Lawmakers label FCA incompetent, report echoes previous criticisms

A report by a group of lawmakers has damned the Financial Conduct Authority (FCA) as incompetent and its culture as “profoundly defective”. It calls for wholesale reform of the regulator, and its remit and senior leadership, while reiterating criticisms about a lack of accountability aired in previous select committee reports.  

Bob Blackman, co-chairman of the All-Party Parliamentary Group (APPG) on Investment Fraud and Fairer Financial Services, said the report suggests significant shortcomings at the FCA.

“It comes across as an opaque and unaccountable organisation, slow to act and even slower to admit it has got things wrong and to change. The individuals who generously shared their experiences with us told tragic tales of regulatory failure causing enormous financial and emotional distress,” Blackman said in the foreword to the report.

“Perhaps some of the most compelling evidence comes from current and former employees of the regulator itself, who depict its culture and leadership as profoundly defective.”

APPGs are set up by groups of parliamentarians who share a common interest in a subject. They are not part of the official legislative scrutiny process that is carried out by select committees, however, the report adds to criticism aired in recent reports and evidence sessions held by the House of Lords Industry and Regulators Committee and the House of Lords Financial Services Regulation Committee.

Undermining attractiveness of the UK

The report has added to the negative noise around the regulator at a time when the new Labour government is keen to grow the UK’s financial services sector.

Charles Kuhn, a partner and financial crime specialist at global law firm Clyde & Co, said the report was not a good look for the UK and risked undermining London’s position as a financial centre. 

“Businesses deciding whether to set up or stay here are likely to factor in a regulator struggling with leadership and operational issues in their choices,” said Kuhn, who has worked in the FCA’s enforcement and financial crime division.

“A credible, well-functioning regulator is an important part of maintaining trust and stability in the UK’s financial system, and this report highlights the urgent need for meaningful reform,” he added.

Oversight and liability  

The APPG stopped short of calling for the FCA to be replaced but said this nuclear option might be needed in future if the regulator did not embrace its proposals.

A key recommendation of the report, which includes unverified first-person accounts from 175 individuals including former and current FCA employees, financial services whistleblowers, and scam victims, is for a financial regulators’ supervisory council to be placed above the FCA board. The APPG suggests the council would provide “critical, ongoing, arm’s-length, specialist oversight” in the consumer and public interest.

At present, the National Audit Office carries out regular reviews of the FCA. Its 2023 report recommended that by the end of 2024, the regulator put in place the operational processes it needed to manage all of its change programme.

The APPG report also proposes removing the FCA’s immunity from civil liability as it relates to consumers.

“This immunity exists within the Financial Services Act 2012. There are only two carve outs — bad faith and breach of human rights. Otherwise, the FCA is completely immune from civil liability, and it is therefore not exposed to jeopardy for poor performance,” the APPG said in the report.

Currently, the Financial Services Complaints Commissioner can make a modest award (up to £2,500) where a FCA failure is deemed to have contributed to a financial loss suffered by a complainant. However, the scheme was amended by the FCA and the Prudential Regulation Authority last year. In her annual report, current commissioner Rachel Kent pointed out the change effectively meant that the FCA will rarely pay the compensation.

In 2023/24, the commissioner recommended the FCA pay compensation on 39 occasions.

Recommendations

Other recommendations from APPG include that the FCA: develop and embrace “a consumer-centric mission statement”; align its staff promotions and systems with its objectives; and create a consumer-facing department for scam victims. The government should consider setting up an Australian-style Royal Commission to advise on radical architectural reform, the report said.

Another recommendation that borrows from another jurisdiction is the call to establish a non-governmental organisation (NGO) to “act as a counterweight to industry lobbying”. In 2011, members of the European Parliament set up the NGO Finance Watch to strengthen the voice of society in financial services regulation.

A new chair of the Financial Services Consumer Panel, to take up post in 2025, is currently being recruited, and the APPG called for the appointment to be vetted and approved by Parliament. Currently, the Treasury Committee carries out this oversight for several other regulatory appointments.

The consumer panel chair is invited to give evidence to the Treasury Committee on an ad hoc basis, and present incumbent Helen Charlton will appear before the committee on December 3.

FCA response

An FCA spokesperson said: “We sympathise with those who have lost out as a result of wrongdoing in financial services, however we strongly reject the characterisation of the organisation. We have learned from historic issues and transformed as an organisation so we can deliver for consumers, the market and the wider economy.”

The FCA said it believed that accountability was vital and it “hugely benefitted” from close and regular scrutiny by parliamentary committees. Its senior leadership had appeared at 38 committee hearings in the last Parliament and provided an additional 41 written updates on its work.

Giving evidence to the House of Lords Financial Services Regulation Committee this month, FCA chief executive Nikhil Rathi said a key driver for the regulator’s proposals to name more firms it had under enforcement investigation was because he was regularly asked to do this by members of Parliament.

“The frequency and regularity with which I get asked by committees, indeed by the former chancellor himself or MPs, about specific investigations, there is an intensity and a regularity about that, which is not seen or felt by my counterparts in the G7, who I talk to all the time,” Rathi said.

The FCA said its 2024 employee survey showed an improving picture on internal culture, with staff giving it a 64% trust score, up from a low of 48% in 2022. It also scored 75% for work environment and 78% for diversity in the latest survey.