1 Introduction
1. On the evening of 27 March 2014, the Daily Telegraph
published an article on its website describing a forthcoming thematic
review by the Financial Conduct Authority (FCA) into the life
insurance market. The same story appeared in the print edition
of the Telegraph the following day. The story, based on an advance
briefing given by the FCA to the Telegraph earlier that week,
gave a misleading impression of the scope of the life insurance
review, and was published before the FCA had made any official
announcement of its own. When the markets opened on 28 March,
the share prices of several leading life insurers began to fall
heavily. Only when the FCA published a clarifying statement about
the scope of the review—several hours later that day—did
share prices begin to recover.
2. On the day following the publication of the Telegraph
article, the Chairman of this Committee called for a "full
and transparent explanation about how such an apparently serious
mistake came to be made by our financial services watchdog—the
body appointed by Parliament to enforce high standards of conduct".[1]
Simon Davis, Partner at Clifford Chance LLP, was subsequently
appointed to conduct an investigation, and reported his findings
in December 2014. The Committee records its thanks to Mr Davis
for undertaking this work and for the evidence he gave to it.
3. This incident came less than a year after the
initial establishment of the FCA as one of the successor bodies
to the Financial Services Authority (FSA). The Parliamentary Commission
on Banking Standards (PCBS) concluded that the FSA—the UK's
former financial regulator for both prudential and conduct supervision—had
left the UK poorly protected from systemic risk, and had also
failed to regulate conduct effectively.[2]
In April 2013, the FCA inherited the FSA's responsibilities for
conduct supervision, and the Prudential Regulation Authority (PRA)—a
subsidiary of the Bank of England—became the prudential
supervisor. In its final report in June 2013, the PCBS concluded:
The FCA and PRA are new organisations. They have
each set out their aspirations for a new approach. This is welcome.
Whether they meet those aspirations, or whether they repeat mistakes
of the past, remains to be seen.
The FCA is housed in the same building as the
former FSA, has many of the same staff, and many of the same systems
as the FSA. These continuities will make the transfer to a new
judgement-based approach more difficult for the FCA than for the
PRA.[3]
The FCA's responsibilities expanded further in April
2014, when it took over regulation of consumer credit from the
Office of Fair Trading.[4]
4. The work
of the FCA affects millions of financial services customers and
employees. The FCA also has an important role to play, on behalf
of the UK, in international negotiations on financial regulation.
It is vital that the public and the industry can have confidence
in the regulator.
5. The FCA has
a very difficult job. Its remit—which has expanded further
since the FCA's inception in April 2013—includes the protection
of consumers, the enhancement of market integrity, and the promotion
of competition in financial services. There was merit in creating
a regulator with a greater focus on consumer protection. But while
the PRA—the FSA's successor body for prudential regulation—became
part of the Bank of England, the FCA retained many of the systems
and staff of the FSA. This has made it more difficult for the
FCA than the PRA to break the link with the FSA, which had manifestly
failed not only to protect the UK from systemic risk, but to regulate
conduct effectively. The establishment of new and more effective
conduct regulation will take a long time. It is the role of Parliament
to scrutinise progress towards this goal.
6. The FCA's
core function is to ensure that markets work well. It contains
the UK Listing Authority, which is responsible for ensuring that
listed firms comply with the UK Listing Rules. Simon Davis concluded
that the FCA's own actions led to the creation of a false market
in life insurance shares on 28 March. This was very serious. The
FCA put its own statutory objectives at risk. It is therefore
important that the FCA has learned the lessons from what went
wrong and that it is taking the right steps to solving the problems
exposed by this affair.
7. The FCA's
Board has accepted all of Simon Davis's conclusions and recommendations,
and has begun to make improvements accordingly. Mr Davis's recommendations
were concerned with specific FCA practices and processes. Notwithstanding
the breadth of his terms of reference, Mr Davis chose not to draw
wider conclusions about the FCA's culture or the overall effectiveness
of its management. In response to questions on these points, he
told the Committee that wider issues about the FCA were for others
to examine in the light of the evidence that he assembled. The
Committee, as the Parliamentary body responsible for scrutinising
the work of the FCA, has considered these wider questions.
The FCA's role as the markets
regulator and the UK Listing Authority
9. The FCA's objectives are set out in the Financial
Services Act 2012, which amended the Financial Services and Markets
Act 2000. The Act provides that:
The FCA's strategic objective is: ensuring that
the relevant markets (see section 1F) function well.[5]
Section 1F provides that:
"the relevant markets" means—
(a)the financial markets,
(b)the markets for regulated financial services
(see section 1H(2)), and
(c)the markets for services that are provided
by persons other than authorised persons in carrying on regulated
activities but are provided without contravening the general prohibition.[6]
The Act also sets out three operational objectives
for the FCA: the consumer protection objective; the integrity
objective; and the competition objective. The integrity objective
is defined as follows:
(1) The integrity objective is: protecting and
enhancing the integrity of the UK financial system.
(2) The "integrity" of the UK financial
system includes—
(a) its soundness, stability and resilience,
(b) its not being used for a purpose connected
with financial crime,
(c) its not being affected by behaviour that
amounts to market abuse,
(d) the orderly operation of the financial markets,
and
(e) the transparency of the price formation process
in those markets.[7]
10. The effects of the actions of the FCA on 27 and
28 March on the life insurance market were very serious indeed.
Simon Davis was told by representatives of insurance firms that
they believed that a "false or disorderly market" had
existed on 28 March.[8]
Simon Davis defines a false market as follows:
For the purposes of this Report, and in the absence
of any formal legal definition, we consider that a "false"
market may exist in a number of circumstances including where
investors are making investment decisions which are materially
affected by unsubstantiated rumours, the dissemination of false
or misleading information or the existence of a widespread misapprehension.[9]
It appears that a significant number of investors
in life insurance sector shares based their investment decisions
on the widespread misapprehension of the nature and scope of the
Life Insurance Review.[10]
As a result, he concluded that "a 'false'
market, as defined in paragraph 3.20 above, existed on 28 March
2014 prior to the issuance of the FCA's statement via the RNS."[11]
11. The UK Listing Authority (UKLA) is part of the
FCA. The FCA is therefore responsible for monitoring market disclosures
by issuers and others and for enforcing compliance with the FCA
Disclosure and Transparency Rules, and for operating the UK listing
regime, which requires listed issuers to comply with the UK Listing
Rules.
12. James Palmer, Partner, Herbert Smith Freehills
and Chairman of the FCA's Listing Authority Advisory Panel, identified
the rules that would be relevant to a listed firm, in the context
of the events of 27 and 28 March:
[…] there are market abuse rules on the
communication of information, as well as the avoidance of insider
dealing, or the equivalent of insider dealing; there are listing
rules and listing principles about how listed companies should
be operated; and there are disclosure and transparency rules about
the way in which information is communicated.[12]
13. The FCA itself is not formally bound by all of
these rules. It is subject to the rules relating to market abuse.
But, as the regulator, it should always conduct itself to the
high standards it expects of listed firms. We have therefore considered
the extent to which the FCA's actions were in breach of its own
rules—whether or not these rules technically apply to the
FCA—and the action that the FCA itself would be likely to
have taken against a listed firm which had acted in this way.
14. On the question of whether the FCA had breached
rules relating to market abuse, James Palmer told us:
The market abuse rules do apply to the FCA in
relation to its own communication, and it is only because this
was—in my view—probably not inside information that
there was not a market abuse breach by the FCA. It was close to
the line, but on the right side of it.[13]
15. As far as the listing rules were concerned, Mr
Palmer said that "it does appear that if the FCA had been
subject to the same requirements as a listed public company, there
would have been a breach of the Listing Rules in relation to the
events of late March last year."[14]
He said that the two listing rules which would have been broken,
had they applied to the FCA, were Listing Principle 1 and Premium
Listing Principle 6. Listing Principle 1 states that "A listed
company must take reasonable steps to establish and maintain adequate
procedures, systems and controls to enable it to comply with its
obligations". Premium Listing Principle 6 states that "A
listed company must communicate information to holders and potential
holders of its listed equity shares in such a way as to avoid
the creation of a false market in those listed equity shares."[15]
16. On the question of the penalty to which a listed
firm would have been subject for similar breaches, Mr Palmer explained:
[…] the FCA does not always take enforcement
action when a Listing Rule breach occurs: it may make a private
censure or criticism or take no action. […] in this case,
whilst I believe an Enforcement Division investigation would have
been launched into a listed company on comparable facts, it is
a possibility that no enforcement action would ultimately have
been taken.[16]
He did not therefore consider it possible that
"a particular level of fine can be identified as that which
FCA would have suffered had it been a listed company."[17]
He did, however, provide examples of penalties for breaches of
listing principle 1 and premium listing principle 6. For the former,
he gave the examples of Nestor Healthcare, fined £175,000,
and Lamprell, fined £2,428,300, in 2013 and of Exillon Energy,
fined £292,950 in 2012. He noted that "at paragraph
71 of the Lamprell finding an example is cited of the FCA's private
action without enforcement over systems and controls defects."[18]
As breaches of premium listing principle 6, he noted the cases
of the penalties listed for Cattles—which was the subject
of public censure for market abuse and breaches of the listing
principles in 2012—and JJB Sports, which was fined £455,000
in 2011.[19]
17. In written evidence, Mr Palmer set out the bases
on which action might or might not have been taken against the
firm by the FCA. As bases for not taking action, he identified
the following:
· it
does not appear that the information in question was in fact "inside
information"; the primary problem regarding price sensitivity
related to the way in which the information regarding FCA's Business
Plan was reported to the market; and
· the
FCA's disclosures to the journalist do not themselves appear to
have been inaccurate, even though communicated in an unsatisfactory
manner.
On the other hand, as bases on which action might
have been taken against the firm, he considered that:
· the
extent of market disruption, and
· the
absence of systems and controls to manage release of inside information
within certain parts of FCA,
would both have been factors weighing towards
pursuing enforcement action, had the relevant Listing Rules applied
to FCA and the information been information about a listed company's
own business plans, impacting its own share price comparably.[20]
18. We asked Simon Davis what action he believed
the FCA would have taken against a listed firm which had behaved
as they FCA had done. He told us that "that there would evidently
be alarm bells taking place within the company itself and within
the FCA."[21] He
said that he would have expected the firm in question, having
taken legal advice, to go to the FCA to say "Something has
clearly gone wrong here and we want to get to the bottom of it
and we are happy to cooperate with you and do whatever we can
to get to the bottom of it and present to you a report of what
we found".[22] Alternatively,
he said, the FCA itself could approach the firm and say "We
don't like what has happened and we, therefore, want to have some
kind of investigation conducted, either by the company or by a
separate, say, skilled person".[23]
He thought that an investigation, similar to the one which he
had conducted, would then take place—"which would involve
retention of documents, analysis of documents, rigorous interviews
and then the culmination of that would be the findings".
He said that "it would then be up to the FCA to decide what,
if any, action should be taken as a result".[24]
Asked what action the FCA might take if the findings of such an
investigation were similar to those of his own report, he said
"there will be a range available to the FCA and the FCA has
available to it the ability to impose fines and there have been
all kinds of fines in the past."[25]
19. The FCA is exempt, under the Financial Services
and Markets Act 2000 [as amended], from liability to damages.
We asked James Palmer whether he considered that this created
a level of complacency. He said:
I think that the complacency arose through the
absence of having to focus on the issue and a lack of thought
about responsibilities in relation to all parts of the FCA for
inside information. I personally am a strong supporter of the
statutory immunity. The regulators that are susceptible to litigation
get bogged down and paralysed by it, and it is of great benefit
to my profession only. [26]
20. The
FCA's overarching strategic objective is "ensuring that the
relevant markets function well". One of its secondary objectives
is "protecting and enhancing the integrity of the UK financial
system", which includes "the orderly operation of the
financial markets". In selectively releasing information
to the press about its work, the FCA put these statutory objectives
at risk. By effectively breaching its own listing rules, the FCA
itself created a false market in life insurance shares. This is
a matter of serious concern.
21. The FCA
would have considered this kind of conduct from a listed firm
to be a serious failure, and it is reasonable to believe that
the FCA might well have imposed a substantial fine on the firm
or firms involved. The fact that the FCA failed to meet the high
standards it expects of firms put its credibility at risk.
1 Treasury Committee, Press release, 29 March 2014 Back
2
Parliamentary Commission on Banking Standards, First Report of
Session 2013-14, Changing banking for good, HL Paper 27-I/HC 175-I,
paragraph 181 Back
3
Parliamentary Commission on Banking Standards, First Report of
Session 2013-14, Changing banking for good, HL Paper 27-I/HC 175-I,
paragraphs 182, 185 Back
4
Financial Conduct Authority website, 'Enforcement', accessed 11
March 2015 Back
5
Financial Services Act 2012, section 6 Back
6
Financial Services Act 2012, section 6 Back
7
Financial Services Act 2012, section 6 Back
8
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 4.91 Back
9
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 3.20 Back
10
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 4.92 Back
11
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 4.92 Back
12
Q 317 Back
13
Q 317 Back
14
James Palmer, Chairman, FCA Listing Authority Advisory Panel (PRE00007) Back
15
Financial Conduct Authority Handbook, LR 7.2: The Listing and Premium Listing Principles Back
16
James Palmer, Chairman, FCA Listing Authority Advisory Panel (PRE00007) Back
17
James Palmer, Chairman, FCA Listing Authority Advisory Panel (PRE00007) Back
18
James Palmer, Chairman, FCA Listing Authority Advisory Panel (PRE00007) Back
19
James Palmer, Chairman, FCA Listing Authority Advisory Panel (PRE00007) Back
20
James Palmer, Chairman, FCA Listing Authority Advisory Panel (PRE00007) Back
21
Q 3 Back
22
Q 3 Back
23
Q 3 Back
24
Q 3 Back
25
Q 4 Back
26
Q 338 Back
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