7 Overall conclusions
194. The
events of 27 and 28 March, and the findings of Simon Davis's investigation,
revealed multiple flaws in the FCA's processes and practices.
These failings went right to the top of the organisation, including
the Chairman and Chief Executive. Simon Davis found that:
· Procedures
within the FCA for identifying and controlling the release of
price sensitive information were inadequate and not of the standards
that the FCA expects of the firms it regulates;
· The
FCA's communications strategy, and the way in which it was implemented,
was "high risk, poorly supervised and inadequately controlled";
· The
FCA itself created a false market in life insurance shares, despite
being the markets regulator and containing the UK Listing Authority;
· The
FCA had no emergency plan for dealing with an incident of this
sort; and
· The
FCA's response to the serious incident on 28 March was "seriously
inadequate". In particular, the Executive Committee failed
to react "urgently and effectively on 28 March".
Overall, the FCA failed to meet
the minimum standards that it sets for listed firms.
195. Simon Davis's
report sets out factually what happened in detail. It makes sensible
recommendations for improvements to the FCA's internal processes—which,
implemented in full, should go some way towards bringing the FCA
into line with the high standards it sets for firms. But Simon
Davis himself told us that he had not examined the wider implications
of his findings for the FCA and its governance. He said that this
was for others to do. This Report considers the extent to which
the events of 27 and 28 March 2014 were simply the result of a
failure of controls, or whether they might reflect broader problems
at the regulator.
196. The FCA
accepts that there were multiple failures across the organisation,
both in the days and weeks leading up to the publication of the
Telegraph's 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.
This must be the responsibility of the Executive Committee. Simon
Davis concluded that "the system broke down", and the
overall impression left by the multiple failures he identified
is of a dysfunctional organisation. In a regulated firm, these
failings might lead the FCA to consider whether to initiate 'special
measures'. Using this tool—recommended by the PCBS—the
regulator can examine whether individual failings are underpinned
by a systemic problem throughout the organisation, and require
the firm to take remedial action if this is found to be the case.
197. If the
Executive Committee has failed properly to discharge its responsibilities,
then the Board has consequently failed in its duty to oversee
and challenge the Executive Committee effectively. It is also
clear from the evidence that the Board as a whole failed in its
duty to identify and manage risk.
198. The events
of 27 and 28 March have been a major self-inflicted distraction
from the FCA's core purpose: ensuring that markets work well.
It is not clear that the FCA has yet fully grasped the extent
of the failings revealed by Simon Davis's report. To address this:
· The
Executive Committee should examine the FCA's communication methods
and poor working relationships between divisions;
· The
non-executive members of the Board should investigate whether
the FCA has a problem of inadequate sharing of expertise, and
whether standards and culture contributed to the events of 27
and 28 March;
· The
Board should commission an external review of its own effectiveness,
particularly its approach to managing risk; and
· The
FCA should produce a 'Responsibilities Map', as it expects banks
to do, which sets out clearly where senior responsibility lies.
The PRA should produce an equivalent document.
Individually, most of these pieces
of work, and the remedial proposals of the Davis report, focus
on relatively specific questions about the operation of the FCA.
Taken together, they amount to an examination of whether the FCA
is suffering from a systemic weakness in standards and culture.
The FCA should prioritise this work, which is essential for the
FCA to be able to assure itself and Parliament that it is not
suffering systemic weaknesses. The Committee expects the FCA to
publish the results of this work within six months.
199. Since its
inception, the FCA has needed to grapple with the legacy of the
serious problems it inherited from the FSA. This episode, and
the evidence of the Davis report, suggests that the FCA may have
a good deal of further work to do fully to address that legacy.
The FCA now has an opportunity better to identify the scale of
these problems and put them right. By grasping the scale of what
remains to be done, the FCA's leadership will be better placed
to be able to use its new powers effectively, to perform its consumer
protection function to the highest possible standard, and to develop
a much higher level of constructive engagement with industry,
which this incident may have prejudiced.
200. Millions
of financial services consumers need a robust consumer protection
body on which they can rely. It is the role of Parliament to do
what it can to ensure that this independent regulator is working
well on their behalf. When the FCA has published the results of
the work that we have recommended, the Treasury Committee in the
next Parliament should consider whether a detailed inquiry into
the governance of the FCA, the effectiveness of its Board, the
extent to which it is fulfilling its statutory objectives, and
standards and culture throughout the organisation, is necessary.
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