Britain’s markets watchdog, when it was run by Andrew Bailey, now head of the Bank of England, failed to supervise London Capital & Finance properly before the fund collapsed last year, an independent report said on Thursday.
The demise of LCF left 11,600 investors in mini-bonds facing losses of up to 237 million pounds ($322.25 million).
Former high court judge Elizabeth Gloster said the Financial Conduct Authority’s failure was due to “significant gaps and weaknesses” in its practices and policies.
“The investigation has concluded that the FCA did not discharge its functions in respect of LCF in a manner which enabled it effectively to fulfil its statutory objectives,” the report said.
LCF was regulated by the FCA, but the mini-bonds it sold to raise funds for small companies, were not.
The report said the FCA’s “flawed approach” to where the regulatory perimeter lay meant that LCF was able to use its FCA-regulated status to present an “unjustified imprimatur of respectability to the market, even in relation to its non-regulated bond business”.
“Responsibility for the failure in respect of the FCA’s approach to its perimeter rests with the executive committee and Mr Bailey,” the report said.
The Bank of England said it had no immediate comment.
Britain’s finance ministry said it would set up a compensation scheme for LCF bondholders.
The FCA’s new chief executive Nikhil Rathi said the report made “sobering reading” and he was committed to implementing its nine recommendations.
“We know that the FCA must make faster and more effective decisions, prioritise the right outcomes for consumers, markets and firms, and reform our approach to intelligence and information sharing,” Rathi said.
The FCA said bonuses for its executive committee members for the 2019/20 year financial year, which have been deferred, will not be paid.
Ahead of the report, the FCA made a temporary ban on selling mini-bonds to retail investors permanent from January.
(Editing by William Schomberg)