The Fca: In Hot Water, With a Leaky Ship?

Chris Finney, Partner at Cooley

The UK’s Financial Conduct Authority (FCA) will find itself in hot water again on 1 February 2016.

In March 2014, the FCA mishandled a pre-briefing of its Life Insurance Review and inadvertently caused the share value of some UK life insurers to fall, before belatedly intervening to correct a newspaper report about its planned activities in that sector. The share prices recovered; but, as the FCA’s CEO (Martin Wheatley) said at the time, this was “not [the FCA’s] finest hour“.

In March 2015, the UK’s Treasury Select Committee (TSC) severely criticised the FCA’s handling of that incident. “The FCA accepts that there were multiple failures across the organisation, both in the days and weeks leading up to the publication of the [newspaper] article and in the period that followed. These failures took place in multiple divisions of the FCA and at senior as well as junior levels. They caused the FCA to breach its own rules … the overall impression left by [these] failures … is of a dysfunctional organisation ... It is not clear that the FCA has yet fully grasped the extent of the failings …”.

In July 2015, Martin Wheatley, the FCA’s CEO suddenly resigned. Afterwards, it emerged that the chancellor, George Osborne, had decided not to renew Martin Wheatley’s contract, and that he therefore had to go.

Since then, and if recent news stories are anything to go by, it’s gone from bad to worse. In late 2015, the FCA decided that it would abandon a proposed thematic review of bank culture, not because it was going soft on the banks (as some have suggested), but because it thought it would get better results by pursuing the same issues in other ways. From an internal perspective, this was a minor change: when it published its Business Plan for 2015/6, it thought a thematic review was the best course of action. By late 2015, it thought there were better ways of skinning the cat, so it changed its mind. The direction of travel was the same, but the FCA was on a cheaper, faster train. Unfortunately, this change has been misinterpreted by much of the media; and some see it as clear evidence of interference from the Treasury, the Bank of England and the Prudential Regulation Authority. That would make a great story, but there’s no evidence that it’s true.

This story took a testy turn for the worst on 20 January 2016, when the FCA’s chairman (John Griffiths-Jones) and acting chief executive (Tracey McDermott) appeared before the TSC to answer MP’s questions. Unfortunately, one thing that’s apparent from the two and half our video of that session is that some MPs also misunderstood what had happened, and why. The result: whilst the FCA was fairly criticised for some things, it was unjustly criticised for many others.

Since then, MPs have decided to debate a motion on 1 February 2016; and the debate will be followed by a vote. In the Commons’ calendar, the debate appears as “backbench business – the future of the Financial Conduct Authority“. But the underlying motion is more troubling: “this House believes that the Financial Conduct Authority in its current form is not fit for purpose and we have no confidence in its existing structure and procedures“. That might look like ordinary party politics, but the debate appears to have cross-party support – the sponsors are Guto Bebb MP (Conservative), John Mann MP (Labour) and Ian Blackford MP (SNP). Unfortunately, we’ve seen this film before, and it doesn’t end well. Little wonder, then, that FCA morale is at rock bottom.

Rather more worrying is the ‘unregarded trifle’ that’s been overlooked in this misplaced furore. Clients often ask us if their information will be safe if they give it to the FCA, and the answer is usually: “yes – whilst there’s always a risk that something will leak, the FCA and its staff would commit a criminal offence if they disclosed confidential information, except in very limited circumstances. It ought therefore to be okay”. So, what’s changed? The FCA has admitted that there have been at least 15 leaks in the last 12 months; and that another investigation is underway, because someone seems to have leaked the internal papers that proposed abandoning the thematic review of bank culture, on which the FCA’s decisions were based. This seems to suggest that the theoretical risk that firm-specific, commercially sensitive information will leak, is less theoretical than it once appeared. If that’s right, the FCA will be facing trouble of a whole different order of magnitude. If you look hard enough, there will always be issues on which a regulator can be criticised. Cancelling the thematic review of banking culture is not one of them. Presiding over a leaking ship, if that’s what it is, would be different.