True accountability?Jun 16th, 2021
LCF was incorporated in July 2012 and obtained a consumer credit licence to carry on the business of consumer credit (lending) and credit hire.The FCA assumed regulatory responsibility for these activities on 1st April 2014.
LCF’s primary business appears to have been commercial lending, financed by issuing ‘mini-bonds’ to individuals. Bonds had a term of up to five years, and carried a fixed rate of interest significantly more than could be obtained from a bank or building society. This was unregulated business: LCF derived no income from regulated activities.
In November 2015, Mr Neil Liversidge, an independent financial adviser, wrote to the FCA raising concerns about LCF. It included the following passage:
If [LCF] can reach [Mr Liversidge’s unsophisticated retail investor client] then they can reach a lot more and from what I see, I would not class this as a suitable investment for the unsophisticated retail market. Additionally, the obviously unprofessional character of this promotion gives me cause for concern as to how safe or otherwise will be any funds clients place with them
Enclosed with the letter was a redacted email exchange between Mr Liversidge and his client:
According to the last full set of accounts [LCF] only has 1 customer to whom it is lending everything...You’d be lending money via [LCF] to [Company A]...They’ve also been lenders to [Company B]– who are worth the square root of bugger all...You’re getting 8% according to their website, not 8.5%. LCF lends the money out at 15%. What do you know about the business they’re lending to? What do you know about the ‘assets’ it’s supposedly secured on? If a business has to pay 15% - so much over the odds for capital, there’s a reason why...This looks like some dodgy foreign property development outfit. No wonder banks won’t lend on it...The owners don’t have much at risk per the accounts and [a member of LCF’s senior management] has been a director of [LCF] and [[Company A]]. Conflict of interest?...
The FCA did not respond and maintains that no copy of the letter could be found. No trace of it was found during the investigation process. The report concludes as follows:
4.10 The Investigation does not rule out the possibility that the Liversidge Letter was received by the FCA and then somehow lost through inadvertent human error before it was recorded and passed to the Enforcement and/or Supervision Divisions. Indeed, Mr Bailey noted that these events pre-dated his tenure as the FCA’s CEO but commented: “...what I can tell you is the process[es] of the FCA were not very robust going back in time. So I have to be frank, I think if I had to predict it I would say [the Liversidge Letter] probably did come and for some reason never got recorded but I can’t give you chapter and verse on that”.
4.11 In the light of Mr Bailey’s comment, if it had been incumbent on the Investigation to have reached a decision on this point, it would have concluded on the balance of probabilities that the Liversidge Letter was received by the FCA.
There are instances of FCA call handlers lacking appropriate training and providing incorrect information to callers. Examples are provided in Chapter 6 of the Gloster report:
6.3 For example, on 15 April 2016, a caller stated that, in respect of LCF, he was “looking at taking out a bond, it’s got quite a bit of money going into it”. The FCA call-handler stated “I’ve managed to locate the firm, yes, and [LCF] are registered with us, and they are also, these, the products that they’re offering, in other words their website... is approved as a financial promotion by another firm called Sentient Capital London Limited, which is also registered with us. So, yes, both firms are regulated by us, which means you would be protected up to a certain limit if you were to use their services, by the FSCS, the Financial Services Compensation Scheme” (emphasis added). The caller then stated “Right, so we would be protected?” to which the FCA call-hander responded “Yes, that’s correct, yes.”
6.4 On 24 June 2016 a caller stated they were looking to invest in a fixed three-year income bond at 8% per annum. The caller stated “[i]t does sound too good to be true doesn’t it” to which the FCA call handler replied “Let’s have a look”. The call handler then stated, “[LCF]... So that’s coming up as authorised and regulated, so that’s absolutely fine. That means if you wanted to invest with them, you’d be protected by up to £50,000 by the Financial Compensation Scheme.”
The Contact Centre at the FCA received numerous calls from individuals alleging irregularities at LCF. For example, this one on 10th July 2017, from an individual who had previously called:
“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”.
The Gloster report provides a detailed catalogue of multiple failings at the FCA: notably, its focus on the ‘perimeter’ apparently made the organisation blind to what authorised firms were actually doing beyond it, i.e. failing to look at the totality of a firm’s business operations.
By the time the FCA did actually intervene in December 2018, LCF had raised in excess of £237 million from 11,625 bondholders. LCF went into administration on 30th January 2019, and was declared in default by the Financial Services Compensation Scheme (“FSCS”) on 9th January 2020.
However, because the bonds were unregulated, only bondholders who were able to prove that they received advice (either from LCF or Surge Financial Ltd, an online marketing company, which acted on behalf of LCF) were protected under the FSCS.
By 19th April 2021, FSCS had completed its work and paid out £57.6m in compensation to 2,871 LCF bondholders. That left the vast majority without protection, mainly elderly individuals who faced significant loss of savings.
On the same day, HM Treasury announced details of a compensation scheme for LCF bondholders; investors who received nothing from the FSCS will receive 80% of the money they lost, up to a maximum of £68,000 (that figure being 80% of the normal maximum protection under the Deposit Guarantee Scheme). This is expected to cost taxpayers around £120m.
This action ought not to be seen as government removing hazard for anyone who invests money in something that seems too good to be true: as ever, if that seems to be the case, investors should be extremely wary.
However, the extent of failings at the FCA revealed in the Gloster report are alarming and, whilst it is undoubtedly the case that implementation of an EU directive (MIFID II) and the loss of passporting rights for firms following Brexit occupied a significant amount of time and resource for the FCA, the report is highly critical.Dame Elizabeth’s report effectively concludes that failures in regulation led to more money flowing into LCF than would otherwise have been the case.
Neither the FCA nor government accept any legal liability in respect of LCF: a number of participants in the representations process to Dame Elizabeth Gloster asked the investigation not to make findings about individual responsibility for the FCA’s deficiencies. For example, the Investigation was asked to delete references to ‘responsibility’ resting with specific identified/identifiable individuals. Dame Elizabeth was not persuaded by such requests. However, it remains unclear where true accountability rests in this sorry saga.