PwC Penalized £15m by City Regulator for London Capital & Finance Audit Failings
PwC has notably become the inaugural audit firm to face a substantial fine from the City regulator, with a £15 million penalty for failing to address suspected fraud at London Capital & Finance.
An in-depth investigation carried out by the Financial Conduct Authority (FCA) revealed that The Big Four accountancy group’s audit team had identified multiple “red flags” during their examination of the minibonds company’s 2016 accounts. Despite being obligated to do so, PwC did not report these concerns to the watchdog.
“They should have acted on them immediately,” emphasized Therese Chambers, co-executive director of enforcement and market oversight at the FCA. “Their failure to do so deprived the FCA of potentially vital information.”
This hefty fine follows a previous penalty from the Financial Reporting Council (FRC), which fined PwC £4.9 million in May for related lapses concerning London Capital & Finance. Additionally, EY, responsible for auditing the minibonds firm’s 2017 accounts, was fined £4.4 million by the FRC, while Oliver Clive & Co, a smaller firm, was penalized £42,000 for its brief audit activities in 2015.
London Capital & Finance was entangled in one of Britain’s largest investment scandals when it collapsed into administration in January 2019, leaving over 11,600 investors with losses totaling approximately £237 million due to its unregulated minibonds. The FCA pointed out that “thousands of investors were misled as they were not fully informed about the risks involved with the product.”
This collapse triggered a criminal probe by the Serious Fraud Office, which is still ongoing, and led to a ban on the mass-marketing of speculative minibonds to retail investors. The scandal also prompted the government to establish a redress scheme for the victims, distributing £115 million, while the Financial Services Compensation Scheme reimbursed another £57.6 million. Last October, the FCA censured the failed minibonds company, and in February imposed a £31,800 fine on Floris Huisamen, a former director, along with a ban from the industry.
The FCA’s investigation into PwC’s audit work concluded that the accountancy group encountered “significant issues” during its audit, including “aggressive behaviour” from a senior figure at London Capital & Finance, challenges in obtaining basic information, and efforts to mislead auditors. These actions led the audit team to document concerns early on about potential misconduct. These escalating worries resulted in an internal suspicious activity report being submitted to PwC’s money laundering reporting unit.
Although PwC ultimately issued a clean audit opinion for London Capital & Finance’s 2016 accounts, the FCA asserted that PwC had a duty to report its initial reasonable suspicion of fraud, even if their subjective belief had changed. The FCA clarified that PwC’s failures were “not reckless or deliberate” and that the audit firm “was not involved in the misconduct of LCF.”
A PwC spokesperson responded: “We have reached a settlement with the FCA to resolve an unintentional reporting breach.”
It was revealed this year that PwC and EY had agreed to a £25.5 million settlement with the administrators of London Capital & Finance, following claims pursued against the collapsed company’s former auditors.