Technical Director Ben Rees discusses in Law360 the new FCA powers to combat misleading and fraudulent claims.
Ben’s article was published in Law360, 5 June 2023, and can be found here.
Marking another key moment in the London Capital & Finance scandal, in May the company’s former CEO was handed a 10-month jail sentence, suspended for two years, after being found guilty of breaching a court order freezing his assets.
Having admitted a breach and contempt of court in July 2022, Michael Thomson was only spared prison because of his early admission of guilt, as well as the expected impact of a custodial sentence on his already declining mental health, according to the judge in his trial at London’s Southwark Crown Court.
Thomson had admitted spending close to £100,000 on luxury items, including a foreign holiday, a hot tub and thousands of pounds worth of clothes, despite the Serious Fraud Office having secured a freezing order over his assets in the wake of London Capital’s collapse in 2019.
The SFO’s investigation into London Capital is ongoing, and — to date — neither Thomson nor any of his fellow executives have been charged with any wrongdoing in relation to the failure of the firm.
London Capital’s collapse saw holders of its mini-bonds all but wiped out, with bondholders expected to receive as little as 20 pence in the pound following the liquidation of the company and the distribution of its remaining assets.
In March 2019, London Capital’s administrators reported that 11,625 bondholders had invested some £237 million ($283 million) in its products, which — despite the company itself being regulated by the Financial Conduct Authority — were not in fact regulated by the FCA.
London Capital was thus able to promote itself to investors as being FCA-regulated, but the permissions it held with the regulator did not actually permit the type of activity that was ultimately carried out by the company.
However, many of the consumers caught up in the scandal invested on the basis that they were reassured by the true — if misleading — statements that the company was regulated by the FCA.
The unfortunate reality is that consumers are frequently unaware of the complexities of the FCA’s authorizations regime. Many simply see the term “authorized and regulated by the FCA” as being confirmation that the firm is appropriately regulated and therefore permitted to provide all the advice and services offered by way of its promotional material and adverts.
By the time the misinformation comes to light, investors are often already nursing heavy losses, as was the case with London Capital’s bondholders at the time of the company’s implosion and sinking into insolvency.
Some victims of misleading advertising or misleading claims may retrospectively not even be able to use the U.K. Financial Ombudsman Service or the U.K. Financial Services Compensation Scheme to seek redress. This is the case, for example, in situations where
the firm was not properly authorized and regulated in the first place.
When London Capital collapsed, the holders of its mini-bonds were not eligible for compensation by the scheme, on the basis that the mini-bonds were not actually a regulated investment and no regulated adviser had been involved in the sale to the bondholder .
The holders of mini-bonds were fortunate to garner sympathy from the British government, which in December 2020 announced that the exceptional circumstances of the London Capital scandal warranted a dedicated compensation fund.
However, the government said that compensation would be capped at £68,000 per investor, significantly less than the £85,000 scheme compensation cap.
The November 2020 report into the FCA’s regulatory conduct by Elizabeth Gloster, a former High Court judge, in regard to the London Capital scandal was damning for the regulator, and prompted soul-searching at the FCA.
The regulator later announced changes to its authorizations regime, which it said were prompted directly as a result of the London Capital scandal.
In 2022, the FCA stated its intention to clamp down on firms that misuse regulatory approvals in a way that misleads consumers, announcing it would now use its new powers to revoke businesses’ permits to carry out regulated activity much faster than before.
As a result of the regulatory changes, the FCA can now cancel or change a regulated business’ permission a mere 28 days after a warning has been issued, if the firm has not taken appropriate action. Previously, it would reportedly often take three months or more before a firm’s permission could be canceled.
The FCA noted that time is of the essence when tackling such conduct, in that the shorter time frame:
will strengthen consumer protection by reducing the risk of consumers misunderstanding or being misled about their exposure to financial risk and how much consumer protection they have.
The FCA believes that this new power will support its existing “use it or lose it” initiative. Under this initiative, since May 2021 alone, the FCA has carried out 1,090 assessments to check whether firms are in fact undertaking the financial activity for which they have been granted permission.
By July 2022 — the latest figures available from the FCA — this process had already resulted in 264 firms applying to voluntarily cancel their permissions, while a further 47 have modified their permissions to carry out regulated activities. The new 28-day limit should help to expedite this process and indeed any other regulatory initiatives.
When announcing the update to the authorizations regime, Mark Steward, the then- executive director of enforcement and market oversight at the FCA, noted the risk to consumers posed by businesses that retained permissions they did not need or use.
While the FCA’s new powers meant that the regulator could take quicker action to cancel unused or unneeded permissions, he urged firms to be proactive by regularly reviewing their permissions and seeking to cancel those not needed or not used.
Where firms have historical permissions but do not use them, the change in rules means that such firms will be streamlined much faster by the FCA, which should have a positive knock-on effect in terms of combating those firms that seek to obfuscate their real permissions and authorizations to commit offenses or criminal frauds.
The changes made by the FCA further enhance powers to cancel authorizations granted to it by the Financial Services Act 2021.
This legislation empowered the FCA to vary or cancel authorizations where there is a failure to respond to a warning within the 28-day period, although such a decision may be reversed upon the application of a firm when the FCA considers it just and reasonable to do so.
One simple way for consumers to reduce the risk of fraud is to check the FCA’s Financial Services Register before investing with a particular provider or taking advice from a financial adviser.
The register enables anyone to instantly check whether a company is in fact regulated by the FCA, and it also gives detail as to which services they are regulated to provide. The government should do more to make consumers aware of this simple service that, if more widely used, could help to protect consumers.
It is certainly the case that introducing a more thorough policing by the FCA of the way that permissions are used, and employing a swifter way to correct the position when permissions are unused or misused, are both steps in the right direction.
Such changes should however be combined with greater public awareness of what firms can and cannot do, and the consequences of investment with an unregulated firm. This should be combined with a campaign to more generally raise awareness of the ever-present risk of fraud and misleading claims being made in the advertisement for investments.
Should such action be taken, it would avert future disastrous situations occurring, shielding investors from the type of avoidable losses seen in the wake of London Capital’s collapse into insolvency. While the FCA claims to have understood its shortcomings in relation to the demise of London Capital, only a radical step forward to sufficiently tighten permissions regulation will prove that the regulator has truly learned lessons from its past mistakes.