FCA seeks to defend its handling of London Capital & Finance matter
The UK Financial Conduct Authority (FCA) has published its response to the Complaints Commissioner’s Final Report on the FCA’s handling of London Capital & Finance (LCF) matter.
The Commissioner published her Final Report on 15 February 2022. It sets out her conclusions on the three main topics she identified when reviewing complaints about the FCA’s handling of LCF: the FCA’s oversight of LCF, the FCA’s approach to ex gratia compensation and the FCA’s handling of complaints.
The FCA agrees with the some of the recommendations, but does not accept others.
In addressing the first topic of the Final Report (the FCA’s oversight of LCF), the Commissioner recommends that the FCA upholds allegation five that, in the case of LCF, the Register was misleading.
The FCA does not accept that the Register was misleading. The regulator explains that it is legally obliged to keep the Register as a record of every person who appears to the FCA to be an authorised person and the services that they say they are able to provide. In the case of LCF, the FCA provided a Register entry which reflected LCF’s permissions and authorised status at the time.
Although the Register is an important source of information, it is not designed to be the sole source of information for investors to use before making investment decisions. The FCA would expect investors to consider a wide range of information from different sources to help them understand any potential investment and the risks involved and to identify if they are protected if things go wrong.
According to the FCA, the Commissioner has concluded that the Register was misleading because investors assumed they were investing in a safe product solely, or largely, because LCF was on the Register.
The FCA states:
“As required by legislation we give authorised persons permission to carry on certain financial services and we provide information about those permissions on the Register. Based on the information that we have, the Register’s entry correctly reflected LCF’s permissions at the time. Given this, we cannot agree with the Commissioner’s conclusion that the Register was misleading”.
The regulator adds that it has since changed the Register so that its role is displayed more clearly and prominently. The Register shows what regulated activities a firm can carry out, but it cannot inform users about which particular products and services offered may be protected by the FSCS or included in the jurisdiction of the Financial Ombudsman Service. This is because protection applies, amongst other things, on the basis of regulated activities, and not on the provision of particular products.
It is relevant in this case that the issuing of LCF bonds was not a regulated activity.
The FCA explains:
“Standing back, we still think there is an important distinction between the fact of LCF being authorised giving a false sense of security (the ‘halo effect’) and the Register being misleading. We do not believe that in presenting the legally required information, as in this case, the Register could be described as misleading.
Many firms are FCA authorised but also undertake activities or offer products or services that are unregulated. For example, several large authorised financial services firms, including high-street banks, provide some type of unregulated services, and the risk that consumers may be influenced by the ‘halo effect’ also exists for these firms. Any ‘halo effect’ is an unavoidable consequence of the legislative framework”.
The current legislative framework means that what the Register is required to show relates to the activities which the firm is stating it is able to provide. However, firms are not required to let the FCA know about the unregulated activities they carry out and these activities are not included on the Register.
The regulator admits that this presents a challenge for consumers trying to navigate the Register.