Summary of Gloster Review of LCF/FCA Failure Released

 The review by Dame Gloster into the failure of London Capital and Finance and the role of the FCA in the matter has been released. It makes for some pretty shocking reading and there are some incredible blunders and omissions by the FCA. It appears that they were warned on many occasions about LCF for different reasons but that these issues were not combined to give a "holistic" view of the company. Being unregulated for selling bonds meant that FCA seemed content to ignore it.

Despite misleading information on their website and such adverts as below the FCA did very little to prevent consumers from being scammed. Repeated breaches of the information on the LCF website which seemed to be a game of cat and mouse with FCA telling LCF to amend, amendments being made, FCA saying all ok and then LCF reversing them again shortly afterwards. This was not a one off.

Gloster Review of LCF/FCA Failure Released

There are quite a few comments throughout the report. I can't give full commentary yet but I thought all these selected paragraphs give a good summary of the information in the report.

P35 LCF was not generating any revenue from regulated activities and had no clients from regulated activities. LCF’s regulatory business plan dated 4 October 2016 stated that its actual revenue from regulated business in 2015 and 2016 was £0

 

P36 The FCA did not adequately supervise LCF’s compliance with the FCA’s rules and policies. In general, the FCA’s approach to supervising LCF was contrary to the “pre-emptive approach” described in the FCA Handbook

 

P37 In the event, even such limited reactive supervision was not carried out effectively. The FCA did not react appropriately (or at all) to express allegations received from third parties that LCF was engaged in fraud or seriously irregular conduct

P38 The FCA failed to respond to repeated allegations by third parties that LCF might be engaged in fraud or serious irregularity. (Appendix 6)

P39 Contact Centre policies also failed to state clearly that call-handlers should not reassure callers in respect of FCA-authorised firms’ non-regulated activities based on their FCA-authorised status

P44 Although the FCA’s Listing Transactions Team raised concerns regarding LCF’s business model in September 2018, these concerns were not adequately pursued by the Supervision Division. A supervisory case was opened on 11 September 2018, but no significant further steps were taken. This was because the Supervision Division initially assessed LCF as a relatively low priority case

In short, the good work done by the Listing Transactions Team was negated by the Supervision Division’s failure to appreciate the significance of the concerns and their delay in acting. Fortunately, the Intelligence Team was able to review

P77 As part of a review conducted on a non-public database external to the FCA300 in relation to another firm in October 2018, a member of the FCA’s Intelligence Team identified significant adverse intelligence in relation to LCF and related individuals and entities. The significant adverse intelligence showed potential conflicts of interest, potential criminality and concerns regarding the way in which LCF was running its business.

 

P368 LCF’s marketing appeared designed to target unsophisticated investors

P371 On 23 January 2017 a caller, aged over 70, requested information on LCF prior to investing on the basis that the interest rate offered of 8% “seems rather a lot”.1233 She wanted to find out whether the firm was “legit”.1234 The call-handler provided reassurance that if LCF was FCA-authorised it was unlikely to be operating a scam

Some calls to the FCA enquired whether LCF was operating a scam, but did not allege that LCF was in fact doing so. Some of these calls are summarised below. As also explained below, a feature of some, but not all, of these calls is reassurance by Contact Centre callhandlers that if LCF was FCA-authorised it was unlikely to be operating fraudulently.

P376 Sometimes call-handlers reassured callers that LCF was likely to be a reputable company on the basis of its FCA-authorised status. This occurred in calls on 3 October 2016,1262 8 June 2016,1263 24 June 2016 (paragraph 6.4 above) and 1 July 2016 (paragraph 6.5 above). In some other calls, however, call-handlers warned investors about investing in LCF

P

 

 

 

 

Apex6 P359

On 18 July 2016, the same caller1168 alleged that there were various irregularities in respect of LCF. For example, the caller alleged that LCF’s recent rate of growth was suspicious. The caller stated: ““They’re claiming that they have 160 SMEs which they lend money to and they’ve invested £30 million with them so far since the beginning of the new published financial year. Now I did a company search on them and they have no assets, their amount of money in the bank is £8 and it goes on basically… So they had – during that year, their income was £14,000 and the lending was to one person only and that person was another company of which the director of the company was the same director as the lending company… So basically what I’m trying to find out is how on earth can they suddenly get 160 customers that they lend to when they only had one last year and that was someone basically who was the director of their own company”

P365

On 21 June 2017, the caller contacted the Contact Centre again. On this call, the caller expressed a number of concerns as to LCF’s business. For example, the caller stated that: (a) the first time he had looked at the mini-bonds offered by LCF he thought that they were an “absolute formula for fraud… a perfect formula for a scam”.1206 (b) he was having difficulty obtaining information from LCF on what it was spending bondholder’s capital on and that the firm was refusing to divulge such information on the basis of data-protection.

 

LCF’s marketing was misleading. The caller stated: “And then, of course, things which are misleading and their website, things that they were saying just weren’t true, for example, all of their assets, the company’s assets were in security for the, for the bond, to the bondholders. But all you’d have to do is a simple credit check and it showed that all the liabilities wiped out their assets

 

On 10 July 2017, the FCA received a further call from the same caller.1215 The caller again alleged irregularities in respect of LCF. The concerns which the caller raised included the following: (a) LCF was paying interest out of Bondholders’ money and the caller had suspicions that LCF may be a “pyramid scam”;1216 (b) The rates of interest which LCF charged to businesses were suspicious;1217 (c) It did not appear that LCF’s operations were genuinely set up to lend to businesses