The governor of the Bank of England, Andrew Bailey, has been cleared of misleading an inquiry into the London Capital & Finance investment scandal, but an influential committee of MPs has found that the regulator he ran until last year “fell short” in its duty to protect the public.
In a new report, MPs on the Treasury select committee said that after the high-profile collapse of London Capital & Finance (LC&F), which saw thousands of people lose money, the Financial Conduct Authority needed to be “more interventionist” and “should make more frequent use of its powers”.
More than 11,600 people had invested a total of £237m – an average of £20,000 – when LC&F went under in January 2019. Its “mini-bonds” had promised returns to investors of up to 8% a year.
Late last year, an independent inquiry headed by the former high court judge Dame Elizabeth Gloster concluded that the FCA had failed to properly supervise and regulate LC&F before its collapse.
Andrew Bailey was chief executive of the FCA from July 2016 until March 2020, when he took over as governor of the Bank of England.
Gloster’s report disclosed that Bailey had asked investigators to delete references to responsibility for the FCA’s failures resting with specific individuals. However, Gloster went ahead and included his name and those of two other individuals.
This triggered a high-profile row when Bailey and Gloster gave evidence to the Treasury select committee earlier this year as part of its own inquiry.
Gloster told the MPs that there had been “quite a lot of pushback” to her decision to name Bailey and the other two people, and that it seemed “inappropriate” and “a lack of judgment” to try to suggest that their names should not be mentioned. She later said she “must disagree” with some of the evidence Bailey had given to the committee.
Asked by MPs if he regretted making representations about being named, an angry Bailey said there had been a “fundamental misunderstanding”, adding that the draft version of Gloster’s report contained “ambiguity” in terms of the distinction between more general responsibility and personal blame.
In their report, the MPs said: “The public disagreement between Dame Elizabeth Gloster and Andrew Bailey effectively raised the question as to whether Andrew Bailey had misled the committee when giving evidence on this matter.” But they added: “We do not believe Mr Bailey misled the committee.”
The MPs said the revisions made by Gloster to the draft report, clarifying that “responsibility was not an attribution of culpability”, met the essence of Bailey’s request. They said they now regarded the matter as closed.
However, when it came to Megan Butler, one of the other two FCA executives named in Gloster’s report, the committee did have criticisms. It said it believed the FCA was wrong not to have engaged in a more thorough recruitment exercise for the “executive director for transformation” job to which Butler was appointed in November 2020.
“Given that Dame Elizabeth’s report cited Megan Butler as bearing responsibility for important areas of failure, and that her recruitment was conducted internally with just one alternative candidate, we understand why many will feel that ‘a buck that does not stop with an individual stops nowhere’ when it comes to the personal consequences for those involved with the failings at the FCA in relation to LC&F,” said the MPs.
The report also said that after the scandal, “changes in culture” were needed at the FCA to protect consumers and financial markets.
It said: “The FCA recognises that it has a statutory duty to protect customers from fraud. In the case of LC&F, the regulator fell short, due to a culture that saw fraud as principally a matter for the police, and its lack of enthusiasm to look beyond the perimeter.”
The LC&F scandal has proven costly: it emerged in April that taxpayers face a £120m bill for the compensation of those who lost money. About 8,800 people who invested in the defunct firm were due to receive an average of £13,600 each after the government set out details of an official compensation scheme.
In a statement, the FCA said: “We welcome the committee’s report and will be providing a formal response in due course. As we have said, we are profoundly sorry for the mistakes we have made over LC&F and are committed to implementing the recommendations of the Gloster report, which are progressing at pace. The FCA has embarked on a wide-ranging transformation programme to build a data-led regulator able to make fast and effective decisions, and we are providing the committee with updates on our progress.”