2 The independence of Simon Davis's
inquiry
Announcement of the inquiry
22. It was clear on 28 March that the FCA had made
a serious error, which was compounded by the length of time it
had taken to correct matters. In the evening of 28 March, John
Griffith-Jones, the Chairman of the FCA, telephoned the Chairman
of this Committee. Simon Davis reports that:
Mr Griffith-Jones called Andrew Tyrie MP, Chairman
of the TSC, at around 8.00 pm on 28 March 2014. Mr Griffith-Jones
informed Mr Tyrie about the day's events and the fact that the
Board had agreed to appoint an external law firm to conduct an
investigation. After the call, Mr Griffith-Jones arranged for
Mr Tyrie to be sent the FCA's two statements.
There were subsequent conversations between Mr
Griffith-Jones and Mr Tyrie in relation to the scope and conduct
of this Inquiry, including in relation to ensuring that the Inquiry
would be conducted independently.[27]
On 8 April, the FCA's non-executive directors
announced that they had appointed Simon Davis to conduct an independent
inquiry.[28]
23. The FCA's Board did not seem at first to have
fully grasped the need for the inquiry to be entirely independent
of the FCA itself—including its non-executive directors.
John Griffith-Jones had convened a Board call at 5pm on 28 March.[29]
The minutes of that call record that "The Chairman proposed
that the Board should investigate what had happened and involve
an independent law firm. The Board supported this proposal."[30]
They further state that "Non-executive Board members interested
in being involved in conducting the review were requested to contact
Mr Griffith-Jones or the Secretariat".[31]
24. At 6.15pm the FCA issued the following statement
via the Regulatory News Service (RNS):
The FCA Board acknowledges the concerns of the
market regarding today's press coverage of the FCA's proposed
supervisory work on the fair treatment of long standing customers
in life insurance. The FCA put out a statement of clarification
this afternoon. The Board will conduct an investigation into the
FCA's handling of the issue involving an external law firm, and
will share the outcome of this work in due course.[32]
25. John Griffith-Jones was asked in oral evidence
whether he thought that the FCA's original announcement—which
had suggested that the investigation would be led by the FCA's
own Board—had been a misjudgment. He said:
I think that the process that we finally adopted
turned out to be a good one. That statement was issued I think
at about 5 o'clock, so two and a half hours after the incident
had been closed down, and it lacked the precision that you drew
our attention to very shortly thereafter. But the statement was
made in good faith and it was certainly the view right from the
beginning, at the very least, that it was from the nonexecutive
directors. I know the statement came out as "the board"
but there was never an intention of involving the executive.[33]
When pressed further, Mr Griffith-Jones admitted
that the statement "could have been phrased better",[34]
but added "It was never our intention that we would write
the report".[35]
He eventually conceded that he was "happy to go with the
word 'misjudgment'".[36]
26. It was misguided
of the FCA's Board initially to announce that the Board itself
should conduct the inquiry into the events of 27 and 28 March.
The FCA's statement—released on the evening of 28 March—said
that the Board would "conduct an investigation into the FCA's
handling of the issue involving an external law firm". The
fact that the Board, in drafting this statement, did not grasp
that it was wrong in principle for the FCA to be seen to be investigating
itself is of considerable concern. This was a misjudgment.
27. John Griffith-Jones
told the Committee that it was not the Board's intention that
the inquiry should involve the executive. It is clear from his
evidence, and from the Board's minutes, that the Board intended
its non-executive members to be involved. This was another misjudgment.
On 28 March, the role of the FCA's Chairman in the events was
unclear. Moreover, it should have been transparent to the Board
from the outset that its own role—including the role of
the non-executives—in what had happened would need to be
examined by the inquiry. The FCA Board initially considered that
an inquiry with some independent support was sufficient, not recognising
the need for demonstrable independence.
28. Following
the call from the Chairman of the Treasury Committee on 29 March
2014 for an independent inquiry, the Chancellor wrote to the Chairman
of the FCA to say that it was essential that the inquiry should
be independent.
Terms of reference and protocol
29. On 8 April, the FCA's non-executive directors
published the terms of reference for Mr Davis's inquiry.[37]
The Chairman of this Committee wrote to Mr Griffith-Jones on 15
April to raise a number of concerns about these terms of reference,
including:
· The
proposed scope of the inquiry;
· The
role proposed for the FCA's non-executive directors;
· Where
responsibility for deciding on accountability should lie;
· The
role of the Treasury; and
· The
arrangements for publication of the report.
30. On the proposed scope of the inquiry, the Chairman
wrote that "there should be no restriction on Mr Davis examining
anything that he might reasonably consider relevant, nor on his
making such recommendations as he sees fit."[38]
The original terms of reference, published by the FCA on 8 April,
had confined Mr Davis to answering a list of specific questions.
31. As far as the role proposed for the FCA's non-executive
directors was concerned, the terms of reference published on 8
April included the following provision at clause 11:
The inquiry will be overseen by a committee of
the non-executive directors of the FCA's Board chaired by John
Griffith-Jones, the FCA's Chairman.[39]
In his letter of 15 April, the Chairman of this Committee
said that this arrangement was "unacceptable", because
"the inquiry must be wholly independent of the non-executive
directors, as it is possible that one or more of them may be investigated
themselves."[40]
32. In oral evidence, John Griffith-Jones said that:
Clause 11—and this is absolutely the case—was
simply designed to ensure that someone was responsible for the
thing coming to an end, which is not unimportant in reports of
this nature. I understand again, obviously with hindsight, you
are attributing to the word "oversight" some sort of
control over what it said. Whereas, I am attributing to the word
"oversight" some sort of responsibility for getting
it done.[41]
33. In his letter, the Chairman also explained that
he understood that a draft protocol for Mr Davis's inquiry had
been drawn up. This protocol provided for the non-executive members
of the FCA Board to request from Mr Davis the pre- and post-Maxwellisation
versions of his report. The Chairman said that he did not see
a need for the non-executives to see the report at the time of
Maxwellisation, and that "they should wait for Mr Davis's
final report".
34. On 2 May, following further discussions with
the Chairman and the Clerk of the Treasury Committee on the wording
of the protocol, the FCA published a revised set of terms of reference
for the inquiry, together with the protocol. The new terms of
reference made clear that, in addition to addressing specific
issues and questions:
Simon Davis can examine any other matters he
might reasonably consider relevant and make such recommendations
as he sees fit.
The new protocol provided for the Maxwellisation
process as follows:
Insofar as you intend in your report to make
criticism of individuals, groups of identifiable individuals or
organisations (including the FCA), (1) you will identify those
individuals, groups or organisations, who will be given a reasonable
opportunity to make representations in relation to such proposed
criticisms and, having received any responses, (2) you will consider
those responses prior to producing your report.[42]
On the sharing of information with the non-executive
directors, it stated that:
You will not keep the Non-Executive Directors
informed as to the progress of the report, except with respect
to the logistical progress and the cost of the inquiry, which
will not include matters of substance. You should raise with the
FCA Chairman or, if you consider it necessary, HM Treasury at
any time any matter which you consider to be so urgent or important
that it needs to be disclosed to them.[43]
35. The
original terms of reference for Simon Davis's inquiry, which were
published on 8 April by the FCA, included a clause which stated
that the inquiry would be overseen by a committee of the Board's
non-executives, chaired by the Board's Chairman, John Griffith-Jones.
This gave the impression that the non-executives would have control
over the final report. John Griffith-Jones told us that this had
not been the non-executives' intention. It is regrettable that
the original terms of reference gave this impression. In the event,
the FCA removed this clause after its shortcomings were pointed
out to John Griffith-Jones. But the fact that the clause was inserted
in the first place shows that the non-executive Board members—who
might conceivably have been implicated in any criticism of the
FCA—had not fully understood that the inquiry had to be,
and be seen to be, fully independent.
Was the protocol breached?
36. Clause 3 of the protocol for Simon Davis's inquiry
read as follows:
This Protocol sets out the procedures under which
the inquiry is to be carried out, reflecting the requirement for
this Inquiry to be, and to be seen to be, independent.[44]
37. Clause 22 provided for the Maxwellisation of
the report:
Insofar as you intend in your report to make
criticism of individuals, groups of identifiable individuals or
organisations (including the FCA), (1) you will identify those
individuals, groups or organisations, who will be given a reasonable
opportunity to make representations in relation to such proposed
criticisms and, having received any responses, (2) you will consider
those responses prior to producing your report.[45]
38. Clause 25 of the protocol stated that:
You will not keep the Non-Executive Directors
informed as to the progress of the report, except with respect
to the logistical progress and the cost of the inquiry, which
will not include matters of substance. You should raise with the
FCA Chairman or, if you consider it necessary, HM Treasury at
any time any matter which you consider to be so urgent or important
that it needs to be disclosed to them.[46]
Simon Davis told the Committee that he had not needed
to use this provision to raise any urgent matters of substance
with the non-executive members of the FCA's Board.[47]
39. Mr Davis did, however, tell the Committee that
he had shown the Board a copy of his full report—including
his recommendations—as part of the Maxwellisation process.
He explained why he had considered this to be necessary:
In the context of Maxwellisation, bearing in
mind what Maxwellisation is designed to achieve or to avoid is
people not being treated fairly my view was that many of the recommendations
that I set out are pregnant with criticisms of the FCA. So far
as I was concerned I did not want to get to a position where anybody,
at the conclusion of my report, was going to be able to say, "Look
at this recommendation, that criticises us, we did not have an
opportunity to deal with it".[48]
40. In his oral evidence, Clive Adamson, then Director
of Supervision at the FCA, told the Committee that:
The non-executives saw the full report. The executives
did not see the full report. They saw the main part of the report
other than those parts that involved individual criticism. I believe
Mr Wheatley saw the full report, including all the criticism.[49]
He said that there had been no discussions between
John Griffith-Jones and Simon Davis about the recommendations—but
there had been "one exchange of letters about one or two
of the recommendations".[50]
He said that, as far as he was aware, "there was no 'mucking
around' with the report or recommendations".[51]
41. John Griffith-Jones told the Committee that the
decision to share the recommendations with the Board had been
made by Simon Davis. He explained that he had been "slightly
surprised" when Mr Davis had said that the Board would see
the report, but that "having handed the entire process over
to him, I did not feel it was appropriate to say to him, "I
am now going to supervise how you do this report".[52]
On the letter he had written to Mr Davis, he said that the Board
"took the opportunity to write to [Mr Davis] about four relatively
minor amendments to his draft of his proposals, which we felt
would make them more easily operable and we wrote in good faith."[53]
He assured the Committee that the Board "had no intention
of redrafting" Mr Davis's report.[54]
42. Mr Griffith-Jones provided the Committee with
a copy of the letter he had sent to Mr Davis. The letter asked
for changes to four of Mr Davis's recommendations. First, the
Board asked Mr Davis to reconsider a recommendation about the
use of insider lists, expressing concern that his recommendation
would lead to "large swathes of the organisation [being]
listed as permanent insiders". As a result, Mr Davis amended
his recommendation to make clear that he was proposing the creation
of insider lists "in appropriate cases".
43. Second, the FCA asked Mr Davis to redraft a recommendation
about the price sensitivity of the FCA's Business Plan. Mr Davis's
original recommendation was that "the FCA should proceed
on the basis that the Business Plan contents are price sensitive
information". The FCA's Board was concerned that this would
constrain its ability to consult on the Business Plan. It proposed
instead that Mr Davis recommend that the Business Plan be considered
to be price sensitive once it had been approved by the Board.
Mr Davis did not accept this proposal. Instead, he inserted the
word "potentially", so that the final recommendation
read: "the FCA should proceed on the basis that the Business
Plan contents are potentially price sensitive information".
44. Third, the FCA expressed concern about a recommendation
which originally read:
The wording of any announcement of a thematic
review should seek to avoid direct or indirect messaging which
suggests the FCA has a pre-determined view that poor conduct exists,
rather than that it is proceeding to conduct a review to consider
whether poor conduct exists at all.[55]
The FCA's Board argued that "Many of our thematic
reviews are triggered because our analysis, or intelligence that
is available to us, suggests that there may be a significant risk
to our objectives from poor conduct or behaviour". It noted
that it was "important that there is no pre-determination
of our conclusions at the instigation of a particular review".
But it said that if the FCA were unable to make clear that it
was launching a review in response to its analysis and intelligence,
then it would "struggle to explain to interested parties,
such as the [statutory] Panels and the industry and consumer representative
bodies, why we had decided to take forward a thematic project
on a particular issue". As an alternative, the FCA Board
suggested:
Any announcement of a thematic review should
seek to avoid direct or indirect messaging which suggests that
the FCA has a pre-determined conclusion about the precise nature
and extent of any misconduct it believes may exist or about the
actions, if any, it may take following the review.[56]
Mr Davis largely accepted this recommendation,
removing only the words "precisely" and "it believes",
so that his final recommendation read:
Any announcement of a thematic review should
seek to avoid direct or indirect messaging which suggests the
FCA has a pre-determined conclusion about the nature and extent
of any misconduct that may exist or about the actions, if any,
that it may take following the review.[57]
45. On the fourth recommendation discussed in its
letter, the Board made two points. The first related to a recommendation
that read:
We recommend that the FCA urgently put in place
price and volume monitoring procedures, combined with an action
plan for the effective management of the FCA's reaction to any
issues involving price-sensitive information originating from
or involving the FCA.
The Board noted that the FCA often released price-sensitive
information to the whole market in a controlled fashion, and said
that it therefore assumed that Mr Davis was referring to the "uncontrolled
release of such information". The Board asked Mr Davis to
let it know if it had misunderstood this point. In his final report,
Mr Davis added the words "the uncontrolled release of"
to his recommendation.
46. The second point related to the recommendation
that the action plan recommended by Mr Davis should:
[…] include the ability for the FCA to react
swiftly, led by a sub-committee of the Board, including but not
limited to the CEO and representatives of the Markets Division
and Communications Division and a senior non-executive.[58]
The FCA questioned the proposal for a senior FCA
non-executive to sit on the Board sub-Committee leading the rapid
response plan. It argued that this structure would inhibit its
ability to react swiftly, because the non-executives are not usually
on the premises and are not required to be available at all times.[59]
Simon Davis's final recommendation does not require a non-executive
director to be a member of the sub-committee.[60]
47. The
terms of the protocol produced by the FCA were designed to safeguard
the independence of the inquiry and to ensure that there could
be no suggestion that the FCA itself had influenced Mr Davis's
conclusions. Mr Davis made a mistake by sharing his whole report—including
his recommendations—in draft with the FCA's Board. Mr Davis
considered that it was necessary for him to do this as part of
the Maxwellisation process. However, the Maxwellisation process,
as set out in the protocol, was intended to give individuals,
groups or organisations criticised by Mr Davis a reasonable opportunity
to make representations about those criticisms that related specifically
to them. Mr Davis's recommendations did not contain direct criticism
of individuals or groups. The Committee therefore does not accept
that it was necessary for Mr Davis to share his recommendations
with the Board as part of this process. In sharing them with the
FCA's Board, Mr Davis acted contrary to the purpose of the protocol
that had been drawn up by the FCA to protect his own independence.
48. The FCA
Board should not have accepted Mr Davis's invitation to read his
report in full. They failed to recognise, and tell Mr Davis, that
their doing so was a breach of the spirit of the protocol.
49. In the event,
not only did the FCA Board have the opportunity to suggest to
Mr Davis that he alter his recommendations; it took that opportunity.
This too was an error of judgment by the FCA Board.
50. Regardless
of the nature of the representations it intended to make, it should
have been obvious to the FCA Board, and particularly to its Chairman,
that it was improper to write to Mr Davis about his draft recommendations.
This was another reflection of the FCA Board's lack of understanding
of the necessity for Mr Davis's inquiry to be, and to be seen
to be, wholly independent.
27 Simon Davis, Clifford Chance, 'Report of the Inquiry into the events of 27/28 March 2014 relating to the press briefing of information in the Financial Conduct Authority's 2014/15 Business Plan',
20 November 2014 (published 10 December 2014), paras 16.29-16.30 Back
28
FCA, Press release: FCA Independent Directors Appoint External Law Firm and Publish Terms of Reference,
8 April 2014 Back
29
Simon Davis, Clifford Chance, 'Report of the Inquiry into the events of 27/28 March 2014 relating to the press briefing of information in the Financial Conduct Authority's 2014/15 Business Plan',
20 November 2014 (published 10 December 2014), para 16.19 Back
30
Simon Davis, Clifford Chance, 'Report of the Inquiry into the events of 27/28 March 2014 relating to the press briefing of information in the Financial Conduct Authority's 2014/15 Business Plan',
20 November 2014 (published 10 December 2014), para 16.24 Back
31
FCA, Minutes of the Board meeting on 28 March 2014, page 2 Back
32
FCA, Press release: FCA statement on supervisory work on the fair treatment of long standing customers in life insurance,
28 March 2014 Back
33
Q 418 Back
34
Q 419 Back
35
Q 420 Back
36
Q 340 Back
37
FCA, Press release: FCA Independent Directors Appoint External Law Firm and Publish Terms of Reference,
8 April 2014 Back
38
Letter from Mr Andrew Tyrie MP to John Griffith-Jones, Chairman,
Financial Conduct Authority, 15 April 2014 (PRE0015) Back
39
FCA, Terms of Reference: Inquiry by the Non-Executive Directors
of the Financial Conduct Authority (FCA) into the events of 27/28
March 2014 relating to the press briefing of information in the
FCA's 2014/15 Business Plan, 8 April 2014 Back
40
Letter from Mr Andrew Tyrie MP to John Griffith-Jones, Chairman,
Financial Conduct Authority, 15 April 2014 (PRE0015) Back
41
Q 426 Back
42
FCA, Protocol for the conduct of the inquiry into the disclosure on 27/28 March 2014 of the FCA's Business Plan 2014/15,
2 May 2014, clause 22 Back
43
FCA, Protocol for the conduct of the inquiry into the disclosure on 27/28 March 2014 of the FCA's Business Plan 2014/15,
2 May 2014, clause 25 Back
44
FCA, Protocol for the conduct of the inquiry into the disclosure on 27/28 March 2014 of the FCA's Business Plan 2014/15,
2 May 2014, clause 3 Back
45
FCA, Protocol for the conduct of the inquiry into the disclosure on 27/28 March 2014 of the FCA's Business Plan 2014/15,
2 May 2014, clause 22 Back
46
FCA, Protocol for the conduct of the inquiry into the disclosure on 27/28 March 2014 of the FCA's Business Plan 2014/15,
2 May 2014, clause 25 Back
47
Q 5 Back
48
Q 7 Back
49
Q 122 Back
50
Q 125 Back
51
Q 126 Back
52
Q 434 Back
53
Q 432 Back
54
Q 437 Back
55
Letter from John Griffith-Jones, Chairman, FCA to Simon Davis,
Clifford Chance, 29 October (PRE0010) Back
56
Letter from John Griffith-Jones, Chairman, FCA to Simon Davis,
Clifford Chance, 29 October (PRE0010) Back
57
Letter from John Griffith-Jones, Chairman, FCA to Simon Davis,
Clifford Chance, 29 October (PRE0010) Back
58
Letter from John Griffith-Jones, Chairman, FCA to Simon Davis,
Clifford Chance, 29 October (PRE0010) Back
59
Letter from John Griffith-Jones, Chairman, FCA to Simon Davis,
Clifford Chance, 29 October (PRE0010) Back
60
Simon Davis, Clifford Chance, 'Report of the Inquiry into the events of 27/28 March 2014 relating to the press briefing of information in the Financial Conduct Authority's 2014/15 Business Plan',
20 November 2014 (published 10 December 2014), para 19.63 Back
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