The government has launched an independent inquiry into the collapse of London Capital & Finance, the investment firm at the centre of a mounting £236m financial scandal in which thousands of investors lost money.

Dame Elizabeth Gloster, a leading high court judge specialising in corporate failures, finance and fraud, will lead the investigation into the company and the oversight of the City watchdog ahead of its collapse.

LC&F sold £236m worth of so-called “mini bonds” which promised stellar returns to investors of 6.5% to 8% a year, but the investment firm collapsed earlier this year owing money to more than 11,000 customers.

John Glen, economic secretary to the Treasury, said: “We urgently need to get to the bottom of the circumstances around the collapse of LC&F.

“Dame Elizabeth will bring her vast experience and rigour to this important investigation, which will help ensure this type of thing doesn’t happen again.”

The inquiry could prove deeply embarrassing for the Financial Conduct Authority, after it emerged that the City regulator’s enforcement team was warned three years ago about the company but failed to act.

It follows criticism of the regulator over whistleblowing complaints made against Lloyds Banking Group.

More than a dozen MPs have called for the resignation of Andrew Bailey, the FCA’s chief executive, over his handling of the LC&F failure. It comes at a difficult time for the regulator, who is considered among potential candidates to replace Mark Carney, the governor of the Bank of England.

The FCA decided in March there should be an independent review into the issues raised by LC&F’s failure and wrote to the Treasury requesting that one was launched.

Charles Randell, FCA chair, said the investigation would help establish what happened and whether or not further changes are required. “The FCA will ensure that she has all the access and support she needs to conclude her work as quickly as possible,” he added.

Gloster has had a distinguished career as a barrister and as a judge in the high court and the court of appeal, including work for creditors in the Robert Maxwell saga and the failure of Barings Bank. She also acted for the government in banning the Barings directors as company managers, and the football manager, Terry Venables, as director of Tottenham Hotspur.

The findings of her review into LC&F will be reported to the Treasury, which will also review the regulation and marketing of the kinds of investment products sold by the company.