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A report from the all-party parliamentary group (APPG) on investment fraud and fairer financial services has called the UK’s regulator, the Financial Conduct Authority (FCA) “incompetent at best, dishonest at worst”.

The group called for extensive reforms to address serious shortcomings, which could affect fund operators as wrangling to sort the issue out could drag on and see more changes recommended.

According to the Guardian, the examination of the FCA, which took almost three years and collected evidence from 175 fraud victims, whistleblowers, and the regulator’s former staff, found “there are very significant shortcomings to the FCA”.

It was carried out by a group of 30 MPs and a dozen members of the House of Lords, after a series of financial scandals.

In those scandals, financial services firms were accused of mistreating consumers and small businesses, and the FCA has been blamed for “doing too little too late – or nothing” to prevent or punish alleged wrongdoing, Bob Blackman, who co-chairs the APPG, wrote in the 358-page report.

The report could have serious implications for the credibility of the organisation and how it goes forward with delivering guidance to the UK’s financial services firm. Especially in terms of reputational damage and adherence to its rules.

“Described as “hard-hitting” and widely described last week as the FCA being “incompetent at best, dishonest at worst”, it rings very true and feels accurate - given our post-pandemic experiences of dealing with the UK’s regulator on behalf of our clients,” said Neil Robson, Financial Markets and Funds partner at law firm Katten Muchin Rosenman UK LLP, in a comment on the findings.

"Given the FCA always asks firms’ management to set the tone from the top, the proposed overhauling of the FCA’s senior leadership team has to be the right approach."

“The testimony gathered indicated there were problem areas, all of which we feel as our worked reality, as they expressed a range of frustrations that we have experienced with our clients and their interactions with the FCA – and frankly, in light of these experiences we would heartily welcome fresh policy thinking and reform of the regulator,” he said.

The report recommended that there be key changes at the FCA – with a new mission against which the FCA should be tested and held accountable, FCA staff to be compensated – and promoted – and explicitly aligned with its professed objectives and values.

“I think [this] would be welcomed by all outside the FCA. Given the FCA always asks firms’ management to set the tone from the top, the proposed overhauling of the FCA’s senior leadership team has to be the right approach since the FCA criticism has to flow up to the current management,” said Robson.

However, showing the difficult position the regulator is in attempting to balance consumer and industry, it was reported in the days after the paper was launched by City AM that the FCA was to “soften its controversial ‘name and shame’ plans and will take into account the damaging impact the proposals could have on companies, after furious backlash from the City and Westminster”.

The FCA said it would set out plans for “further engagement” after its initial plans triggered “significant concerns” when they were announced in April.

The FCA’s proposals in response to feedback included:

• The potential negative impact on a firm would be explicitly considered as part of a public interest test - previously it wasn’t included as one of the factors.
• Firms would be given 10 days’ notice ahead of any announcement being made, rather than the 1 day originally consulted on. During this period, firms could make representations. If the FCA decides to announce, firms would then have an additional 48 hours’ notice before it is published.
• The potential for an announcement to seriously disrupt public confidence in the financial system or the market has also been included as a new factor in the public interest test.
• The FCA has clarified it won’t announce investigations which began before any changes to the policy come into effect. (Although it may reactively confirm investigations which are already in the public domain, where this is in the public interest).

'We have heard the strength of feedback to our original proposals, and we are making changes as a result. We hope the greater detail published today supports the further engagement we hope to have on the proposals, before we make any final decisions,” said Therese Chambers, the FCA’s Joint Executive Director of Enforcement and Market Oversight.

“We cannot grow the economy in and of itself, but there are ways we can facilitate that growth. The first is to reduce the cost of regulation, or, to ensure there is good value from it.”

In a speech days before, Emily Shepperd, FCA Chief Operating Officer, delivered at the TheCityUK National Conference in Birmingham, said that “The UK regulatory regime is highly regarded and only pipped from first place by Singapore.”

Shepperd said “As a regulator, we cannot grow the economy in and of itself, but there are ways we can facilitate that growth. The first is to reduce the cost of regulation, or more specifically, to ensure there is good value from it.”

It is likely that the FCA will face further scrutiny in the coming months, which means fund operators should be vigilant for any potential changes.

 

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