The UK’s financial watchdog failed to properly supervise and regulate London Capital & Finance, a mini-bond provider, before the firm collapsed and wiped out the savings of thousands of people, an independent inquiry has concluded.

The government-backed investigation, led by the former high court judge Dame Elizabeth Gloster, identified “significant gaps and weaknesses” in the policies and practices of the Financial Conduct Authority (FCA).

It said the watchdog ultimately failed to make sure that LC&F was following the rules. More than 11,600 people had invested a total of £236m – an average of £20,000 each – when LC&F collapsed last year.

Gloster’s team said it showed the FCA needed better training for its staff and recommended a government review of the watchdog’s remit.

The findings are a blow to the reputation of the FCA’s former boss Andrew Bailey, who was chief executive for nearly three years before the collapse of LC&F in early 2019. Bailey left the watchdog to takeover as governor of the Bank of England in March this year.

“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.

Bailey apologised to bondholders on Thursday, but said he had tried to reform the watchdog during his tenure.

“As CEO of the FCA between 2016 and 2020, I apologise to LC&F bondholders. When I was asked to lead the FCA in July 2016 it was clear that a substantial reform programme to the supervision of many of its 60,000 firms was essential … I am sorry those changes did not come in time for LC&F bondholders.”

The FCA announced it was scrapping £205,000 worth of executive bonuses for the 2019/2020 financial year following the report’s release. However, Bailey is not affected by the FCA’s decision, since he left too early in the year to qualify for a bonus.

Gloster’s team said the FCA fell short of its duty to protect investors when the firm went under in early 2019. The Treasury said the report showed the watchdog “did not effectively supervise and regulate” LC&F ahead of its collapse.

The investigation concluded: “The bondholders, whatever their individual personal circumstances, were entitled to expect, and receive, more protection from the regulatory regime in relation to an FCA-authorised firm (such as LCF) than that which, in fact, was delivered by the FCA.”

The inquiry – which lasted 16 months – also found LC&F did not even have the right permissions for the kind of business it carried out. While the FCA had sufficient power to monitor the investment firm’s marketing materials, and intervene if it breached its rules, the FCA did not have appropriate processes in place to take action.

“The FCA’s handling of information from third parties regarding LCF was wholly deficient. This was an egregious example of the FCA’s failure to fulfil its statutory objectives in respect of the regulation of LCF,” the report explained.

LC&F mini-bonds promised stellar returns to investors of up to 8% a year, but put only a small amount of cash into safe interest-bearing investments.

The rest was funnelled into speculative property developments, oil exploration in the Faroe Islands and even a helicopter bought for a company controlled by LC&F. The company collapsed in January 2019.

The inquiry has put forward a raft of recommendations in light of the FCA’s failings. It said the FCA should provide “appropriate training” to key teams involved in authorising and supervising firms, to ensure they can spot fraud and know when to escalate concerns.

Meanwhile, the Treasury was urged to “consider the optimal scope of the FCA’s remit” and make sure that UK laws allow the FCA to quickly intervene, no matter where the breach is taking place.

The Treasury said a reform programme outlined by the FCA on Thursday – which included enhanced training and a restructuring of its policy, supervision and competition teams – was the best way to manage its remit, but said it would consider further compensation for investors.

The FCA said it has invited Gloster and her team to meet its senior leadership “so we can hear frankly from them about their recommendations and listen carefully to their feedback on the FCA”.

FCA chairman Charles Randell said: “We accept all the recommendations that have been made to the FCA and we are profoundly sorry for the mistakes we have made.”