London Capital & Finance – The FCA’s failed approach to misleading financial promotions
This article covers the approach the FCA took to the financial promotions issued by London Capital & Finance (LCF) including its use of its financial promotions power. Despite being given a clear power to publish details of misleading financial promotions the FCA decided to keep confidential six occasions where it intervened over LCF’s misleading promotions. Dame Elizabeth Gloster’s independent investigation concluded that the FCA’s approach was “too cautious”.
I view the FCA’s failure to make full use of the financial promotions power as inexplicable and inexcusable. There remain outstanding questions of why, despite claiming to have learned lessons from its experience of LCF, the FCA still fails to make regular use of the power to name firms when it bans their misleading financial promotions.
Over the course of many years, I campaigned for the FSA and FCA to take more robust action against misleading financial promotions. This article contains a chronology surrounding the introduction and FCA’s failure to make proper use of the power to ban misleading financial promotions and publish details of the firms and promotions involved.
In the 6 years leading up to the passage of the Financial Services Act 2012, I played a role in encouraging Parliament to give the FCA this new financial promotions power, which eventually became Section 137S of FSMA. The financial promotion power enables the FCA to ban a promotion issued by a firm and publicise the fact that it has done so by publishing the notice it has sent to firm. Following its introduction in 2013, I tried to encourage the FCA to make proper use of this new power.
The Financial Services Act 2012 gave the FCA the power to order firms to withdraw misleading financial promotions and to publish details of misleading promotions, including naming the firms and the promotions involved.
A report into the culture of the FCA which I co-wrote as Director of Policy at New City Agenda, and which was published in October 2016 noted that the regulator had a cultural reluctance to use its new powers and that “This was a significant missed opportunity as the whole point of Parliament granting the new powers was that they would be used by the regulator to strengthen the incentive for firms to pay fair redress and issue clear financial promotions“. The report referenced the financial promotion powers and said that the FCA should “make greater use of its new powers to name and shame misleading adverts”.[1]
If the FCA had actually used the financial promotions power with regard to LCF far earlier then, I believe, the banning of LC&F’s financial promotions would have had the desired effect of preventing a significant amount of detriment. It would have drawn attention to LCF’s practices both within and outside the FCA. Consumers searching for information about the firm online would have been led to news stories about the misleading promotions. Instead, a regulator with a statutory objective to protect consumers decided that consumers thinking about investing with LCF should not be told that the FCA had concerns that the firm was issuing misleading promotions.
The FCA found that LCF’s promotions gave undue prominence to the firm’s FCA authorisation and was using its regulatory status in a way which was “misleading” but decided to keep this information secret from consumers for over two years.
In my view, this approach shows a casual disregard for the interests of consumers. The FCA’s failure to make full use of this power until it was far too late is inexplicable and inexcusable.
The Nutella problem – a lack of feedback from the FCA when you report a misleading financial promotion
I have reported numerous misleading promotions for mini-bonds and peer-to-peer investments to the FCA. In the vast majority of cases this feedback and intelligence disappears into the FCA and they refuse to provide any feedback about what they are doing with it or even if they agree that the promotion is misleading. This is dispiriting for those providing the feedback and does not encourage them to engage with the FCA or provide intelligence.
The distinction which can be drawn is that if you report a misleading advert for Nutella Chocolate Spread you will receive a detailed adjudication stating whether the Advertising Standards Authority agrees with your complaint and also receive acknowledgment for having been responsible for seeing the advert banned.[1] Providing a response and acknowledgment is important both for third sector organisations – which always seek to demonstrate impact from their activities – and also for commercial organisations which will want to know that if they devote time and resources to reporting the activities of other firms or scammers then it will have an impact. If you complain to the FCA about an advert for a misleading mini-bond, peer-to-peer investment, mortgage, credit card or any other form of financial product and you don’t receive any feedback. You just receive an email from the FCA which includes the sentence:
“We will look into your complaint, and if we find that the advert you’ve sent to us is unfair, unclear or misleading, we will take appropriate action. However, please remember that for legal reasons we cannot tell you what action we have taken as a result.”
FCA intervenes six times on LC&F’s promotions but decides not to tell consumers
LCF had repeatedly breached the FCA’s financial promotion rules by using its FCA-authorised status to attract investors to its non-regulated bond business. The FCA raised concerns regarding LCF’s financial promotions in correspondence on 18 January 2016, 2 September 2016, 5 April 2017, 1 June 2017, 12 June 2017 and 18 August 2017.
These interventions followed complaints from consumers about the promotions questioning whether LCF had appropriate permissions for the products it was offering; alleging that LCF was “a scam” or a “pyramid scheme”; the picking up of an advert in the Times by the FCA’s automated system and a complaint about an advert in the Telegraph; and a complaint that LCF “flaunts its FCA membership”.
In these six interventions, detailed in the chronology at the end of this article, the FCA raised a number of concerns repeatedly with LCF about their misleading promotions including:
- undue prominence given to the firm’s FCA authorisation despite the bonds not being regulated or having FSCS protection, including using the firm’s authorisation for promotional purposes in a misleading manner as the “reference to an FCA regulated firm may give consumers the possible indication that their investment benefits from the protections of the regulatory regime, which is not the case”.
- failing to include prominent warnings that capital was at risk on LCF’s website or in Google promotions
- use of terms like 100% protection and 100% track record
- past performance warnings were insufficiently prominent
Despite these six interventions, the FCA appears to have not done any proactive monitoring of LCF’s financial promotions or to have raised these concerns with the authorisation division who were at the time considering LCF’s application to expand its permission to conduct regulatory activities.
Importantly, the FCA decided to keep these interventions secret from consumers and those thinking about investing with LCF.
Seventh time lucky
It was only on the seventh and final time that the FCA intervened on LCF’s financial promotions that it formally used its financial promotions power to publish the fact that it had done so.
On 13th December 2018, the FCA published the fact that it had directed LCF to withdraw promotions for its “Fixed Rate ISA or Bond” from its website, Facebook, Youtube, Google and other comparison sites. The FCA required the firm to refrain from making the misleading claims and to publish a statement on its website that “The Financial Conduct Authority has directed London Capital & Finance plc to withdraw all of its existing marketing materials in relation to LCF’s Fixed Rate ISA or Bond”.
Dame Gloster’s review identified that the issues with LCF’s financial promotions which were the basis for the intervention in December 2018 were similar to those identified in the previous interventions:
(a) “undue prominence given to the firm’s FCA authorisation despite the bonds not being regulated or having FSCS protection”;
(b) “past performance warning insufficiently prominent”; and
(c) “inappropriate comparison with cash savings”.
There was one additional issue with LCF’s financial promotions that had not been identified by the Financial Promotions Team prior to the intervention in late 2018: “the LCF Bonds are not ISA qualifying investments”.
Why did the FCA wait so long before making use of its financial promotions power?
A significant question is why the FCA failed to make use of its section 137S financial promotion power at a far earlier stage. I believe that earlier use of this power could have reduced the detriment associated with LCF and other mini-bond firms. It would have led to press coverage of the misleading promotions and any consumer considering investing with LCF would have known that the FCA had concerns about the accuracy of the promotions. This might have caused some consumers to think twice about investing and led to further scrutiny of the business models of LCF.
An alternative way of viewing the FCA’s approach is that even though it had a statutory objective to protect consumers, it decided that consumers thinking about investing with LCF should not be told that the FCA had concerns that the firm was issuing misleading promotions. In my view, this approach shows a casual disregard for the interests of consumers.
In my view, the FCA’s failure to make full use of this power until it was far too late is inexplicable and inexcusable. It represents a significant failure of the FCA leadership and Board members that the regulator failed to make use of a power it was given by Parliament.
Dame Elizabeth Gloster finds that the FCA’s policies on LCF’s financial promotions were deficient
The investigation found that the FCA’s policies in relation to LCF’s financial promotions were deficient. Although the FCA had the powers in place, it failed to use them appropriately, to communicate the findings more widely within the FCA or to consider that multiple breaches were indicative of a pattern of misconduct:
The FCA was aware that LCF repeatedly breached the financial promotions rules. However, the Financial Promotions Team (which formed part of the Supervision Division) handled each case separately rather than considering whether the pattern of conduct was indicative of poor culture or systems and controls, or even misconduct, at LCF.[2]
It criticised the FCA’s failure to use the financial promotions banning power as “too cautious”:
The FCA’s policy regarding the use of the banning power under section 137S of FSMA was also too cautious. The FCA had not used the section 137S power between its introduction in 2012 and the FCA’s intervention against LCF in late 2018. Instead, the FCA issued “minded to ban” letters to firms prior to invoking section 137S. If the firm cured the breach, as firms often did, the FCA would not exercise its power to issue a direction under section 137S. The Investigation recognises that, since the events relating to LCF, the FCA has used its banning power more frequently.[3]
The investigation seems to conclude that the FCA’s caution arose from legal advice received from the General Counsel’s Division (GCD), which in 2013/14 indicated that the FCA could not use the s137S power purely for the purposes of “achieving transparency”.
The advice from GCD seems to totally contradict all of the statements made by politicians as to the reason for the FCA being given the power and also the public statements by the FCA. It also seems that although this question was under active consideration there were significant delays in receiving advice.
The investigation says that later advice from 2015, however, suggested that the FCA could revise its policy so that it could exercise its S137S powers in appropriate cases, but even so the FCA did not use the power until 2018. The report found that:
The FCA’s caution in respect of the use of its section 137S power arose, in part, owing to what was regarded as difficult legal questions in respect of the circumstances in which the section 137S powers could be exercised and their purpose. The FCA received varying legal advice from different counsel on this issue over the course of 2013 and late 2015 and these questions were under active consideration by the FCA during this period.
The FCA also said in October 2017 that it didn’t publicise decisions to ban financial promotions if it thought that to do so would be unfair to the firm or might harm the interests of consumers. It said that this was a “proportionate” way to respond to complaints about financial promotions. It is unclear if the FCA failed to publish details of LCF’s misleading financial promotions six times between January 2016 and August 2017 because it would be “unfair” to the firm.
When we ban or prevent a financial promotion taking place, we issue a decision notice. We do not publicise that decision notice if we judge that to do so would be unfair to the firm or might harm the interests of consumers. We believe that this is a proportionate way to respond to such complaints about financial promotions.
FCA decides not to disclose full details because of the “reputational risk” to the FCA and that it would “provide fuel for those who want to argue that the FCA has missed a trick and should have shut the marketing down a long time ago”
The investigation’s report notes that the FCA was concerned about being criticised for its inadequate response and decided not to include details of its previous interactions with the firm when publishing its direction banning LCF’s promotions:
The Investigation’s conclusion that the FCA failed to take appropriate action in respect of LCF’s financial promotions is reinforced by the fact that internal FCA documents also suggest that the FCA was sensitive as to its past inadequate response to LCF’s financial promotions’ breaches. For example:
(a) when drafting the first supervisory notice in respect of LCF, the FCA considered putting in a section entitled “Past indication of concerns by the FCA”. A comment on a draft version of First Supervisory Notice stated: “I am inclined not to include details of why we [are] issuing this without giving the firm the chance to amend its advert i.e. the past interactions with Finproms. Arguably it is more complete to include this detail but I don’t think we are required to put it in the Notice and it would provide fuel for those who want to argue the FCA has missed a trick and should have shut the marketing down a long time ago” (emphasis added).
(b) An internal FCA email dated 11 January 2019 commenting on the draft second supervisory notice stated that “it was previously considered to include the 4 pursued [financial promotions] cases as a reason for issuing the direction. However, they decided not to include it because of the potential for reputational risk to the FCA, as there could be criticism that we did not resolve the issues with the firm sooner. Apparently, this was also discussed with Megan [Butler] during the approval of the Notice and she agreed to leave this information out.”
Key unanswered questions
Although the investigation notes that there has been greater use of the financial promotions banning power, the FCA website seems to indicate that this has only been used 3 times since 2018. Once for LCF in December 2018, once for a Claims Management Company in 2019 and once to ban online and Instagram adverts for a motor finance company in February 2020. This seems to indicate that the FCA has still not learned the lessons from its failures over LCF.
The key unanswered questions from the review are:
- Why did the FCA Board fail to exercise proper oversight of the way the FCA uses its existing powers and fail to challenge the policy set by the executives?
- Why is the FCA still failing to make regular use of its financial promotions banning power under Section 137S of FSMA and naming the firms and promotions involved?
- Are there any outstanding legal issues which the FCA consider prevent it from making full use of the financial promotions banning power?
- On how many other occasions did the FCA raise concerns about misleading financial promotions for other firms selling mini-bonds, IFISAs or Peer-to-Peer investments and decide not to tell consumers? Did it raise concerns about misleading promotions from firms like Blackmore Bonds, Lendy and Funding Secure, but decide that their prospective customers should not be told?
Please see below for a full timeline of the introduction and use of the financial promotions banning power
Timeline of the introduction and use of the power on misleading financial promotions (137S of FSMA)
November 2006
“The FSA has, at the moment, a seemingly far less transparent system in regard to financial advertisements, with no publication of complaints, and little public record of which companies have broken the rules. This means consumers seem to get a worse deal, with the FSA offering no public scrutiny and little incentive for advertisers to keep to the rules. The FSA needs to take a far more robust approach by highlighting poor practice.”[4]
But the FSA responded by saying it pursued hundreds of complaints every year about misleading adverts.
A spokeswoman explained: “As a regulator we have a formal procedure we have to go through – we can’t just issue a formal censure of a firm.”
2007 / 2008
The FSA considers whether it can develop a register of occasions where firms have amended or withdrawn financial promotions because of action by the regulator.[5] This register would disclose the details of firms that have amended or withdrawn a financial promotion at [the FSA’s] request. The Register of amended or withdrawn financial promotions would contain, in addition to the name of the firm, the steps the firm has taken in amending or withdrawing a promotion, and would also include an explanation of the reasons why [the FSA] were concerned and what prompted the amendment. Finally, [the FSA] would also provide a copy of the promotion that prompted [the FSA’s] intervention
The FSA consultation decided against having a register of amended or withdrawn financial promotions because it:
- It would result in reputational damage to firms that was disproportionate and so unfair.
- If firms thought it might be, a significant potential downside would be that firms would be less willing to make changes to their promotions for fear of appearing on the Register as the FSA was, in practice, very dependent on the cooperation of firms to make changes or withdrawals quickly to minimise risks to consumers.
- The existence of the Register could also be a disincentive to innovation in financial promotions if firms became more cautious about their interpretation of FSA requirements.
2009
The FSA provides feedback on the transparency consultation and says that it maintains the “view that the benefits of this proposal are not sufficient to justify the significant downsides”. The FSA noted that “Consumer groups continue to consider that a register would be an effective tool for deterring firms from publishing misleading promotions and would also help to inform consumers. Nevertheless, we believe that the alternative tools already available to us would achieve the desired outcome in a more proportionate way.”[6]
July 2009 – Conservatives “Plan for Sound Banking”
Following a meeting between Which? and the special advisers in the Conservative’s Treasury team, the Conservative’s proposals to reform financial services regulation were published in their “Plan for Sound Banking”. The Conservatives plans for regulatory reform include the creation of a new financial conduct and consumer protection regulator which will be required to “to disclose any action it takes against misleading financial promotions”[7]:
The [new regulator] must also be tougher than the FSA at holding the industry to account for its actions. For example, in its thematic market reviews the FSA does not ‘name and shame’ firms in breach of their regulatory obligations. And whereas the Advertising Standards Authority publishes information about which firms have been forced to withdraw or amend misleading promotions, the FSA does not.
This policy of secrecy provides firms with protection against public embarrassment and means consumers are denied information that could help inform their decisions. We believe that greater disclosure could provide a powerful incentive for firms to meet their responsibilities towards consumers. As the Financial Services Consumer Panel has argued[8] “The FSA should be a more transparent regulator. FSA should name and shame firms who are in breach of regulatory obligations. Consumers have a right to know more about the shortcomings of the firms with whom they deal well before the ultimate sanction of enforcement action by the FSA. Enforcement is not the only regulatory tool used by the FSA to change firms’ behaviour and we would like to see the full suite of tools deployed more transparently.”
2010-2011 – HM Treasury consultation on new regulatory framework
Following the 2010 election the coalition Government consulted on dividing the FSA into the PRA and the FCA and giving each regulator new objectives, powers and responsibilities. The Government announced that it would legislate to give the FCA a new power to direct a firm to withdraw or amend misleading financial promotions with immediate effect, and to publish the fact that it has done so.
“Misleading advertisements can be a key source of detriment for retail customers of financial services, for example by failing to give an accurate description of the risks or costs associated with a product. Advertisements can often have an immediate impact, and so swift regulatory intervention is often necessary to prevent consumers from being harmed.
Regulating financial promotions is therefore an important part of the FSA’s retail conduct work, and its general approach will be carried forward to the new regime. Nevertheless, the Government believes that there is significant scope to do more, particularly to make firms’ conduct and the regulator’s actions in this area more visible to the public.
A shortcoming of the current regime is that the FSA is not able to publish the fact that it has asked a firm to withdraw a misleading promotion, unless this action is the result of a formal decision or supervision notice.
While the FSA does a lot of work to enforce its financial promotions rules, this is not always evident to consumers, who do not know what action the regulator takes – often as a result of their tip-offs. Many consultation respondents cited this lack of transparency as an area of frustration, and argued that there was a missed opportunity here to impose greater market discipline around activities that the FSA considers ‘bad practice’.
The Government agrees with stakeholders that greater visibility of the regulator’s actions and decisions in relation to misleading financial promotions will increase confidence in the FCA’s ability to protect consumers and increase regulatory accountability, and that greater transparency around misleading promotions will engender better practice across the industry by making firms’ misconduct more visible.”[9]
November 2012 – Slight watering down of the power
Respondents to the HM Treasury consultation expressed a range of views expressed on whether the FCA should be under a duty to publish directions made under the new power. In its response the Government maintained that the FCA should have a duty to publish when it has given a firm a direction to amend or withdraw a financial promotion, as this will increase the visibility of the regulator’s activities, provide firms with greater clarity as to good and bad practice, and engender better practice across the industry.[10]
The initial draft of the new legislation included the following procedure for the new rule which would apply after the regulator has given a firm a direction to amend or withdraw a financial promotion and give the firm an ability to make representations about the direction:
“After the period for making representations in relation to a direction given under this section has ended, the FCA must publish such information about the direction as it considers appropriate (even if the direction is revoked).”[11]
However, during the parliamentary process the Government slightly watered down the power, the final text of the power was:
“After the period for making representations in relation to a direction given under this section has ended, the FCA may publish such information about the direction as it considers appropriate (even if the direction is revoked)”[12]
The Minister explained the reason for this change in the House of Lords, but was clear that the new power would still address a fundamental weakness in the current regime. The Government was committed to ensuring both that the regulator can and does take action in relation to inappropriate promotions and that the regulator is seen to be taking such action and that changing the word from “must publish” to “may publish” still held up a presumption that something was going to happen in this area:
“There was a lot of approval for those amendments but not so many people are staying to listen to the fascinating start of today’s discussion on the important issue of financial promotions. The regulation of financial promotions may seem relatively minor in importance and impact when compared with some of the other major and systemic issues covered by the Bill but, in fact, the appropriate regulation of financial promotions to ensure that they are clear, fair and not misleading is absolutely vital. It is a first and essential step on the road to preventing consumer detriment happening in the first place.
The fundamental shortcoming of the current financial promotions regime is that in most cases the FSA is not able to publish the fact that it has asked a firm to withdraw a misleading promotion. The Government are committed to ensuring both that the regulator can and does take action in relation to inappropriate promotions and that the regulator is seen to be taking such action. However, as I said when we last discussed this power on 8 October, there may be circumstances when it is not necessary or appropriate to publish the information about a direction. For example, where the firm is able to explain to the FCA why the promotion is not in fact misleading, there is little purpose in the FCA being required to say, “We thought there was a problem with this promotion and required the firm to withdraw it in the short term, but we discussed it with the firm and were persuaded that the promotion was in fact acceptable”. This does not necessarily help the FCA, the firm in question or consumers.
In our discussions on 8 October, the noble Baroness, Lady Hayter of Kentish Town, expressed her support for the new financial promotions power but cautioned:
“We would not want to see it diminished in any way”.—[Official Report, 8 October 2012; col. 880.]
I share her view, and would like to reassure her that changing “must” to “may” here does not in any way undermine, diminish or weaken the power for the FCA to step in and require promotions which the FCA considers may be inappropriate to be withdrawn. It simply gives the regulator some helpful discretion as to how it approaches disclosure. I can confirm that we do not expect this amendment to result in any change of policy in how the regulator exercises the power to direct firms to withdraw inappropriate promotions.
My Lords, as we have discussed before…the mere fact of putting in the Bill a statement with a “may” in it actually carries much more than the common-sense connotation of “may”; it holds up a presumption that something is going to happen in this area.”[13]
2012: Which? – Watchdog, not Lapdog Campaign
The Which? campaign supported the new financial promotions power:
“The Financial Services Authority (FSA) removed 327 misleading financial adverts in 2011 and 262 in 2010. And yet, it won’t name and shame them. Which? obtained the data under the Freedom of Information Act (FoIA), but the FSA refused to reveal the companies and products these ads were promoting. New regulator with proactive powers Following pressure from Which? and other consumer groups, the government has announced it will give the Financial Conduct Authority, which replaces the FSA next year, the power to name and shame companies when it finds misleading ads. When Which? looked at a range of financial adverts earlier this year, we found several that our legal expert, a barrister specialising in consumer law, believed could breach the Consumer Protection from Unfair Trading Regulations. Some 66% of consumers want the financial regulator to be proactive about taking misleading financial adverts off the market. What Which? wants the FCA to do about misleading ads: Which? wants the FCA to be a strong, open and proactive watchdog that ensures all products on the market are suitable for consumers and that products are advertised responsibly. We are pleased that the FCA, unlike the FSA, will publish details (including the name of the company) when it has found a dodgy financial promotion. Our findings demonstrate why this new approach is important – 300 adverts have been removed but no-one knows which companies and products they were promoting”[14]
October 2012: FCA – Journey to the FCA
In October 2012, the regulator published a document called “Journey to the FCA”[15] which noted that the Financial Services Bill 2012 provided new powers to the regulator including “the ability to ban financial products, publish details of misleading financial promotions, and let people know when we are proposing to take disciplinary action against a firm.” The Journey to the FCA document was intended to be “a statement of intent for the future, detailing how the FCA will carry out the functions that will be entrusted to it by Parliament and society”.
The FCA explained that the new power was intended to help it raise standards in a particular area, such as for new products, or relatively new channels like social media, as it would give a clear message to firms that are thinking of doing something similar. It also said that the promotions where it would use the power will not only be the worst cases, and it would not always measure harm to consumers in terms of actual or potential financial loss.
1st April 2013 – FCA gains new financial promotions power
On 1st April 2013, the Financial Services Act formally came into force and created the FCA and gave it the ability to use the new financial promotions power. The Government announcement said that “to complement and underline the principles of transparency and openness enshrined in the new regulatory framework” the FCA would have a “new power to take formal action against misleading financial promotions and disclose the fact it has done so”.[16]
Unfortunately for consumers the FCA did not seem keen to disclose the action that it had taken under the financial promotions power. It did not publish any directions or action against financial promotions which it had taken in 2013, 2014, 2015, 2016 or 2017.
In 2017, the FCA contacted firms with regards to 251 financial promotions, to express concerns that they may be unclear, unfair or misleading.[17] The FCA did not disclose the details of any of these promotions or the identity of the firms which issued them.
October 2016 – New City Agenda publishes report “Cultural change in the FCA, PRA & Bank of England: Practising what they preach?”
During 2016, New City Agenda conducted an investigation into the culture of the FCA, PRA and Bank of England. I co-authored the report and we interviewed a number of current and former FCA/FSA/PRA/Bank of England staff and stakeholders from consumer groups and industry.
New City Agenda published its report into the culture of the FCA, PRA and Bank of England in October 2016. The report highlighted a reluctance in the FCA to use its new powers which was described as a “significant missed opportunity”.
The report found:
Reluctance to use the new powers granted to it by Parliament: The Financial Services Act 2012 which created the FCA had granted it a number of new powers. These included the ability to name and shame firms which issue misleading financial promotions, publish details of warning notices issued to firms, and ban or restrict the sale of financial products. It had also recently gained the power to order individual firms or a number of firms to operate a redress scheme. The FCA has only used the product intervention powers once, only established one formal industry-wide redress scheme and has published a few warning notices – but without identifying the firms or the individuals involved. As far as stakeholders were aware, it had never used its power to name and shame firms which issue misleading financial promotions. This was a significant missed opportunity as the whole point of Parliament granting the new powers was that they would be used by the regulator to strengthen the incentive for firms to pay fair redress and issue clear financial promotions.
The report also noted the lack of transparency and the fact that despite the new power, those reporting misleading promotions to the FCA were still told that they couldn’t be told what action was taken:
Despite being given a specific power by Parliament to name specific firms issuing misleading financial promotions and publish details of the promotion, those reporting a misleading promotion to the FCA receive the following reply:
“We are assessing the promotion in accordance with our team’s case assessment procedures. Our processes require a determination of whether there is a breach and then an assessment of whether the issue meets our risk threshold. We then decide what action, if any, we should take. Due to confidentiality restrictions, we are unfortunately unable to provide you with any information as to what action we may have taken/take in this case, as we cannot divulge details of our action taken in respect of individual firms.”
The culture of secrecy damaged the accountability of the regulator as it was very difficult for politicians or the public to see what action it had taken in particular cases.
The report recommended that the FCA should make proper use of the new powers, improve engagement and take robust action in response to concerns raised with it by the public, should be more transparent and set up and independent evaluation office:
Make proper use of the new powers granted by Parliament. The FCA had failed to make proper use of the new powers it had been given to regulate products, name and shame misleading financial promotions or order companies to pay redress. It seems a missed opportunity that the FCA still refuses to name the firm involved when it finds a misleading advert.
Improve engagement with the public, SMEs and whistleblowers and take robust action in response to their concerns. Engagement could help improve trust, provide a valuable intelligence and offer an early warning system of potential risks and problems. It was unclear whether there had been any progress in the FCA’s initial aspiration to develop a ‘radar’ to deliver real-time information on risks to consumers. Once information had been received it was important that robust action is taken in response. All too often people we spoke with thought that their reports, certainly initially, were not being taken seriously.
Be more transparent. The FCA was far too secretive which damaged accountability and fed suspicions that it wasn’t always working on behalf of the consumer. The FCA needed to be far more open about what it was investigating and instructions it had given to the industry. It also needs to provide greater feedback to whistle-blowers and others who report problems. The FCA needed to be built on a presumption that information would be disclosed unless it would damage the public interest.
Set up an independent evaluation office within the FCA to ensure greater independent evaluation and internal challenge. The FCA is an organisation which is under pressure from multiple external constituencies. However, it tends to deal with this pressure through being guarded and not engaging in much serious reflection. The FCA should set up an Independent Evaluation Office, similar to the one which exists within the Bank of England.
The New City Agenda report was criticised by the FCA:
“the New City Agenda report was pretty disappointing. It was very rooted in the past. It drags over past history. It’s just raked over the old coals.”[18]
Media coverage of the New City Agenda report
Media coverage of the New City Agenda report mentioned the recommendations concerning financial promotions:
The Guardian – October 2016[19]
The report – written by André Spicer, a professor at Cass business school at City, University of London – calls on the FCA to use new powers to name and shame misleading adverts and take action against senior executives.
It also calls for the abolition of rules that allow regulators to cite their inability to disclose confidential information about firms. “The current framework has damaged efforts to hold regulators accountable,” the report said.
New City Agenda was formed in the aftermath of the banking crisis and is backed, among others, by John McFall, a former MP who used to chair the Treasury select committee.
Reuters – 25th October 2016[20]
The FCA must demonstrate independence from politicians and industry and use its new powers to “name and shame” misleading adverts, and take action against senior industry executives.
FCA activity with regard to the financial promotions issued by London Capital & Finance (LCF)
At the FCA Annual Public Meeting it was said that in the “period between 2014 and ’15, and late 2018, the FCA intervened using its so-called financial promotion powers on 5 occasions in respect to the LCF, and in respect to their financial promotions.”
The independent investigation uncovered six interventions from the FCA. The FCA raised concerns regarding LCF’s financial promotions in correspondence on 18 January 2016, 2 September 2016, 5 April 2017, 1 June 2017, 12 June 2017 and 18 August 2017. These followed complaints received by consumers or on one occasion a press advert triggered under the FCA’s monitoring. The details below are taken from pages 56 to 78 of the Dame Gloster’s report.
January 2016 intervention
In December 2015, a consumer emailed the FCA’s Customer Contact Centre on to ask whether LCF had the appropriate permissions for the products it was offering. The Financial Promotions Team subsequently wrote to LCF on 18 January 2016 as a result of the concerns identified by the December 2015 review of LCF’s website. The letter identified the following issues with respect to LCF’s website:
- The website did not include a warning that the customer’s capital was at risk. The letter from the Financial Promotions Team to LCF stated that this was a breach of COBS 4.2.1R and it was also “not in line with COBS 4.2.4G(1)”.
- The statement “Protection 100%” (which the letter noted was used in relation to each bond) was misleading since the customer’s capital was at risk. The letter explained that this statement was, therefore, misleading and in breach of COBS 4.2.1R.
- Whilst the website referred to various information memoranda being approved by Sentient Capital, it was unclear whether an authorised firm had approved the website as a promotion.
LCF sent the FCA a letter dated 29 January 2016 which detailed the steps the firm had taken to address the FCA’s concerns. Among other steps, the letter noted “[t]he term “Protection 100%” has been removed and replaced with “Assets secured” which is 100% accurate”. The covering email which attached the letter, also dated 29 January 2016, noted that LCF had taken advice from a law firm and Sentient Capital in making the changes noted in the letter. The FCA replied by email dated 15 February 2016 to the effect that it remained concerned that the prominence of the capital at risk warning that LCF added to its homepage was not adequately displayed.
September 2016
Following another call from a consumer alleging that LC&F was a “pyramid scheme”, the FCA reviewed the LC&F website and sent a letter to LC&F. The letter set out various concerns including:
- The statement at the top of the home page of LCF’s website which read “[a]uthorised and regulated by the Financial Conduct Authority” was misleading because “[LCF] is not authorised and regulated by the FCA for the purposes of issuing the [LCF] bond” but only for consumer credit lending.
- The regulatory statement was “being used in a promotional manner as it is the first bullet point in the financial promotion and is highlighted in bold font. In our view it is not acceptable to use a firm’s regulatory status in a promotional manner, especially when this is misleading”.
- The risk warnings in respect of consumer’s capital being at risk and that FSCS protection was unavailable were not displayed sufficiently prominently.
- The letter also asked for further details regarding the “100% track record” statement on LCF’s website.
The Financial Promotions Team raised further concerns by a letter to Sentient Capital on 8 September 2016 that stated:
- “We note that you have amended the text in the box to say “Authorised and regulated by the Financial Conduct Authority for the purpose of consumer credit lending” and have made it less prominent by moving it further down and removing the bold font. It is important to make it clear to consumers what [LCF] is regulated for, but it is equally as important to be clear what they are not regulated for. In our opinion it is still not clear to consumers that [LCF] is not regulated by the FCA for the purposes of the bond, especially as the regulatory statement is contained with other promotional information about the bond investment. It is important consumers understand the investment does not receive any of the protections associated with a regulated firm. Please make this clearer on the website”.
- “The statement “Authorised and regulated by the [FCA] for the purpose of consumer credit lending” is also incorrect. [LCF] is only regulated by the FCA for credit broking… Please amend this statement accordingly”.
- “You have confirmed that the statement “100% track record” relates to [LCF] fully repaying investor capital in the past when due. In our opinion this triggers the past performance requirements in COBS 4.6R but the promotion does not contain this information. COBS 4.6.2R states a firm must ensure that information that contains an indication of past performance of relevant business, a relevant investment or a financial index, satisfies the conditions set out in COBS 4.6.2R(1-6).”
Sentient Capital responded by letter dated 15 September 2016 and stated that LCF:
- would remove the sentence “[a]uthorised and regulated by the [FCA] for the purpose of consumer credit lending”;
- used the phrase “[LCF] is regulated by the FCA for credit broking activities”; and
- disputed that the 100% track record statement engaged the FCA’s past performance requirements (i.e. the provisions of COBS 4.6R).
By letter dated 16 September 2016, the Financial Promotions Team wrote to Sentient Capital again to reiterate its view that the 100% track record statement triggered the past performance rules.
Sentient Capital responded by letter dated 19 September 2016 stating that LCF had amended the 100% track record statement to include a warning that past performance was not an indicator of future performance.
By further letter of 21 September 2016, the Financial Promotions Team raised the new issue that “the risk of illiquidity of the bond lacks prominence” to which Sentient Capital responded noting “[t]he phrase ‘Bond Series 3 to 7 are non-transferable’ has been added.”
By email dated 3 October 2016, the FCA confirmed to Sentient Capital that it had closed the case.
April 2017
Following a complaint from a consumer alleging that LC&F was “a scam” and a complaint which had been submitted by a consumer to the ASA, the Financial Promotions Team sent a letter dated 5 April 2017 to LCF which covered two points:
- The letter noted that the FCA had already written to Sentient Capital and LCF several times in September 2016 “regarding concerns about the [LCF] website, such as the “authorised and regulated” statement…the past performance trigger “100% track record” and the absence of an illiquidity warning. The capital at risk warning that was contained in the second box on the home page… is also no longer there. We are very disappointed to see that the changes made to the website to address these concerns are no longer in place. We have enclosed copies of our previous correspondence to remind you of our concerns”.
- The letter also questioned who was approving LCF’s website as a financial promotion.
By email of the same day, LCF’s Compliance Officer wrote to the Financial Promotions Team and stated LCF “didn’t notice the change and have contacted the technical providers. They had apologised and promised to investigate on how the version you saw was uploaded.” LCF also explained that it did not need approval from Sentient Capital given LCF was “authorised and regulated by the FCA (albeit with limited permission)”and that LCF had had telephone calls with the FCA to this effect.2
By email dated 6 April 2017 the FCA noted that “technical providers have re-instated the latest version of the website and you were unaware it had changed. We also note that you approved your own website in your capacity as an authorised firm. We confirm that we have now closed our file.”
The Financial Promotions Team considered this breach to be relatively unimportant. For example, three members of the Financial Promotions Team exchanged emails on 11 April 2017 expressing their collective view that the case was not of sufficient significance to be mentioned in the team’s weekly report. One team member involved in the case expressed the view as follows: “I’m not sure my closed case is worthy of mention. I wrote to [LCF] because all the changes they had made to their website last year when I wrote to them had disappeared and the old non-compliant version was up. I wrote to them and it was a technical error – at the flick of a switch the compliant version was back again.”
It does not appear that the Financial Promotions Team escalated or investigated the consumer’s concern in the report of 20 March 2017 that “this [i.e. a promotion for LCF’s products] has to be a scam”. Importantly, the Financial Promotions Team does not appear to have escalated these concerns to the Authorisations Division which was, at that time, reviewing the First [Variation of Permission] Application.
1st June 2017
Based on monitoring of financial promotions in the press the FCA Financial Promotions Team opened a case in connection with this press promotion, which was an advert that appeared in The Times on 3 May 2017.The Financial Promotions Team sent a letter to LCF on 1 June 2017 which stated:
“[w]e consider that this promotion does not comply with our rules and is not in line with our guidance because we consider that the statement “Authorised and regulated by the [FCA] for credit purposes” could be misleading in the context of the financial promotion. As the promotion is for investment activity that is not regulated by the FCA, including a statement regarding your regulatory status could be misleading for consumers. In our opinion the reference to an FCA regulated firm may give consumers the possible indication that their investment benefits from the protections of the regulatory regime, which is not the case”.
LCF responded the same day to say that it had made changes to the advert (albeit noting that LCF considered it a general advert that did not promote any specific investment and was, therefore, outside the scope of the financial promotions rules). The Financial Promotions Team emailed to confirm that they were closing the case but disagreeing with LCF’s assertion that the advert fell outside the financial promotions rules. It appears that there was no other action or review undertaken by the Financial Promotions Team. Further, the Financial Promotions Team does not appear to have discussed the case with the Authorisations Division which was, at that time, still reviewing the First [Variation of Permission] Application.
8th June 2017
Following the escalation of a consumer complaint by the ASA to the Financial Promotions Team on 8 June 2017 regarding a promotion for LCF’s products that appeared in the Daily Telegraph in May 2017, the Financial Promotions Team wrote to LCF on 12 June 2017 to raise similar concerns regarding the promotion in The Times.
The promotion contained the warning “[a]s with any investments, your capital may be at risk”. The email from the Financial Promotions Team noted that “[w]ith a mini bond a consumer’s capital is at risk”. As a result, the Financial Promotions Team explained that the promotion was in breach of the fair, clear and not misleading requirement in COBS 4.2.1R.
LCF responded the next day to say the promotion would be “amended immediately” and that “[i]nternal disciplinary procedure to run”. It appears that there was no other action or review undertaken by the Financial Promotions Team.
September 2017
A member of the public submitted an online report of a misleading financial promotion in connection with LCF’s website on 11 August 2017. The complaint stated: “[LCF’s website] fails to warn that the capital is at risk – it flaunts its FCA membership and misleads consumers that their deposit is protected under the FSCS”.
The Financial Promotions Team reviewed this report and sent a letter to LCF on 18 August 2017. The Financial Promotions Team’s letter identified the following issues in respect of LCF’s website and a sponsored Google promotion:
- The website displayed the statement “we are authorised and regulated by the Financial Conduct Authority, FRN 722603” which raised the same concerns detailed in the Financial Promotions Team’s letter of 2 September 2016 (i.e. the statement was misleading as it was used in relation to investment activity that was not regulated by the FCA). This was stated to be in breach of COBS 4.2.4G(4).
- The firm was using its regulatory status in a promotional manner.
- A sponsored Google promotion for LCF failed to contain a “capital at risk” warning, which was stated to be a breach of COBS 4.2.4R(1).
- The sponsored Google promotion also contained the statement “100% track record” which triggered the past performance requirements in COBS 4.6.2R.
The letter from the Financial Promotions Team noted that they had written to LCF “on three other occasions concerning deficiencies in [LCF’s] promotions”. The letter explained that a further breach would result in the team seeking “a formal attestation by an approved person conducting a significant influence function from within [LCF] that there are adequate systems and controls in place for the approval of compliant financial promotions”.
LCF responded on 31 August 2017 and explained the changes they had made to their website and the Google promotion. The response stated that LCF “had no intention of utilising its regulatory status as a marketing tool” and in respect of the threatened attestation: “[p]lease note that our promotional material undergoes a full approval process at all times, marked to COBS and other aspects we consider”.
In the light of the amendments made by LCF, the Financial Promotions Team closed the case without any further action. It does not appear that the Financial Promotions Team (or any other team within the FCA) took any steps to verify LCF’s assertion that its “promotional material undergoes a full approval process at all times”. In addition, even though the FCA had identified multiple breaches of the financial promotions rules by LCF, there was no ongoing targeted monitoring of LCF’s financial promotions. The Financial Promotions Team was reliant on complaints from consumers or the Ebiquity tool to identify any future issues with LCF’s financial promotions.
December 2018
The first time the FCA used its powers under Section 137S to publish the fact that it had forced a firm to withdraw a financial promotion was when it intervened with regards to LCF’s promotions, on 13th December 2018. The Supervisory Notice says that on 10th December 2018 the FCA directed[21] London Capital & Finance plc (“LCF”) to immediately:
(a) Withdraw from its website (www.londoncapitalandfinance.co.uk) all communications relating to its “Fixed Rate ISA or Bond”;
(b) Withdraw all other communications that relate to its “Fixed Rate ISA or Bond”, whether those communications appear on Facebook, Youtube, www.top-isa.rates.co.uk, www.best-savings-rate.co.uk, as a result of Google searches or any other platform or advertising medium;
(c) Refrain from making any communications that in substance replicated the claims made on the firm’s website about the “Fixed Rate ISA or Bond”;
(d) Publish on its website the following statement prominently at the top of the homepage “The Financial Conduct Authority has directed London Capital & Finance plc to withdraw all of its existing marketing materials in relation to LCF’s Fixed Rate ISA or Bond”
The issues with LCF’s financial promotions which were the basis for the intervention in December 2018 were similar to those identified in the previous interventions:
(a) “[u]ndue prominence given to the firm’s FCA authorisation despite the bonds not being regulated or having FSCS protection”;
(b) “[p]ast performance warning insufficiently prominent”;260 and
(c) “[i]nappropriate comparison with cash savings”.
There was one additional issue with LCF’s financial promotions that had not been identified by the Financial Promotions Team prior to the intervention in late 2018: “[t]he LCF Bonds are not ISA qualifying investments”.
List of references
[1] For example, see this press coverage relating to the ASA publishing an adjudication into the advert: http://news.bbc.co.uk/1/hi/uk/7266143.stm
[2] Page 37 of Dame Elizabeth Gloster’s report
[3] Page 41 of Dame Elizabeth Gloster’s report
[4] http://news.bbc.co.uk/1/hi/business/6131640.stm
[5] https://www.fca.org.uk/publication/discussion/fsa-dp08-03.pdf
[6] http://www.fsa.gov.uk/pubs/cp/cp09_21.pdf
[7] https://conservativehome.blogs.com/files/planforsoundbanking.pdf
[8] https://www.fs-cp.org.uk/sites/default/files/turner_review.pdf
[9] HM Treasury, A new approach to financial regulation: building a stronger system, Para 4.78-4.83
[10] HM Treasury, A new approach to financial regulation: blueprint for reform https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/81403/consult_finreg__new_approach_blueprint.pdf
[11] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/81403/consult_finreg__new_approach_blueprint.pdf Page 143
[12] http://www.legislation.gov.uk/ukpga/2012/21/section/24/enacted see 137S
[13] https://hansard.parliament.uk/Lords/2012-11-26/debates/12112612000460/FinancialServicesBill
[14] https://www.which.co.uk/news/2012/05/financial-watchdog-removes-327-ads-but-wont-name-and-shame-287125/
[15] https://www.fca.org.uk/publication/corporate/fsa-journey-to-the-fca.pdf
[16] https://www.gov.uk/government/news/financial-services-bill-receives-royal-assent
[17] https://www.fca.org.uk/publication/foi/foi6273-response.pdf
[18] https://www.hl.co.uk/news/2016/10/27/10-things-you-need-to-know-in-markets-today
[19] https://www.theguardian.com/business/2016/oct/25/financial-conduct-authority-andrew-bailey-new-city-agenda-report
[20] https://uk.reuters.com/article/uk-britain-banks-regulations/report-calls-uk-financial-watchdogs-cowed-and-secretive-idUKKCN12O2PN
[21] https://www.fca.org.uk/publication/supervisory-notices/second-supervisory-notice-london-capital-and-finance-plc-2019.pdf