The London Capital & Finance scandal, in which the now infamous investment firm collapsed owing £236m to 11,000 people, may be one of the worst regulatory failures on the watch of the Financial Conduct Authority, the body established in 2013 to do better than its derided predecessor. Now an independent investigation will be launched. About time too.
The first half of the inquiry is the tamer element, at least from the FCA’s point of view, since it will ask whether the regulatory system itself is up to scratch. At least part of the answer must be no. LC&F itself was regulated by the FCA from June 2016, but the actual “mini-bonds” marketed with enticing interest rates of up to 8% were unregulated. The scope for confusion among innocent retail investors is obvious.
Better technical fixes may mean neon-lit warnings about the limitations of an FCA authorisation, or even pre-approval of marketing materials. But something clearly has to improve.
Yet the core question is about the FCA itself. Even within a muddled system, should it have woken up earlier? Independent advisers have said they warned the regulator about LC&F as early as November 2015. What did the FCA actually do between then and December 2018, when it finally ordered LC&F to withdraw “misleading, unfair and unclear” marketing literature?
Assets were frozen at that point, and the administrator has since reported on where investors’ “mini-bond” savings were going. It is an extraordinary tale of speculative property developments in the Dominican Republic, Faroe Islands oil adventures and helicopters. Then there is the separate question of how LC&F’s products could ever have appeared, incorrectly, alongside the magic words “ISA eligible”.
The worst part, though, is how long the LC&F saga lasted. One can accept that even competent regulators will sometimes struggle to police every corner of the financial jungle. But, when outside professionals have sounded the alarm, the excuse for inaction had better be good. If the FCA has a sound explanation, it has yet to share it. The terms of reference for the inquiry have yet to be decided. Go for: as deep and wide as necessary.
Big four accountancy firms face fees pressure
“Audit can only be transparent and independent when it is fully priced. It will only be fully priced when it is no longer subsidised. Therefore, subsidies must end and audit must stand on its own two feet.”
The business select committee’s succinct summary of the case for separating the audit and non-audit functions of the big firms is excellent. It addresses head-on the big four’s objection that audit fees would go though the roof under a ringfenced system. Yes, fees might increase, the MPs accept, but “letting prices rise if need be is a desirable development”.
Quite right. A system in which non-audit fees subsidise audit work is almost bound to breed conflicts of interest. The audit partners can feel beholden to their non-audit colleagues, especially when individuals are being rewarded on a firm-wide basis. In the end, the quality of audit work deteriorates and willingness to deploy professional scepticism suffers.
The MPs prefer full structural separation of big firms, as opposed to the less radical option of operational separation. There is a long way to go before that argument is won, but the report should at least encourage belief in the idea that independence is worth paying for. We’ve tried the lower-cost subsidised version of auditing, and results have been terrible for years.
Thames Water changes tune after regulatory nudge
It’s amazing what a firm regulatory prod can do. At the end of January, Thames Water sounded furious when told by Ofwat to “substantially rework and resubmit” its next five-year business plan. Two months later, the tune has changed. The company has re-examined its numbers and concluded it can indeed achieve more for less.
It promises to reduce pollution by 30%, rather than the 18% originally proposed; flooding in homes and businesses will fall by 20%, not 15%; and so on. And it will be done on a five-year budget cut by £800m to £10.9bn.
We’ll find out in July whether Ofwat is satisfied, which is not guaranteed since Thames is still only offering a £5 per customer cut in bills, versus others’ more generous pledges. But the regulator has clearly won the main argument about efficiency: Thames should have pushed itself harder in the first place.
In one respect, though, the company probably has a point: most customers surely do care more about getting decent pipes and reservoirs for the 21st century than shaving a few quid off bills. Ofwat must triple-check spending assumptions, but there may be a basis for agreement this time.
