FCA under fire, facing calls for drastic reform

As the regulator of financial services firms and financial markets in the UK, the Financial Conduct Authority (FCA) has the task of preventing, identifying and, when necessary, punishing behaviour which is illegal or falling short of expected standards.

So it should, arguably, come as no surprise that the FCA’s name is in a report that makes brutal criticism of a failure to perform functions, a defective culture and a lack of accountability. The report says that its subject is "incompetent at best, dishonest at worst".

The alarming fact, however, is that this is not an FCA report into a rogue company it has been investigating - it is a report into the FCA itself. 

The report’s implications

The criticism is contained in an assessment of the regulator by the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services. It took nearly three years to complete and involved the collection of evidence from 175 fraud victims, whistleblowers and former FCA staff.

The damning 358-page report makes uncomfortable reading for the FCA. It is hard to think of any other regulator that has been pilloried and had its integrity questioned so vociferously. The Group says that the FCA is widely seen as incompetent and has significant shortcomings. It details an organisation where errors, inaction, staff bullying and discrimination, and alarmingly poor treatment of whistleblowers are part of working life.

The report concludes by saying: “The picture painted is not pretty. The FCA is seen as incompetent at best, dishonest at worst. Its actions are slow and inadequate, its leaders opaque and unaccountable.”

Any subject of a report as scathing as this would find it hard to respond. The report’s contents amount to a full-blown assault on the FCA’s credibility. But the problem is more acute for the FCA as it has suffered criticism from a number of independent reviews in recent years. Yet it still does not appear to be managing its problems. FCA Chief Executive Nikhil Rathi has introduced his own changes since taking the organisation’s reins four years ago. Yet in its report, the Group says that nearly all those questioned said those changes had not worked.

This situation is particularly concerning as the Chancellor only told the FCA a matter of days ago that it should encourage more “sensible risk-taking’’ across the City. A combination of increased financial risk taking and a financial regulator that is, according to this latest report, operating with a “profoundly defective’’ culture and leadership hardly inspires confidence.

Significant proposals

If there is any consolation to be taken from this state of affairs, it is that the report does at least propose measures that could improve how the FCA functions. These include creating a supervisory council to review the FCA's effectiveness, restricting staff movement between the regulator and regulated companies, changing how the FCA is funded, and replacing the FCA’s leadership team “if it proves necessary”.

These are all major proposals that would rip up the FCA’s existing working arrangements. And while a strong case could be made for any (or all) of them being put into practice, now may be the time for some considered thinking on both sides. If it acknowledges that the criticisms are valid, the FCA has to respond with some form of action plan that at least addresses its faults. Meanwhile, the government has to assess whether the strength of criticism in the report merits the huge changes the Group believes is necessary.

If this is not to be a turning point for the FCA, it is hard to see what could be. But for now at least, the report is nothing more than explosive reading matter. There are, as yet, no signs that it has already been a catalyst for the FCA’s transformation. But it would be surprising if it does not prompt some change. And that change has to be significant.