Conclusions and recommendations
Introduction
1. 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. (Paragraph 4)
2. 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. (Paragraph 5)
3. 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. (Paragraph 6)
4. 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. (Paragraph
7)
5. 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.
(Paragraph 20)
6. 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. (Paragraph 21)
The independence of Simon Davis's inquiry
7. 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. (Paragraph 26)
8. 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. (Paragraph 27)
9. 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. (Paragraph 28)
10. 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. (Paragraph 35)
11. 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.
(Paragraph 47)
12. 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. (Paragraph
48)
13. 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. (Paragraph
49)
14. 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. (Paragraph 50)
The FCA's approach to communications
15. Communicating
with consumers and alerting them to conduct risks is an important
aspect of the FCA's work. It can help to raise consumer awareness,
allowing customers to make more informed choices and advancing
the FCA's consumer protection objective. The media can be an effective
vehicle for this type of communication, since the messages can
generally afford to be simplified as the broad intended audience
does not need to be party to great levels of detail. In a similar
way, the media can be an effective means of making employees of
regulated firms broadly aware of the FCA's work and aims. (Paragraph
72)
16. However, the media
is an inappropriate means of communicating specific regulatory
information. Martin Wheatley suggested that part of the FCA's
aim in using the media was to prompt regulated firms, or their
individual employees, to take note of the issues the FCA cared
about and to take pro-active steps to address the FCA's concerns.
But if that is the effect the FCA seeks, it should communicate
its concerns to firms with clarity; this cannot be guaranteed
if the media is used as a substitute for direct communication.
(Paragraph 73)
17. It is reasonable
for the FCA to seek to raise awareness in regulated firms of the
conduct issues which it is tackling through rules and regulatory
action. But the intention in using the media for this purpose
should be limited to prompting firms and their employees to examine
the official publications the FCA has issued elsewhere—for
example, specific rules and guidance in the FCA Handbook, or Final
Notices of enforcement action. Martin Wheatley has said that the
FCA uses the media as a complement to its official communications.
The FCA should not use the media as a substitute for its official
communications. Email makes direct, targeted communication—even
to 72,000 firms—cheap and straightforward. Firms that ignore
the FCA's direct communications should know that they do so at
the risk of enforcement action if they fail to comply with its
requirements. (Paragraph 74)
18. There is merit
in the FCA publicising wrongdoing where it has taken place. The
FCA should treat this form of public explanation as an important
part of its work. However, in all of its public communications,
it should be aware of the risk of creating a misplaced wider antipathy
towards the industry among consumers, when most firms may not
be culpable of any misconduct. This would be harmful to regulated
firms and to the FCA's objective to protect and enhance the integrity
of the UK financial system, and may not be in consumers' interests.
The FCA should take particular note of Simon Davis's recommendation
that it adopt a factual, evidence-based approach to communications,
avoiding sensational headlines where possible. (Paragraph 75)
19. The FCA says that
it does not set out to generate sensational headlines. Nonetheless,
the Practitioner Panel believes there are signs, even after the
events of 28 March 2014, that the FCA still judges the success
of its communications strategy by the quantity of media coverage,
more than the quality of its content. The FCA needs to satisfy
itself that this is not the case, in its communications area or
any other part of the organisation. If it is not the case, the
FCA needs to consider why this damaging perception still exists
in the Practitioner Panel, and take steps to address it. The expertise
of both the Consumer and the Practitioner Panels needs to be used
to better effect. (Paragraph 76)
20. Pre-briefing comes
in many different forms. Properly controlled, it can be a useful
tool, enabling announcements to be understood and accurately reported
by the press. But 'trailed pre-briefing'—in which journalists
are briefed, and allowed to publish stories, on the FCA's work
before the FCA has published an official statement of its own—is
unnecessary and ill-advised, whether the briefing given is written
or oral. The use of the media as a substitute rather than a supplement
for regulatory statements creates much greater scope for misunderstanding
or partial communication of the intended message. Only by publishing
an official FCA statement at the same time as any pre-briefed
article can the FCA reasonably expect to avoid the risk of miscommunication.
(Paragraph 96)
21. Simon Davis said
that he was not convinced of the need for the FCA to conduct trailed
pre-briefings, and that the FCA should better control the process
if it wished to continue. The FCA has told the Committee that
it intends to refrain from this particular type of pre-briefing
altogether; the Committee welcomes this decision. However, the
FCA has not ruled out giving 'exclusives' to individual journalists,
which may be published at a time of the journalist's choosing.
The FCA has not made clear what the subject of such exclusives
might be. It should confirm that it will not in future use exclusives
to brief the media on forthcoming FCA announcements without publishing
an official statement of its own. (Paragraph 97)
22. Martin Wheatley
told the Committee that the FCA would not pre-brief information
that it thought was price sensitive. The danger, however, is that
even announcements that do not appear to be price sensitive can
become so if they are handled incorrectly—a lesson which
Clive Adamson told the Committee he had learned from the events
of 28 March. (Paragraph 98)
23. Witnesses told
us that the FCA's pre-briefing to the Telegraph on the Life Insurance
Review was not in itself price-sensitive. It contained some broad
information about the review, including that the FCA would collect
information on exit fees—penalty charges for long-standing
policy-holders seeking to switch insurance providers—to
"understand if it is an area in which we need to intervene".
The briefing also said that there were 30 million long-standing
policies of the sort the FCA would consider. However, in handing
over control of the presentation of this information to the Telegraph,
the FCA gave the newspaper—in the words of Mr Davis—"the
leg-up to speculate […] beyond the pure facts" on what
possible regulatory responses at the conclusion of the review
might be. In the event, the Telegraph article suggested that the
FCA might ban exit fees, and that the review would be an "inquiry
into 30 million policies". This proved to be highly market
sensitive. The FCA did not brief the Telegraph explicitly that
it might ban exit fees or that it would examine 30 million individual
policies. Nonetheless, it was reasonable of the Telegraph journalist—on
the basis of the briefing given—to have speculated in this
way. The result was a misrepresentation of the scope of the review.
This misrepresentation, which prompted the share price movements
on 28 March 2014, was inadvertently facilitated by the FCA's briefing
approach. It was not caused by poor journalism; nor did Mr Davis
criticise the Telegraph in his report. (Paragraph 99)
24. If the FCA is
to avoid similar events in future, it must not only take more
care to identify price-sensitive announcements, but consider how
its briefing strategy could lead to non-price-sensitive releases
becoming price-sensitive. It is not clear to the Committee, in
the light of Mr Wheatley's evidence, that the FCA has understood
this important distinction. The FCA's Executive Committee should
conduct, and publish, a review of its communication methods to
reassure Parliament, the regulated community and the public that
it has grasped this important point, which Clive Adamson and others
have made. (Paragraph 100)
25. Martin Wheatley
did not accept that the FCA's communications strategy was to blame
for the events of 27 and 28 March. However, the FCA's Practitioner
Panel believed that what happened was an "unavoidable consequence
of the direction of travel of the FCA's media policy". The
Practitioner Panel was right to draw attention to the risks involved
in the FCA's communications strategy. This strategy made the events
of 27 and 28 March 2014 not just possible, but likely—one
of its principal aims was to ensure that FCA communications reached
a large audience through media coverage, and this media coverage
was secured in part by the FCA handing more control to journalists
over FCA announcements than was appropriate for a regulator. This
inevitably increased the risk of the FCA's intended message being
lost. It is incorrect to claim, as Martin Wheatley has done, that
the communications strategy was not in some way to blame for the
events of 28 March 2014. The Committee is concerned that Mr Wheatley
still does not acknowledge this. (Paragraph 108)
Failures of oversight and co-ordination at the FCA
26. The
fact that care must be taken in communications, to prevent them
from having unintended market effects, should be an overriding
principle for any regulator—particularly so for one including
the UK Listing Authority. It should be far more prominent in the
regulator's consideration of its communications strategy than
the pursuit of media coverage. But, in the FCA's case, it was
not. (Paragraph 118)
27. Martin Wheatley
told the Committee that members of the FCA's Executive Committee
were as involved as they needed to be in the FCA communications
strategy, yet the risk of the FCA's communications having an unintended
price-sensitive effect was never discussed. Ms McMillan and Mr
Wheatley told us that no discussion was necessary—the former
because it was assumed that members were aware that the regulator's
communications could be price sensitive, and the latter because
the FCA never planned to pre-brief sensitive information. The
events of 27 and 28 March showed that these assumptions were misplaced.
(Paragraph 119)
28. Mr Davis described
various aspects of the Executive Committee's handling of the pre-briefing
strategy—its lack of clarity about decision-making, its
lack of consideration of any possible risks, and the lack of any
agreement about the circumstances in which pre-briefing was appropriate—as
"serious concerns". Taken together, they demonstrate
a serious failure of the Executive Committee's control of the
pre-briefing strategy. The Committee has also considered, however,
whether this incident indicates a broader failure by Executive
Committee members to consider the implications of the FCA's communications
strategy for the FCA's objectives. (Paragraph 120)
29. The evidence of
the Davis report has demonstrated that the individual members
of the Executive Committee had all of the information they needed
in order to engage in a full discussion of the FCA's communications
strategy and its operation. Executive Committee members had discussed
by email in March 2014 the risks of price-sensitive information
being briefed to the press, and most were aware that the FCA conducted
pre-briefings. But these individual points—which together
highlighted risks in the strategy of using the media to communicate
with firms, and handing editorial control to the media to secure
that coverage—were never put together. A full discussion
of the risks implied by the strategy never took place. (Paragraph
121)
30. Had the Executive
Committee fully considered the FCA's communications strategy,
it might have realised that it involved risks to the FCA's statutory
role in respect of price transparency and the orderly operation
of the financial markets. These risks might then have been better
controlled. Instead, it appears that the Executive Committee merely
'rubber-stamped' the communications strategy. In doing so, it
failed to engage fully in the question of how the FCA should use
communications in a way that helped to advance its objectives—or
was at the very least consistent with them. This was a serious
failure by the FCA's most senior managers. (Paragraph 122)
31. Since 2001, the
UK Listing Authority has formed part of the FCA or its predecessor
the FSA. The FCA is therefore the UK's primary repository of expertise
on listing requirements and the importance of clear communication
to the market. This expertise seems to have been wholly absent
from the FCA's consideration of the pre-briefing strategy. (Paragraph
131)
32. Simon Davis concluded
that the FCA's procedures in respect of price sensitive information
were "inadequate and not of the standard which the FCA expects
of those it regulates". Mr Davis's report makes clear that
on some of the most important issues on which the FCA imposes
guidance on firms, it imposed no guidance on itself. In particular,
there were no policies consistent with the guidance the FCA issues
for regulated firms on the handling of price sensitive information,
no guidance designed to help staff to identify price-sensitive
information, and no relevant training provided to employees. Worse
still, such limited controls as did exist were not adhered to
strictly. Were a regulated firm to have behaved similarly, the
FCA would—rightly—have considered it a serious omission.
For a regulator to have behaved in this way was serious. For a
regulator containing the UK Listing Authority, it was shocking.
This was a case of 'do as I say, not as I do'. (Paragraph 132)
33. Mr Davis recommended
several improvements to controls over price-sensitive information,
which the FCA has since made a commitment to implement. But the
Committee has seen no evidence to suggest that the FCA has assessed
the wider question of whether there might be a problem of culture,
rather than just controls—of a failure to share expertise
across the different areas of the organisation. This sort of failing
could have been mitigated by proper discussion at the Executive
Committee—the forum at which the constituent parts of the
FCA come together—of the risks involved in the FCA's communications
strategy and their possible implications for the FCA's objectives.
As noted, no such discussion took place. (Paragraph 133)
34. The expertise
of the UK Listing Authority was not only absent from the FCA's
consideration of the communications strategy. On the morning of
28 March, Clive Adamson and Zitah McMillan both failed to consult
the UKLA when they became aware that the Telegraph article had
given a misleading impression to the market. Supervision and communications
staff also failed to consult UKLA when they began to issue ad
hoc clarifications to the press and the industry about the scope
of the Life Insurance Review. In the event, the problem was brought
to the attention of the Head of the UKLA by his own staff, who
had observed the movements in share prices. It was not until 12.02pm
on 28 March that the Head of the UKLA was provided with all of
the information he needed to advise Martin Wheatley that the FCA
should immediately issue an official clarifying statement. (Paragraph
134)
35. The non-executive
members of the FCA Board should assess the extent to which the
FCA may suffer from a culture of working in silos and of inadequate
information sharing. It should take steps to ensure that staff
at all levels across the organisation have a good knowledge of
the objectives of other divisions of the regulator, and some familiarity
with the areas of expertise of those divisions. Otherwise, incidents
such as those on 27 and 28 March, in which one area of the FCA
unwittingly acted in a manner harmful to the objectives of another
area, will be likely to occur again. (Paragraph 135)
36. The events of
28 March were in part the result of a series of significant control
failures in the FCA communications division. Mr Davis describes
these failures—including the unauthorised attribution of
quotations in the Telegraph article to Clive Adamson, the failure
to record the telephone interview with the Telegraph, and the
apparent confusion within the communications area as to whether
this last failure was standard FCA practice—in detail. Mr
Davis suggests a number of procedural remedies for these failures.
(Paragraph 144)
37. The problems in
the FCA's communications area revealed by this episode appear
to range far wider than points of procedure. Evidence in Mr Davis's
report left the impression that there were shortcomings of standards
and culture in the FCA's communications division. Staff in supervision
described the communications team as putting "a lot of pressure"
on them to pre-brief the Life Insurance Review to the Telegraph,
even though the supervisors themselves considered this to be risky.
Other exchanges show supervision staff raising concerns about
the tone of draft press releases, and the communications area
resisting their suggested changes to those drafts. Simon Davis
did not draw any conclusions from this about the culture of the
FCA, and did not propose any remedies. (Paragraph 145)
38. The communications
area of an organisation will, and should, contain staff who are
skilled at conveying messages to various different audiences.
These staff should advise the other divisions of the FCA on how
best to communicate their work. But they should not seek to override
the expert views of these areas—supervision, markets and
enforcement—when those areas are more familiar with the
substance of the work, its likely effect on the industry and the
market, and the risks involved. This should be the case at all
levels of the FCA, and should be reflected in interactions between
junior supervision and media staff, as well as between Executive
Committee members. The FCA's Executive Committee needs to satisfy
itself that the working relationship between the communications
area and other areas of the FCA is appropriate, and take action
to address this if it is not. (Paragraph 146)
39. Simon Davis concluded
that there was "a failure of co-ordination between the senior
executives at the FCA" on 28 March, and a "lack of the
urgent actions that the FCA would expect of a listed company in
similar circumstances". The incident could have been resolved
much more quickly—thus avoiding some of the damage suffered
in the life insurance market—if senior executives had shared
information with each other and come together quickly to agree
a response. Instead, the delay of six hours before a corrective
statement was issued caused damage to the credibility and reputation
of the FCA. (Paragraph 158)
40. Simon Davis found that the
FCA did not have a plan for dealing with a situation such as that
which arose on 28 March. The lack of any formal contingency plan
for dealing with this kind of emergency situation was a serious
failure of the FCA's management. An emergency plan to bring together
the FCA's leadership in response to such a major event should
have been considered a basic requirement. The Committee welcomes
the FCA's acceptance of Mr Davis's recommendation that a formal
plan should be put in place. (Paragraph 159)
41. In addition, as Simon Davis
concludes, senior executives should not have needed a formal emergency
plan in order to co-ordinate their response to the events of 28
March. This is not least because the FCA's over-arching strategic
objective to ensure that the relevant markets function well should
have already focused senior staff on such a serious market-moving
incident. The fact that this did not happen may or may not suggest
a problem with standards and culture within the FCA, with even
the Executive Committee failing to take sufficient initiative
in response to a crisis or to keep the FCA's objectives fully
in mind when deciding on a course of action. The non-executive
members of the FCA Board should investigate further to establish
whether this is the case and, if so, what the remedy should be.
(Paragraph 160)
The FCA's response to the Davis report
42. 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.
(Paragraph 173)
43. 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.
(Paragraph 174)
44. 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. (Paragraph 175)
Regulating the regulator
45. Simon Davis reached conclusions
about the responsibility of certain individuals for the events
of the 27 and 28 March. However, it is not clear from his report
where individual responsibility lies for the failures of the FCA's
Executive Committee and Board. Instead, he concludes that the
Board and the Executive Committee are collectively responsible
for their respective failures. This is a well-rehearsed and unfortunate
mantra. The Committee has heard it often from regulated firms,
and particularly banks. One of the key conclusions of the Parliamentary
Commission on Banking Standards was that "a buck that does
not stop with an individual stops nowhere". The Commission
made recommendations intended to establish beyond doubt where
individual responsibility lies at the very top of banks, which
are now on the statute book as the Senior Managers Regime for
banks. The FCA (together with the PRA) has brought forward detailed
proposals for the operation of that regime. As the regulator,
it should be capable of demonstrating that it is applying standards
at least as high to its own senior managers. Mr Davis should have
paid closer attention to individual responsibility in reaching
his conclusions. (Paragraph 183)
46. In response
to recommendations of the Parliamentary Commission on Banking
Standards, the FCA and PRA have proposed, as part of the Senior
Managers Regime for banks, a 'Responsibilities Map': a single
document that describes a firm's management and governance arrangements
and allocates specific responsibilities to senior individuals.
The Committee recommends that the FCA, and the PRA, draw up a
'Responsibilities Map' which allocates key responsibilities to
individuals in their respective organisations. This document should
be published. It should be compliant as far as possible with the
SMR that the regulators require of banks.
(Paragraph 184)
47. Simon
Davis concluded that the FCA's Board was responsible for the inadequacy
of the FCA's controls on the identification, control and release
of price sensitive information. But it is also clear from Mr Davis's
report that the Board of the FCA failed in its oversight of the
FCA's executive and that it failed to identify the risks inherent
in the FCA's communications strategy—risks that materialised
on 27 and 28 March. It is therefore surprising that the Board's
review of its own effectiveness, conducted shortly after this
incident, produced what its Chairman described as a "satisfactory
answer". The Board must, as a matter of urgency, commission
an external organisation to conduct a review of its practices
and effectiveness. This review should consider in particular the
Board's approach to the identification and management of risk.
The results of this review should be published.
(Paragraph 193)
Overall conclusions
48. 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. (Paragraph
194)
49. 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. (Paragraph 195)
50. 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. (Paragraph 196)
51. 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. (Paragraph 197)
52. 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. (Paragraph
198)
53. 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. (Paragraph
199)
54. 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.
(Paragraph 200)
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