interest rate (of 8%). However, the watchdog was warned about the risks around the company on 2 previous occasions (2015 and 2017) but somehow failed to act until December of last year. This came far too late as the public had already invested a staggering £236m into the company. In a last-ditch attempt to defend itself, the FCA claimed that authorisation was made in order to provide consumer financial advice, not the sale of the ISAs or bonds in question. 

As the investigations take place, the FCA must consider 4 key areas:

  1.  Did the FCA act fast enough by intervening in December?
  2.  Are other firms manipulating FCA authorisation in a way that may mislead consumers?
  3.  Should there be more clarification to consumers on the amount of protection that the FCA offers them?
  4.  Should mini-bonds be allowed to be unregulated?

What's the big picture effect?

The collapse of LC&F shows the issues that underpin the current regulations. More specifically, firms like LC&F fall into a blind spot for regulators. As these bonds were structured as loans, it appeared as if the purchasers of these bonds were lending and not investing. While this was the case in the eyes of the FCA, it was certainly not what those buying the bonds would have believed. 

The issue of the FCA’s conduct is made worse as they had been warned as early as November 2015 by financial advisors concerned about the bonds offered by LC&F, but did not respond until years later.

This scandal shows how well-meaning changes to the law can have negative and unintended consequences. The rules, which allowed bonds to be offered as innovative finance ISAs, were intended to allow a wider variety of investments to enjoy the tax-free status that traditional ISAs enjoy. Unfortunately, the ambiguous nature of the rules allowed LC&F to effectively dress up loans as an investment.

Additionally, ISAs have grown into more complicated entities and various governments have made rules which seek to address this but instead complicate ISAs further. The complications that these rules entail led to the creation of regulatory loopholes that paved the way for these scandals to happen. Surprisingly, this is a common theme in the UK’s tax code, which as a result of constant tinkering now stands at a world record, 21,000 pages. 

As the investors anxiously wait for answers, one thing is clear: the FCA has a lot to answer for.

Report written by Harry Barnes

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