LCF collapse shows rules needed for online marketing of financial products, says Andrew Bailey

The lack of regulation around online information advertising financial products is a “serious problem”, former head of the Financial Conduct Authority Andrew Bailey has warned.

“The lesson here is that the online world is not subject to the same legal duties as the more traditional media,” Bailey, who is now governor of the Bank of England, wrote in a letter dated 22 March to the Treasury Committee which was published on 26 March.

“There is consequently no adequate shared responsibility with online service providers and consumers are at much greater risk,” added Bailey, who detailed in the correspondence five lessons he had learnt from the collapse of mini-bond firm London Capital & Finance. Other lessons included the FCA’s prioritisation of workload and the extent of its regulatory perimeter, which dictates which activities fall under its regulatory powers.

“This could be tackled through the Online Harms Legislation, but the experience so far, and thus the lesson, is that there is strong resistance in other parts of the official sector to extending the legislation to financial services. This is a serious problem,” Bailey wrote.

The Treasury Committee has been carrying out an inquiry into the regulation of LCF before its collapse. The firm went into administration in January 2019 after the FCA asked it to withdraw its “misleading, not fair and unclear” promotion for its retail investment products. The firm issued mini-bonds, which are not normally regulated by the UK watchdog.

Some 11,600 retail investors in risky “mini-bonds” lost a total of more than £237m after LCF collapsed. Since then, the promotion of mini-bonds has been banned by the FCA.

READTimeline of the collapse of London Capital & Finance

A December 2020 independent review into LCF’s collapse, by former High Court judge Dame Elizabeth Gloster,  uncovered “serious failings” in the way firm was regulated, and found the FCA had failed to act on specific and detailed allegations it had received from third parties about LCF’s activities.

Bailey, alongside the FCA’s head of transformation and former executive director of supervision Megan Butler and senior adviser and former executive director of retail supervision and authorisation Jonathan Davidson, was named in the report.

Bailey issued an apology to bondholders after Gloster’s report was published, saying that despite a “substantial reform programme” to the FCA’s supervision of firms that took place under his watch, he was “sorry those changes did not come in time” for the investors.

READ FCA: We need to be ‘clearer’ about risks consumers take when investing

Butler and Davidson, who both apologised to affected bondholders too, made similar points in their evidence session on 25 March.

“The short answer is yes, we do need to be clearer about that,” said Butler, when asked if the FCA needed to be more explicit that there is a possibility that a firm can fail and retail investors lose their money. “We do need to help consumers understand the implications of that before it happens.”

“It is very important that consumers understand the risks they’re running and sadly I think we could do more although it isn’t our role to educate consumers,” said Davidson.

To contact the author of this story with feedback or news, email Bérengère Sim

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