5 The FCA's response to the Davis
report
161. Simon Davis submitted his final report to the
FCA's Board on 20 November 2014. It was then up to the FCA's Board
to decide when to publish it. On 8 December 2014, the FCA announced
a new strategic approach, together with a major restructuring.
On 10 December, it published Simon Davis's report in full.
Individual accountability
162. In its response to Simon Davis's report, the
FCA announced that it had accepted his conclusions and recommendations
in full. The changes to the FCA's process and practices are discussed
in chapters 3 and 4 above. In addition to these changes, under
the heading "individual accountability", the FCA announced
that:
In considering Mr Davis' report the FCA Non-Executive
Directors recognised that a number of individuals made errors.
Having thoroughly reviewed the report the Non-Executive Directors
have agreed the following actions.
Chief Executive, Martin Wheatley, Director of
Supervision, Clive Adamson, Director of Communications and International,
Zitah McMillan and Director of Markets, David Lawton will not
be receiving a bonus for 2013/14.
Reflecting their collective responsibility, the
2013/14 bonus payments for all other members of Executive Committee
have been reduced by 25%. Other disciplinary action has been completed
as appropriate.[216]
The FCA's new strategic approach
163. The FCA published Simon Davis's report on 10
December. Two days earlier, on 8 December, it had announced a
"new strategic approach".[217]
It said that:
The approach is shaped by a strategy that will
provide a "sharper focus" on how firms are regulated
and on delivering the right outcome for consumers and the markets.
It recognises the differences in approach required
across the industry given its size and variety, based on emphasising
sector and market-wide work and reflecting the FCA's competition
duties. It also aligns the data and intelligence gathered from
all sources to present a consistent FCA-view of what is happening
in the market and what behaviour is expected from firms.[218]
164. The FCA also announced that this new approach
would be complemented by "several structural changes":
We will bring together the current Authorisations
and Supervision Divisions, with our specialist supervision functions
such as financial crime and client assets. Two Divisions will
be created from April 2015 allowing for a clearer distinction
between our approach to the regulation of large and smaller firms.
Tracey McDermott will take responsibility for
managing this transition and will subsequently lead one of the
new Divisions.
A new Strategy and Competition Division led by
Christopher Woolard will build on our competition capabilities,
bringing together more of our market-based work supported by an
enhanced data, intelligence and research capability to enable
better prioritisation and focus across the organisation.
A new Risk Division to provide a strategic approach
to the management of internal and external risk. Richard Sutcliffe
will be the acting Director for the new division.
A new Markets Policy and International Division
led by David Lawton will focus on increasing the FCA's focus and
influence on the European stage.
A Market Oversight Division will be created incorporating
our UKLA and Market Monitoring functions. This will be led on
an acting basis by Marc Teasdale. Other specialist market supervision
functions will be integrated with Supervision.[219]
165. The press release announcing the new approach
was accompanied by a document of just 8 pages, addressed to FCA
staff, which gave some further explanation. In view of the paucity
of information provided, we asked John Griffith-Jones when work
had begun on the review. He told us:
At the board away day meeting in November 2013,
by which time we had been operating nine months, we took the view
that the first year was going okay, that we would allow the organisation
to run for another year so that the theoretical structures that
we put in place could bed in, but we would conduct a strategic
review during 2014 in order to decide whether further adjustments
were necessary.[220]
166. We asked Otto Thoresen, Director-General of
the Association of British Insurers, for his views on the new
approach. He told us:
I have to say, I don't understand enough about
that yet to even comment on the exact objectives it is trying
to achieve. There are some interesting things there, though, around
a shared view of markets, a better understanding of how markets
are developing, consumer issues, an attempt to segment better
the way they deal with the regulated in terms of smaller firms
and larger firms, and so on.[221]
167. James Palmer, Partner, Herbert Smith Freehills
and Chairman of the FCA's Listing Authority Advisory Panel, said
that he had raised concerns with the FCA about the strategy review,
"mainly because I did not feel they had fully articulated
the reasons for some significant changes. Like Mr Thoresen I do
want to understand better why they have done it."[222]
He added:
[…] it is another layer of change. I am
sure there are good reasons, and I have had some response and
some articulation of it, but there are some risks in the model
they have gone to, because you are now going to have two supervision
departments. You are going to have a smaller firms focus and a
larger firms focus, as you describe. I think one of the important
things will be for the FCA to make sure that they do not lose
the expertise from one in monitoring the other, and that there
is enough co-ordination between the two to make sure that you
do not end up duplicating structure across, actually, the same
kind of activity.[223]
168. For her part, Zitah McMillan told us that she
thought that the removal of the post of communications director
from the Executive Committee was "fundamentally […]
the wrong thing to do".[224]
She explained:
[…] you cannot differentiate between the
substance of the work and how you might engage the intended recipient
with the work. I think it is a mistake to do that. If you leave
how you intend to engage with, say, small businesses and consumer
credit right to the very end of the process, you will probably
not get it right.[225]
The documents published by the FCA on 8 December
do not explain why this change was made.
The departures of Clive Adamson
and Zitah McMillan
169. On the same day as it announced its new strategic
approach, the FCA announced that three members of its Executive
Committee would be leaving. Two of these—Clive Adamson,
Director of Supervision, and Zitah McMillan, Director of Communications—had
been the subject of serious criticism in Simon Davis's report.[226]
The FCA's Board had by this stage had the opportunity to read
Mr Davis's report: first as part of the Maxwellisation process,
and then when Mr Davis submitted his final report on 20 November.
Nevertheless, the FCA published a statement which announced that
they would be leaving "as part of the structural changes."[227]
This announcement was accompanied by quotes attributed to Martin
Wheatley. About Clive Adamson, Martin Wheatley said:
Clive is a respected figure in financial services
and I know that his many friends here at the FCA and across the
industry will join me in thanking him for all that he has done
for the industry over the years.[228]
On Zitah McMillan, he said:
Zitah has brought a professionalism to our communications
that is greatly valued and has radically changed the way we engage
with our stakeholders. We will miss Zitah's creativity, curiosity
and strategic contribution both at ExCo and across the FCA.[229]
170. We asked Clive Adamson why he had decided to
leave the FCA. He told us that there had been three reasons for
his decision. He described two of these as follows:
The first is that I have felt for some time that,
at some point, I wanted to move on from the organisation. I raised
that with Mr Wheatley some months ago and we felt that an appropriate
time, if I were to move on, would probably be around the end of
my current board tenure, which is March 2016. That was discussed
at a RemCo meeting, I believe, in April of this year in terms
of succession. The second reason is that, as you said, there is
a reorganisation that was announced last Monday taking place.
That has been some time in the planning and largely because of
that reorganisation I felt that was a good opportunity or an opportunity
to reconsider the timing of my leaving.[230]
He said that the third reason was that he was "aware
of the criticism in the Davis report".[231]
He explained:
I was aware of the individual criticism. I was
aware that that would, as would be normal, likely lead to some
discussion about disciplinary action against me. I felt I did
not want to be, going forward, part of the story about the organisation.
Therefore, overall, I felt this was the appropriate time for me
to decide to leave.[232]
171. For her part, Zitah McMillan told the Committee
that she would have left the FCA whatever the conclusions of Simon
Davis's report had been. She explained:
Zitah McMillan: I would have gone anyway because,
as Mr Adamson said, the iteration of the strategy, while I support
some of the philosophical parts of it, I disagreed with elements
of it that were personal to me and they would—
Zitah McMillan: The removal of communications
from the executive committee I fundamentally think is the wrong
thing to do.[233]
The timing of the announcement
172. Both
Martin Wheatley and John Griffith-Jones told us that the FCA's
new strategic approach was not connected to Simon Davis's report.
We therefore asked John Griffith-Jones why the FCA had chosen
to announce the new approach two days before it published Simon
Davis's report. He told us that:
It was quite necessary to publish the structural
changes at the same time [as Simon Davis's report] because some
key members of staff were leaving. In terms of the internal handling
of the organisation, we felt the need to publish it at or about
the same time, two days before.[234]
He then explained that "the restructuring
would not have made so much sense without having an underlying
understanding of the strategy as well".[235]
Since, he said, the FCA had wanted "to tell our staff what
pragmatically was going to happen given that some very senior
people were leaving,"[236]
it had been necessary to publish both the new strategy and the
new structure at the time of the Davis report. He said that "it
was not sensible" to publish both the Davis report and the
new strategy "on the same day".[237]
He conceded that:
If we had not had the Davis report being published,
those changes would not have been brought out quite as quickly
as they were, but that again was caught up with the people leaving.[238]
173. The
FCA made no mention of Simon Davis's investigation when it announced
its new strategic approach, and a major restructuring, just two
days before it published Mr Davis's report. The FCA controlled
the publication date in both cases.
174. The conclusions
of the FCA's strategic review have the appearance of being rushed
out in an attempt to mitigate the effect of the publication of
the Davis report on the FCA's reputation. John Griffith-Jones
acknowledged in evidence to the Committee that the new strategic
approach would not have been published so quickly had it not been
for the departure of senior individuals. The restructuring involved
the departures of Mr Adamson and Ms McMillan—two people
heavily involved in the pre-briefing incident. This compounded
the awkward impression that a contrived media-handling operation
was being rolled out: Mr Adamson and Ms McMillan were being made
to take the blame for the pre-briefing incident, while the FCA
was able to deny that this was the case.
175. The FCA
published very little explanation of the reasons for the structural
changes it was making—just a press release and an 8-page
document addressed to FCA staff. Witnesses from industries regulated
by the FCA, or who advised regulated firms, told the Committee
that they were still getting to grips with the changes that were
announced. The FCA consulted neither its statutory Practitioner
Panels nor the public and the industry as a whole. The FCA should
now publish a full explanation for the changes it has made. In
particular, it should explain in detail its reasons for removing
the post of Communications Director from its Executive Committee,
in the light of the concerns expressed by Zitah McMillan about
this change.
216 FCA, FCA response to the Davis Review,
10 December 2014 Back
217
FCA, Press release: New strategic approach to ensure "sharper focus" to regulatory challenges ahead,
8 December 2014 Back
218
FCA, Press release: New strategic approach to ensure "sharper focus" to regulatory challenges ahead,
8 December 2014 Back
219
FCA, Press release: New strategic approach to ensure "sharper focus" to regulatory challenges ahead,
8 December 2014 Back
220
Q 574 Back
221
Q 341 Back
222
Q 363 Back
223
Q 363 Back
224
Q 209 Back
225
Q 209 Back
226
The third, Victoria Raffe, Director of Authorisations, played
no part in the events described in Simon Davis's report, other
than in her capacity as a member of the Executive Committee. Back
227
FCA, Statements regarding changes to the FCA Executive Committee,
8 December 2014 Back
228
FCA, Statements regarding changes to the FCA Executive Committee,
8 December 2014 Back
229
FCA, Statements regarding changes to the FCA Executive Committee,
8 December 2014 Back
230
Q 119 Back
231
Q 120 Back
232
Q 127 Back
233
Qq 208-209 Back
234
Q 575 Back
235
Q 577 Back
236
Q 576 Back
237
Q 579 Back
238
Q 584 Back
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