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The powerful Treasury Select Committee chairman Nicky Morgan has written to the Financial Conduct Authority demanding it considers a full-blown investigation into regulatory failures around the collapse of mini-bond company London Capital & Finance.
In what was a clear threat to the City watchdog, she wrote that if it refuses to launch such a probe, she will urge the Treasury to force it to.
LCF collapsed in January leaving more than 11,000 largely elderly investors facing the loss of nearly all their money.
The Evening Standard has revealed how the regulator was warned in 2015 and 2017 about risks around the company but failed to act until December of last year, by which time the public had invested £236 million in its bonds.
Yesterday the Serious Fraud Office said it had arrested four people in association with the collapse and had launched a full investigation.
It was also confirmed today that one of the businesses it lent to, London Oil & Gas, had collapsed into administration. LoG invested £40 million in North Sea oil explorer Independent Oil & Gas which LFC’s administrators say is the only money bondholders are likely to get back.
Independent chief executive Andrew Hockey today said he welcomed the administrators’ support.
LCF was regulated by the FCA but the mini-bonds it wrongly marketed as ISA-compatible were not.
Morgan said: “The FCA is currently investigating LC&F’s marketing material and the Serious Fraud Office is investigating individuals associated with the company. Yet there is a broader need to understand what can be learned in a regulatory sense from the events at LC&F.”
Morgan wrote to the chairman of the FCA, Charles Randell, that the regulator must investigate four key areas.
*Did the FCA act fast enough in its supervisory action against LCF in December?
*Are other firms using their FCA authorisation in a way that may mislead consumers?
*Should more should be done to explain and clarify to consumers how much protection the FCA gives them?
*Should mini-bonds should be allowed to be unregulated?
The letter reveals that the FCA’s Andrew Bailey has already told the Treasury Select Committee that he is concerned about firms which give the public the misleading impression that they are fully regulated when in fact, only a small part of their business is.
However, the FCA’s failure to act on repeated warnings are likely to come under serious question in any investigation.
Mini-bonds offering high interest rates such as LCF’s 6-9% have flourished against the backdrop of the low interest rates from other investments. Several have proved too-good-to-be-true, but the collapse of LCF is by far the biggest of its type.
The Evening Standard has disclosed in recent months how LCF paid an agent 20% to 25% commission up front from the bondholders’ cash, then lent the money to a small number of highly risky business ventures with links to individuals associated with the bond company.
Questions have been asked in the House of Commons by MPs whose constituents have been affected by the company. One, Gavin Newlands, MP for Paisley and Renfrewshire North, said he has a constituent who invested £60,000 with LCF and £20,000 with Blackmore Bonds, a company whose products were marketed through the same sales agent, earning a similar sized commission.
Speaking of the LCF situation, Newlands said in parliament to leader of the House Andrea Leadsom last week: “Can we have a debate on this scandalous and fraudulent issue?”
Leadsom responded: “I had heard of this appalling collapse, and the honourable gentleman is right to raise it. There will be people who have really suffered financially as a result of this.” She suggested he seeks an adjournment debate to “raise it directly with ministers”.