City watchdog fines PwC £15m over London Capital & Finance audit

PwC has become the first audit firm to be fined by the City regulator with the imposition of a £15 million penalty for failing to raise concerns about suspected fraud at London Capital & Finance.

An investigation by the Financial Conduct Authority found that The Big Four accountancy group’s audit team had encountered several “red flags” during their work on the minibonds company’s 2016 accounts but had not alerted the watchdog, even though they were “duty-bound to report those suspicions”.

“They should have acted on them immediately,” Therese Chambers, joint executive director of enforcement and market oversight at the authority, said. “Their failure to do so deprived the FCA of potentially vital information.”

The FCA’s fine comes after the Financial Reporting Council, the accountancy watchdog, imposed a £4.9 million penalty on PwC in May for failings related to London Capital & Finance. EY, which had audited the minibonds firm’s 2017 accounts, also was fined £4.4 million by the FRC, while Oliver Clive & Co, a smaller firm, received a £42,000 penalty for its brief work with London Capital & Finance in 2015.

London Capital & Finance was at the centre of one of Britain’s biggest investment scandals when it collapsed into administration in January 2019, owing about £237 million to more than 11,600 investors who had bought its toxic, unregulated minibonds. The FCA said that “thousands of investors were misled because they were not given the full picture about the risks of the product”.

The company’s eventual collapse resulted in a criminal investigation by the Serious Fraud Office, which is continuing, and a ban on the mass-marketing of speculative minibonds to retail investors. It also prompted the government to take the unusual step of establishing a redress scheme for victims of the scandal, which paid out £115 million, while the Financial Services Compensation Scheme reimbursed £57.6 million. The failed minibonds company was censured by the FCA last October and in February the regulator levied a £31,800 fine on Floris Huisamen, a former director of London Capital & Finance who had handled compliance for the business, and banned him from the industry.

The City regulator’s investigation into PwC’s work concluded that the accountancy group had encountered “significant issues” during its audit. These included “aggressive behaviour” from a senior individual at London Capital & Finance and difficulty obtaining basic information from the company, as well as attempts to mislead auditors. London Capital & Finance’s actions prompted the audit team to question in meeting notes early on whether there was “something wrong”. When these worries escalated, an internal suspicious activity report was submitted to PwC’s money laundering reporting unit.

While the accountancy firm eventually gave London Capital & Finance’s 2016 accounts a clean audit opinion, the FCA said that PwC had an “obligation to report its previous reasonable belief” about fraud, even if it “no longer subjectively believed” that London Capital & Finance was involved in wrongdoing. It added that PwC’s failings were “not reckless or deliberate” and that the audit firm “was not involved in the misconduct of LCF”.

A PwC spokesman said: “We have reached a settlement with the FCA to resolve an unintentional reporting breach.”

It emerged this year that PwC and EY had been party to a £25.5 million settlement with the administrators of London Capital & Finance, who had pursued claims against the collapsed company’s former auditors.