UK Parliamentary Group Publishes “Hard-Hitting” Report on the FCA | Katten Muchin Rosenman LLP

The UK’s All-Party Parliamentary Group (APPG) on investment fraud and fairer financial services (a group of thirty Members of Parliament and a dozen members of the House of Lords) has published a press release and a “hard-hitting” report (Report) following its call for evidence (Call for Evidence) regarding current issues with the UK’s financial regulator, the Financial Conduct Authority (FCA). The Report is based on the analysis of the written testimonies of 174 individuals and has resulted in the FCA being described widely as “incompetent at best, dishonest at worst”.

Call for Evidence

The APPG launched its Call for Evidence regarding the FCA’s conduct following a series of scandals in which various financial services firms were accused of mistreating consumers – with the FCA being blamed for “doing too little too late – or nothing” to prevent or punish alleged wrongdoing. The Call for Evidence closed on 28 March 2022 and in it the APPG sought input from stakeholders who interacted with the FCA to understand how certain issues have arisen and whether any improvements have been effective. If the testimony gathered from the Call for Evidence indicated there were problem areas, the APPG intended to explore those issues further with a view to proposing remedies. The APPG has acknowledged that its initiative may lead to fresh policy thinking and reform of the regulator. 

Key Findings of the Report

The 358-page Report, which has taken over two and a half years to prepare, states that the testimony received suggests that there are very significant shortcomings to the FCA, describing it as “an opaque and unaccountable organisation, slow to act and even slower to admit it has got things wrong and to change”. Notably, the Report explains that the most compelling evidence comes from current and former FCA employees, who depict the FCA’s culture and leadership as profoundly defective. 

The key findings of the Report include, among other things: 

• there is a common consensus among respondents that the FCA too often fails to perform its functions to a reasonable standard, particularly in relation to its consumer protection remit;
• a significant number of respondents believe the FCA sometimes acts in bad faith – for example, some respondents assert that the FCA displays a lack of honesty and transparency when called to account for its own decisions, actions and inactions;
• testimony from whistleblowers about alleged industry wrongdoing provides a consistent picture that the FCA fails properly to investigate and act on intelligence provided by whistleblowers, and fails to protect (and, in some cases, actively harms) those who provide such information; 
• current and former employees depict the FCA as having a defective culture that has become “increasingly toxic” and “macho” or aggressive, in which errors and inaction are too common, there is little accountability, and those who challenge a top-down “official line” are bullied and discriminated against – or even managed out of the regulator; 
• the FCA lacks transparency and accountability; and
• the FCA’s transformation programmes introduced under the FCA’s current Chief Executive Officer, Nikhil Rathi, have been ineffective, those questioned by the APPG said with almost unanimity.

The Report emphasises that there is a high degree of consistency across those providing testimonies that would imply that a consensus exists about the nature and causation of the problems identified. The Report provides examples of such consistency including various stakeholders criticising the FCA for the same shortcomings in specific named cases as well as recurring themes about slowness, inaction, biases toward firms, widespread whistleblower mistreatment, opacity and unaccountability expressed widely by all stakeholder groups. 

Recommendations of the Report

The Report recommends that there are key changes that the FCA should introduce at the earliest opportunity, including: 

• the development and embracing of a consumer-centric mission statement, against which the FCA should be tested and held accountable by a consumer oversight body;
• the FCA’s reward and promotion system should be explicitly aligned with its professed objectives and values;
• developing recruitment processes that recognise “people are policy”;
• introducing a ‘no tolerance’ policy for those at the FCA who lack integrity;
• developing a specialist consumer-facing department for scam victims; and
• “facing up” to the criticisms made of the FCA by the public at large.

The Report explains that the UK Government can help the FCA perform more effectively through legislative changes, including through measures such as: 

• establishing a Financial Regulators’ Supervisory Council, which would conduct periodic reviews of the operational effectiveness of the FCA;
• making the FCA more directly accountable by removing the FCA’s immunity from civil liability to consumers;
• implementing restrictions on whether and when regulators join regulated firms, and vice versa; 
• removing the fundamental conflicts of interest within the FCA’s objectives;
• introducing a statutory, civilly actionable duty of care;
• providing the Financial Services Consumer Panel a statutory remit, with parliamentary oversight of the appointment of its Chair; 
• changing how the FCA is funded;
• overhauling how the FCA’s senior leadership team is appointed; 
• establishing a new non-governmental organisation to act as a counterweight to industry lobbying; 
• replacing the FCA’s leadership team, if necessary; and
• conducting a Royal Commission for radical architectural reform of the regulator, if all of the foregoing fails.

The Report explains that initial efforts should focus on executing operational, governance and accountability improvements within the current regulatory landscape. While some reforms require legislation, many changes can be implemented by the FCA itself. The Report also flags that, where the FCA fails to gain the confidence of stakeholders, a fundamental reallocation of regulatory responsibilities may be required in time.

In addition, the Report considers the option of limiting the role of the FCA to being just a conduct regulator. If so, the Prudential Regulation Authority would then be responsible for all prudential regulation, with the Competition and Markets Authority having sole responsibility for competition matters, and the Department for Business and Trade being responsible for competitiveness and growth issues. However, the Report states that there is not currently widespread appetite for such radical measures but it suggests that, if measures to reform the FCA are not taken or they do not work, there may be a case for holding a Royal Commission. 

Finally, in the Report the APPG urges both the FCA’s leadership and the UK Government to implement these recommendations “with alacrity and vigour”, emphasising that “should that not happen, we fear that more high-profile misconduct and regulatory failure scandals will occur, causing further deterioration in the standing and fortunes of the industry”. With this in mind, the Report suggests that there should be further, periodic, qualitative evidence-gathering from the FCA’s stakeholders, to establish whether changes have been implemented and, if they have, the extent to which they have succeeded.

Concluding Remarks

The Report reflects growing parliamentary and public pressure on the FCA to improve its accountability and effectiveness. The Report represents an opportunity to assess the FCA’s performance and its role in regulating the UK’s financial sector. The Report may lead to significant reforms in how financial regulation is conducted in the UK, ensuring it remains fit for purpose in a rapidly changing financial services landscape. Watch this space! 

The Report, Press Release and Call for Evidence are available here, here and here, respectively.