FCA head wrings hands over London Capital and Finance

In a much anticipated showdown with the Treasury Select Committee, FCA head Andrew Bailey made extensive use of the Glenn Beck Device.

The Glenn Beck Device, named after an emotionally incontinent US alt-fact pundit, involves saying something totally indefensible but phrasing it as a question, so that anyone who calls you out can be countered with “I’m not saying it is, I’m just asking questions”.

In this vein, Andrew Bailey admitted the colossal failures of the FCA over London Capital & Finance. But by ending the confession with a question mark, he avoided the only other way the sentence could have ended, i.e. “I resign”.

Bailey admitted that the FCA had intervened a total of five times over London Capital & Finance over its misleading financial promotions, but feigned confusion over why the company continued to take in inexperienced retail investors’ money in defiance of the FCA’s insipid bleating. Almost all of which now appears to be lost.

“The question which stands out for me is that the FCA intervened on five occasions with LC&F regarding financial promotions between 2015 and last year.

Why did they not have the effect they should have had?”

The obvious answer is “Because LCF was a Ponzi scheme and they couldn’t care less what the FCA thought, as long as the FCA didn’t stop them taking in money.” Which didn’t happen until December 2018, tens of millions of pounds too late.

Beck Bailey continued:

One of the big challenges we have in the mini-bond world is internet marketing. We have dedicated teams following this stuff. But the big question is what we can expect from internet companies Google, Facebook and the internet service providers?

So Bailey thinks that Google and Facebook should do the FCA’s job for it… no wait, of course he doesn’t, he’s just asking questions.

As JFK might say, when you’re a Government regulator with statutory immunity and a half-a-billion pound budget, ask not what you can expect from Google, but what Google can expect from you.

Google may be a billion-dollar company – with a tiny fraction of those billions now swallowing up the £20 million paid by LCF via Surge to take out misleading ads – but nobody seriously expects Google to turn down an advert for an apparently legitimate FCA-authorised company.

In UK law, responsibility for a financial promotion explicitly rests with the FCA-authorised company that approves it under Section 21 of the Financial Services and Markets Act. If it’s got Section 21 sign off (which all LCF’s adverts did, thanks to the FCA) an advertising platform can reasonably believe it to be kosher.

Google can not issue warnings about dodgy-looking companies soliciting investment from the public without risking a defamation suit; the FCA can as it has statutory immunity. Google cannot investigate companies and demand they open their books; the FCA can.

Whether Internet ad platforms should allow ads for unregulated investments is a matter for debate (of which the winner will be “No”), but LCF wasn’t unregulated.

So the buck bounces back to the FCA.

LCF’s misleading ads were not the only red flag waving long before December 2018. There was also the fact that LCF presented itself as a pseudo-P2P company offering secured lending to hundreds of small businesses, yet Companies House records showed only a handful of borrowers and security charges, all of which were linked to LCF directors.

This fact was in the public domain long before December 2018 but only entered the public consciousness after, because amateur sleuths only took an interest after LCF collapsed. A professional FCA investigator would have discovered the non-existence of LCF’s hundreds of SME borrowers much more quickly. If one had been looking. Which they didn’t.

The question of “What else could the FCA have done?” is not a difficult one to answer.

• Instead of repeatedly and pointlessly “intervening” over LCF’s misleading promotions, demanded LCF provide the documentary evidence it was required to hold under COBS 4.12.9 onwards that all of its investors qualified as high-net-worth or sophisticated investors.
• Because if LCF had repeatedly required “intervention” over its misleading ads, then there was a clear need to establish how many people had already been misled, and were holding LCF bonds when they shouldn’t.
• On top of this, launch a formal investigation into LCF, demand its monthly management accounts and establish the true financial soundness of the business and its loans. Which of course would have led straight to the inevitable liquidation, but the earlier this was done, the less money would have been lost.
• Because whenever a company is willing to flagrantly flout the rules on misleading adverts, the regulator should always be asking: what other rules is it breaking?

Bailey’s revelation that the FCA limply “intervened” five times into LCF before the shutdown in December 2018 makes the FCA’s failure even worse than we thought.

Until yesterday we thought the FCA had been oblivious to LCF until December 2018. It appeared to have paid no attention to LCF since it authorised it in 2016.

Bailey’s revelation that the FCA intervened a total of five times means the FCA was well aware of the potential harm before December 2018.

The FCA knew LCF was misleading the public through its ads. It follows that the FCA knew there were people holding LCF bonds who had been misled as to the risks and for whom ultra-high-risk minibonds were totally unsuitable. It also knew, after the second intervention, that LCF was a serial offender. And that the longer this went on the worse it would get.

But the FCA did nothing.