Low interest rates have been a challenge for savers in much of Europe and the US ever since the financial crisis, tempting many to seek out investments that promise high returns. The natural desire to make money can blind investors to risk — or encourage them to put their savings into products that are not properly regulated by financial watchdogs. That challenge has only been compounded by the pandemic as central banks everywhere have rushed to keep borrowing rates low to keep their economies afloat. The concern is that, faced with the prospect of an extended period of ultra-low or even negative rates, millions more savers will plough their hard-earned capital into speculative schemes.
It is against this backdrop that a long-awaited report into the collapse of British savings company London Capital & Finance should be read. Its conclusions — in particular the revelation of gaping holes in the UK’s financial regulation network — are especially timely. Close to 12,000 consumers lost most of their £236m savings when LCF collapsed into administration in 2019. The company had sold high-risk, unregulated mini-bond investments that promised high rates of interest. Many of the buyers were elderly; some used their life savings to buy the bonds.
The report of the inquiry, led by former judge Elizabeth Gloster, makes for uncomfortable reading for the financial watchdog, as well as for Andrew Bailey, governor of the Bank of England, who was chief executive of the regulator from 2016 until March this year. The inquiry found that the Financial Conduct Authority failed to “effectively supervise and regulate” LCF. The regulator, the report went on, failed to appreciate the significance of “an ever-growing number of red flags”. The report also expressed its “disappointment” at the attempts of certain individuals, including Mr Bailey, to deter the inquiry from singling out individuals.
Consumers are entitled to expect and receive protection from the regulatory regime, in particular when they invest their own savings. Yet one of the most alarming conclusions to be drawn from the LCF report is that neither consumers nor even the regulator’s staff fully understood what is regulated by the FCA and therefore covered by compensation — and what is not. Companies that are authorised by the watchdog can offer unregulated investments.
The FCA has said it accepts all nine recommendations in the report. It is important that these are followed through. They include sensible proposals such as training staff to recognise fraud and irregularities, as well as ensuring that information and data relevant to the supervision of a firm is available on a single electronic system. The FCA should also not reassure consumers about the non-regulated activities of a firm based on its regulated status.
Additional recommendations, however, about regulatory reform could have more far-reaching consequences. They will require careful consideration. Chief among these is that the Treasury should consider the “optimal scope of the FCA’s remit”, citing concerns over the broad scope of the watchdog’s responsibilities and the impact this has on its effectiveness.
Ultimately, regulation on its own cannot guarantee protection for consumers. One of the wider lessons from this scandal is the poor level of investment knowledge of many savers — and the importance of financial education. Against an uncertain economic backdrop as countries recover from the effects of the pandemic, understanding financial investment choices matters more than ever.