London Capital & Finance (LCF) investors have complained about the Financial Conduct Authority’s (FCA) avoidance of compensation claims for victims of financial crime.
More than 1,000 LCF investors complained to the City regulator about its conduct in failing to supervise LCF and the matter was then escalated to the Financial Regulators Complaints Commissioner, which hears complaints against the UK’s financial regulators, with a total amount of up to £50m in aggregate being claimed.
The City regulator has refused to compensate LCF investors as a whole, writing to investors over the last month with pro forma rejections.
The bondholders said that the FCA has offered no compensation for its regulatory failures, receiving repeated warnings and tip offs but failing to intervene, whilst LCF and its associated persons raised and misappropriated £237m of retail deposits.
The bondholders’ complaint concerns the purported introduction by the FCA of a previously unseen and narrow test of causation in its new proposed complaints scheme.
They criticised the “solely or primarily responsible” test for purposes of determining whether compensation should be paid by the FCA to investors who are victims of malfeasance by FCA-regulated firms.
The investors also complained about the application of this novel and baseless test of causation to LCF bondholders, pursuant to an FCA board resolution dated 16 April 2021 and related public statement of 19 April 2021.
In addition, the complaint alleges that the FCA’s supposed “solely or primarily responsible” test of causation has no basis.
Dame Elizabeth Gloster, the former Court of Appeal judge, released her LCF review in December 2020, which concluded the FCA was culpable for multiple and serious regulatory failings.
The bondholders said they now consider the FCA to have moved from its acceptance of the Gloster Report, on the topic of its own responsibility to compensate investors, a matter in which it has a clear self-interest.
“The applicable causation test under the statutory complaints and compensation regime for regulators is well-established and has gone unchallenged by the FCA for over a decade,” said Thomas Donegan, a financial regulatory partner at law firm, Shearman & Sterling, which is representing some LCF investors on a pro bono basis.
“The FCA sought to introduce a “solely or primarily responsible” test of causation via a consultation paper last year, but was forced to abandon its proposals after the public outcry they provoked.
“The FCA must now recognise the legal regime under which it operates remains unchanged and step up to its responsibilities.”
The FCA said it was actively engaged with stakeholders, including Shearman & Sterling.