The report was in response to the FCA’s regulation of investment firm London Capital and Finance plc (LCF).
An independent investigation led by Dame Elizabeth Gloster DBE concluded that “the FCA did not discharge its functions in respect of LCF in a manner which enabled it effectively to fulfil its statutory objectives.”
It also attributed the regulator’s failings to “significant gaps and weaknesses in the FCA’s policies and practices.”
Based on the findings, the Treasury said the FCA needed to become a more “proactive”, “agile”, “decisive”, and joined-up regulator that is willing to act to protect consumers and financial markets.
It said the board should set an end date for its transformation and create milestones to mark changes in culture, which should be published.
Mel Stride MP, chair of the Treasury committee, said: “The collapse of LCF is one of the largest conduct regulatory failures in decades.
“Dame Elizabeth Gloster identified a litany of failings at the FCA regarding its regulation of LCF and highlighted a range of changes needed at the FCA under its new leadership.
“The Treasury committee has made some further recommendations for the regulator and the government to help prevent another LCF.”
In December 2018, the regulator asked LCF to withdraw promotional content for mini-bonds, an unregulated investment product with high risk and typically high returns, saying it was “misleading, not fair and unclear”.
At this point, 11,625 people had invested a total of £237m with LCF. The following month, the firm went into administration.
Dame Elizabeth’s findings were published in December 2020.
The Treasury Committee then launched its inquiry into the FCA’s regulation of LCF in February 2021, to consider the findings and examine what changes had been made since the report’s publication.
The committee said it was not “readily justifiable” for the FCA to require regulated firms to adhere to the Senior Managers Regime while seemingly not adopting similar principles internally. It also said there were doubts that the FCA board met the standards it sought to impose on others.
An over-reliance on collective responsibility may deny visible accountability and could lessen confidence in the organisation as a result, it added.
The Treasury committee said the LCF case highlighted the importance of the FCA looking at a firm’s regulated and unregulated activities.
Dame Elizabeth’s report suggested the oversight created a “halo effect” where investors were attracted to carry out unregulated activities under the confidence of a firm’s regulated status.
The committee recommended the regulator require authorised firms to make the risks associated with unregulated activities clear to customers. It also suggested the FCA be given the power to recommend changes to its perimeter of regulation to the Treasury.