The U.K. Financial Regulators' Complaints Commissioner has published its final report upholding complaints from over 400 complainants concerning: (i) the U.K. Financial Conduct Authority's failures of regulation concerning London Capital & Finance; and (ii) the FCA's subsequent refusal to compensate bondholders for its role in their losses.

LCF, an alleged Ponzi scheme currently under investigation by the U.K. Serious Fraud Office, went into administration in January 2019 causing losses to investors of over £200m. LCF had obtained FCA authorization in 2016 and leveraged the "halo effect" that this created to encourage over 11,000 mostly retail investors to invest in its bonds. It was registered as an ISA manager and sold its products as ISAs via advertising on major search engines and price comparison websites. The majority of investors' funds were then dissipated; LCF's administrators currently anticipate a recovery of just 25%. An investigation into regulatory failings in the supervision of LCF was subsequently launched and chaired by Dame Elizabeth Gloster, culminating in a report that was highly critical of the FCA's supervision of LCF.

The complaints submitted to the FRCC related to the following:

• Element One: complainants were dissatisfied with the FCA's oversight of LCF, in particular that the information about LCF on the Financial Services Register was misleading. The FRCC recommended that the FCA proactively ensures that it maintains the Register and takes steps to mitigate the halo effect which FCA-authorized firms may benefit from.
• Element Two: complainants requested that the FCA should offer an ex gratia compensatory payment for its regulatory failings. The FCA had based its decision not to compensate investors on a so-called "solely or primarily responsible" causation test for liability. The FCA sought to introduce such a rule via a consultation in 2020 but abandoned the rules changes in the face of significant public pressure. The FCA despite this had adopted guidance in a "remedies statement" to this effect and proceeded in the case of LCF compensation as if it had introduced such a new rule to the Scheme Rules. The FRCC determined that the "solely or primarily responsible" test of causation was inconsistent with the statutory framework for complaints against regulators under the Financial Services Act 2012 and that the FCA's decision not to compensate LCF investors was vitiated by legal error. The FRCC recommended that the FCA abandon the "solely or primarily responsible" causation test and retake the LCF compensation decisions in line with an adequately justified test.
• Element Three: complainants were dissatisfied with the FCA's handling of complaints about its supervision of LCF, including the FCA's approach to calculating ex gratia payments for delays in responding to complaints. The FRCC recommended that the FCA publish its internal guide to determining ex gratia payments on its website.

Shearman & Sterling LLP acted for certain LCF investors and made the main submissions to the FRCC in this case.

The FCA is considering the Report and will publish its response by March 15, 2022.

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