Two of the City watchdog’s top executives are under pressure to repay tens of thousands of pounds in bonuses after being castigated for multiple failures during the collapse of a major minibond provider.
Sky News can reveal that senior parliamentarians want Megan Butler and Jonathan Davidson to repay £90,000 in bonuses awarded to them for the 2018-19 financial year after they were singled out for criticism in an inquiry into the scandal at London Capital & Finance (LCF).
On a day of shame for the Financial Conduct Authority (FCA), Dame Elizabeth Gloster, a former Court of Appeal judge, said the watchdog had been “wholly deficient” in discharging its responsibilities for the oversight of LCF.
Nearly 12,000 people invested a total of £237m into LCF products prior to its collapse in early 2019.
On Thursday, the Treasury said it would now examine the case for a compensation scheme that would make payments to some of the affected customers.
In her report, Dame Elizabeth outlined a litany of failures on the part of the FCA, which during the period in question was run as chief executive by Andrew Bailey, the Bank of England governor.
Following the report’s publication, Mr Bailey issued a statement apologising to LCF investors.
He said when he took over at the FCA in 2016 it was clear that “substantial reform” in the way supervises many firms was needed and that immediate steps were taken “to change the approach”.
“The required changes in culture, mind-set and systems was a major programme of work across the organisation, which took some time to put into effect,” Mr Bailey said.
“I am sorry those changes did not come in time for LC&F bondholders.”
Among the flaws in the FCA’s approach to supervising LCF were the watchdog’s inadequate training of its staff, a failure to examine the minibond group “holistically” and inaction in the face of repeated warnings about the company’s activities.
“As a cumulative result of these failures, the FCA did not appreciate the true nature of LCF’s business or the risks that it posed to consumers,” Dame Elizabeth said in a statement.
“Neither did the FCA appreciate the significance of an ever-growing number of red flags, which were indicative of serious irregularities in LCF’s business.
“This occurred at a time when LCF’s unregulated bond business was growing at a rapid pace and substantial funds were being invested by bondholders.”
Despite the excoriating criticism of the FCA and its leadership, the regulator refused to say on Thursday whether Ms Butler or Mr Davidson would return £45,000 in bonuses awarded to each of them for the 2018-19 financial year – after the probe into LCF was commissioned by the FCA’s own board.
The FCA said it did not have a scheme in place to claw back bonus payments to senior managers in the way that it expected many regulated firms to operate.
It said only that £45,000 in deferred bonuses awarded to Ms Butler and Mr Davidson for the 2019-20 financial year would now not be paid.
“We note the comments in the LCF Review which clarify that the allocation of responsibility to individuals is not a finding of personal culpability,” the watchdog said.
“Nevertheless, the FCA board has decided that discretionary pay awards for executive committee members which have been deferred in respect of the 2019/20 year will not be paid.”
Kevin Hollinrake, a Conservative MP who has been a vocal campaigner for reform of Britain’s banking sector, said that decision was insufficient.
“This is a damning report which clearly points the finger at the leadership of the organisation,” he said.
“In many areas the FCA is simply not fit for purpose and unless individuals are held to account for their failings this kind of incompetence and negligence will continue.
“Those responsible should be fired or at the very least have to repay the significant bonuses they have received for their years of failure of the proper regulation of LCF.”
Mr Davidson is to leave the FCA as part of a restructuring initiated by the regulator’s new chief executive, Nikhil Rathi, while Ms Butler is moving to an alternative role.
Pat McFadden MP, Labour’s shadow economic secretary to the Treasury, said: “This scandal represents a shocking failure of supervision in which some people lost their whole life’s savings.
“The primary responsibility lies with those who ran London Capital and Finance and misled investors.
“But many people trusted this company because it was regulated by the FCA, even if individual products were not, and that trust was breached.
“It is only right that the Government has set up a compensation scheme.
“But this case raises broader questions about how the FCA regulates financial firms and the products they sell, especially when its responsibilities are about to expand significantly after Brexit.”
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