Bailey-Gloster LCF spat distracts from real issue

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An unedifying dispute broke out this week as Andrew Bailey testified to a Treasury Select Committee about the collapse of London Capital and Finance.

In one of the more depressing sections of Dame Gloster’s report into the FCA’s mishandling of the FCA-authorised Ponzi scheme (in a crowded field), Dame Gloster highlighted how, instead of using the investigation as an opportunity to learn from its mistakes, the FCA instead tried to shirk responsibility, claiming that holding individuals responsible for their failings might deter people from applying to be senior bureaucrats, and questioning whether, in a very real sense, there was any such thing as responsibility at all.

It also claimed that nobody could have seen the collapse coming (they did) and that the investigation was using the benefit of hindsight (it wasn’t).

Before the Select Committee, current Bank of England Governor Andrew Bailey tried to reverse ferret out of this dodging of the philosophical concept of responsibility, claiming that the report had made a “fundamental misunderstanding” and that he had only sought to remove personal names from the report where they related to “culpability” rather than “general responsibility”.

Gloster for her part refuted that there had been any misunderstanding and stated in an open letter that Bailey’s attempt to have his name removed from the report went beyond what Bailey claimed, and “the distinction between personal culpability and responsibility was merely one argument”.

Before the Committee, Bailey also claimed that Gloster “put it to you that if only we told the staff to pull their socks up the problem would have gone away”. How Bailey got that impression from Gloster’s forensic, comprehensive, nearly 500 page report is a mystery to me.

This is more than a case of “he said, she said”, because implying that the Governor of the Bank of England has not been straight with Parliament is a very serious matter. And yet it is still a side issue.

The best defence for Andrew Bailey would have been to say “Yes, we ignored the numerous whistleblowing reports from reputable professionals and the general public, failed to consider whether a company systematically misselling high-risk bonds needed more investigation then telling them to change the adverts, and wrongly dismissed the whole scheme as ‘not our problem’. But I was merely one big cog in a crappy machine. The entire UK securities law framework is not for purpose, and creates a pathway for high-risk investment schemes to be systematically sold to the public. I screwed up, but because there is a framework that allows you to sell high-risk unregulated investment schemes to the public, as long as you separate out the promotion of the scheme from the investment scheme itself, it was inevitable that someone would screw up.”

But Bailey can’t say that. Because the Governor of the Bank of England can’t tell the world that the UK securities law framework is not fit for purpose. In an interesting new version of the Peter Principle, Bailey has been kicked upstairs into a position of responsibility that gives him too much to lose by calling out the incompetence of those above him.

One of the implicit jobs of the head of the Bank of England, in between taking the flak from savers for lowering interest rates or borrowers for raising them, is to maintain confidence in UK PLC. So admitting that the UK is the scamming capital of the developed world is not going to happen.

London Capital and Finance collapsed two years ago, and there has been no serious movement since then towards:

  • Reforming the UK’s securities law, starting with the Financial Services and Markets Act 2000, to ensure that any firm offering investment securities to the public must register with the Financial Conduct Authority (or equivalent). In contrast to the current system that randomly exempts loan notes and other schemes that try to dodge the UK’s more limited ban on collective investment securities.
  • Reforming the FCA from the top down and rooting out its “regulatory perimeter”, aka the cultural attitude of “if it’s unregulated it’s not our problem”.

London Capital and Finance investors are at present still anxiously waiting to see whether the Treasury will announce further compensation for those left behind by the essentially random compensation payments made so far. (E.g. to people who transferred stocks & shares ISAs but not, for no discernible reason, cash ISAs, and people who successfully convinced the FSCS they received advice from a firm which was not a financial advice firm and employed no financial advisers.)

The legitimate financial industry and the general public, who will ultimately have to pay for any further compensation, are anxiously waiting to see whether Parliament will do anything to stop it happening again, and again, and again.

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