The City watchdog is being called on to consider a full-blown investigation into “regulatory failures” around the collapse of investment firm London Capital & Finance.
Nicky Morgan, chairwoman of the influential Treasury Select Committee, has written to the Treasury and the Financial Conduct Authority (FCA) demanding the regulator looks at conducting a probe.
Should the FCA refuse, she said she would urge the Treasury to use its power to force the regulator to do so.
It comes after the Serious Fraud Office (SFO) announced on Monday it had opened an investigation into London Capital & Finance (LCF) following its collapse in January, which left more than 11,000 investors facing hefty losses.
The SFO has arrested four people in Kent and Sussex in connection with the probe.
Ms Morgan said: “The FCA is currently investigating LC&F’s marketing material and the SFO is investigating individuals associated with the company.
“Yet there is a broader need to understand what can be learned in a regulatory sense from the events at LC&F.”
The FCA ordered LCF in December to withdraw its promotional material for its mini bonds after finding that marketing was “misleading, not fair and unclear”.
But while the promotional material is regulated by the FCA, mini-bonds themselves are unregulated.
Ms Morgan said the FCA must look at whether mini-bonds should be brought under its supervision.
But she said the FCA needs also to look at whether it acted fast enough against LCF and whether other firms may also be using using similar tactics that may be misleading to consumers.
“Even if the regulator does not conduct an investigation, the FCA board should set out whether firms are using their FCA-authorisation in a way that may be misleading to consumers, whether consumers need greater clarity on what such an authorisation does to protect them, and whether mini bonds should now be regulated,” she said.
She added: “The stories of those affected by the actions of LCF are distressing.
“The Government and the regulator must do all they can to prevent history from repeating itself.”
A spokesman for the FCA said: “We have received the letter and we will respond.”
LCF went into administration at the end of January after having its operations frozen by the FCA at the end of 2018 amid accusations of mis-selling.
The company netted £236 million after advertising tax-free individual savings accounts (Isas).
However, it was in fact a high-risk bond scheme with a high interest rate of 8%.
LCF did not have approval to advertise the product as an Isa.
The company’s largely elderly customer base fear they may not be able to recoup the money they invested with LCF.
Bondholders may get just 20% of their money back, according to LCF’s administrators.
Last week, the Financial Services Compensation Scheme (FSCS) said the mini-bonds issued by LCF were not regulated and therefore not protected by the scheme and it is not accepting claims against the firm.
The SFO is encouraging members of the public who invested in the scheme over the period 2016 to 2018 to contact it.