Complaints commissioner Amerdeep Somal has published her report into how the Financial Conduct Authority (FCA) dealt with the London Capital and Finance (LCF) scandal.
In her decision, the commissioner hit out at the regulator for two serious failures: “significant problems” with the FCA Register, and the inability to secure compensation under the watchdog’s complaints scheme.
First, Somal said she is concerned with the “halo effect” surrounding the FCA Register, this is because while investors can check if a firm is regulated, the online tool does not specify whether all of its activities are.
The commissioner said: “The FCA should be taking steps to avoid replicating the failures that occurred in its oversight of LCF. I am not convinced the FCA has given proper consideration to the detrimental impact this could have on future investors if the maintenance of its register is not prioritised and looked into as a paramount consideration.”
Failings surrounding the regulator’s register had already been found in the Dame Gloster report, which stated that the platform was “intelligible and contained insufficient warning”, Somal said.
As a result, the complaints commissioner has urged the FCA to “reconsider its position” and actively keep up to date with the maintenance of its register as well as mitigate any repercussions investors may incur.
She added: “The FCA should do everything in its power to ensure that the register is not misleading, in particular by ensuring that it provides adequate warnings to consumers of the risk of unregulated products sold by authorised firms and presents information in a manner intelligible to the public.”
Somal’s second criticism focused on the regulator’s complaints scheme, more specifically on its ex-gratia payment and/or compensation to victims.
The commissioner said the FCA’s stance on compensatory payments is “unjustified and does not stand up to scrutiny”. While her decision is limited to the LCF case, Somal admitted her remarks raise “questions about policy and interpretation of the complaints scheme”.
The issue is that victims need to demonstrate supervisory and/or regulatory failings from the FCA in order to get compensation, something complainants “will never be able” to do, according to the commissioner.
This has been attributed to three main factors:
- The FCA’s self-devised test where regulatory failings are the ‘sole and primary cause’ as set out in its remedies statement;
- Its binary interpretation of ‘direct dealings’; and,
- Its test that payments should only be made in ‘exceptional circumstances’, something that is not “encapsulated in the [complaints] scheme” and not “defined in detail by the FCA”, the commissioner said.
Somal concluded that the factors are “inconsistent with the statute and with the published complaints scheme”, which does not state whether “ex-gratia compensatory payments arising from regulatory and supervisory failings should be available in practice”.
Since the commissioner found the regulator’s tests to not be suitable, she proposed the FCA to reconsider the ones it adopted “in line with my observations” and then to “re-decide the LCF cases in line with a new, adequately justified, test”.
Somal, however, did not express any views on whether the re-assessments may result in additional pay for LCF victims.
She also suggested the FCA’s causation test to be abrogated altogether and for the regulator to restore the test set out in the complaints scheme. As part of this exercise, the watchdog has also been asked to clarify its position on ex-gratia compensation and to scrap the tests it applies to determine it as, under those, “such payments will never be available in practice”.
One LCF bondholder told International Adviser the latest report was “another nail in the coffin” for the financial regulator since, after an independent report, a treasury inquiry, and a governmental call for reform, “nothing has changed”.
“As a bondholder, I am thankful the commissioner has taken the time to prepare a balanced view and not backed down or been intimidated by FCA. I am disappointed but not surprised by her findings, but I am very disappointed by the FCA reply. ‘No comment’.
“It speaks volumes not just to the commissioner but to all LCF victims, their families and the public. Even under new leadership, the FCA has not changed its spots.”
IA contacted the FCA for comment, but the regulator did not reply in time for publication.
The commissioner expects to receive the FCA’s response to her final report and recommendations by 15 March 2022.
Call for FCA board to be replaced
Campaigner Gina Miller said the FCA has now been left in a difficult position. “Their diversion tactics are now laid bare for all to see, and I cannot see how they can justify the remedies statement now.
“It is a damming indictment of the entire FCA board that it sought to reduce the rights of the public to seek compensation from the FCA for regulatory failure in such an underhand manner. This report should be the final straw that leads to the treasury stepping in and ordering a proper Kingman-style independent review of the FCA.”
Alan Miller added: “It is imperative that the FCA does not make up the law as it goes along, or who prioritise the best interests of the FCA over that of the general public.
“The complaints commissioner rightly states her objection to the FCA seeking to introduce the ‘sole or primarily responsible’ test by way of amendment to the complaints scheme and decided to introduce it without the benefit of public consultation.
“In my view, the NEDs have completely failed to perform their oversight function of the FCA executive board and should be urgently replaced.”