Watchdog bites watchdog is a gift for headline writers, but the description of the UK National Audit Office’s report on the FCA’s performance as a ‘slamming’ may betray evidence of a little too much egg in the Christmas nog. Nonetheless, criticism that the regulator takes too long to identify issues and take action, and that its reporting processes are not sufficiently clear, has to be taken seriously.

As Rob Mason, Global Relay’s Head of Regulatory Intelligence, told us, this is “a strong message sent which will have generated further concerns regarding the FCA’s ability to deliver on its expanding mandate given the resources made available to it”.

Changing financial sector landscape

The NAO set out to study “how well placed the FCA is to respond to the changes that the financial services sector is undergoing, and to support government’s ambitions for the sector”. It does so by:

• detailing changes to the financial services landscape, what this means for the FCA’s accountability and strategy, and how it is changing in response;
• examining whether the FCA has the tools and resources it needs to identify and respond to change, and to influence future innovation and change;
• assessing how the FCA measures, reports and learns from its performance.

It says: “The FCA recognised that it needed to change its approach, both because of changes in its remit as a result of the UK’s departure from the EU and following a number of high-profile regulatory failures.” And it notes that new arrangements under FSMA 2023 gave the FCA more direct power to regulate financial services as well as making it more directly accountable to Parliament.

Referring to the FCA’s multi-year strategy document published in April 2022, the report notes that it acknowledges work to support these changes will “take years to complete”. The NAO does, however, note that “the FCA has become more transparent about what it does and does not regulate”.

“A strong message sent which will have generated further concerns regarding the FCA’s ability to deliver on its expanding mandate.”

Rob Mason, Head of Regulatory Intelligence, Global Relay

The section that has drawn the attention of headline writers focusses on delays between identifying issues and taking regulatory action. It says: “In some cases, the FCA requires additional powers to act – for example, legislation must be approved by Parliament before the FCA can impose conduct standards on buy-now pay-later credit providers.”

“Even where the FCA does have power to act, moving to enforcement can take time. While the FCA has required crypto-asset firms to comply with anti-money laundering regulations since January 2020, and began supervision work including engaging with unregistered firms, it did not begin taking enforcement action against illegal operators of crypto ATMs until February 2023.”

Another example that the NAO may have had in mind could have been the fact that it was not the FCA but UK energy regulator Ofgem that became the first UK regulator to take enforcement action on off-channel comms.

Using data to identify risk

The report also notes that it will take years to complete work on changes to how the FCA uses data to identify risk, and that there are continuing concerns over “significant staff turnover, including at senior level”. It also says: “The FCA’s current public reporting is complex and makes it difficult for stakeholders, including His Majesty’s Treasury, to judge its performance.”

In short, it says: “The FCA is attempting a significant amount of change, on a number of fronts, all at the same time. This brings risks.” So it makes a number of recommendations;

• work with stakeholders to review the effectiveness of new accountability arrangements;
• plan to make changes to provide clarity on external reporting on performance by autumn 2024;
• ensure the FCA “has the operational processes it needs to manage the scale of change it has set in motion” by December 2024;
• develop and maintain a “long-term plan for workforce needs” by September 2024.

While not a slam and possibly not even, to use the Financial Times’ description, a rebuke, this is a pretty blunt assessment, reflecting wider concerns that Mason refers to. “The increased concern for consumer focus, has been at the cost of Wholesale Market supervision, which has seen a much-reduced number of material enforcement outcomes,” he told us. “This has the potential to impact regulated firms’ priority on compliance where we are already seeing further cost reductions applied.”

“There are a number of other issues which are not being specifically addressed, for example, is it wise for the FCA to be taking so much on at the same time?”

Carroll Barry-Walshm specialist blawyer and investigator

Specialist lawyer and investigator Carroll Barry-Walsh points out that “there is a difference between changes which are already happening and to which the FCA is having to respond and an expansion of responsibilities as a result of the decisions of the FCA itself and/or Ministers”. And, she says, “It would be helpful for the NAO to distinguish between the two because, arguably, they require different approaches and different types of scrutiny.”

“For instance, one would expect more ministerial involvement in Brexit-related or AI-related decisions. There is also a risk of empire-building and the FCA spreading itself too thinly. At the risk of pressing on a painful old scar, the FCA – and ministers – might remind themselves of RBS and the perils of hubris.”

Overall, she thinks: “It is good that the NAO is looking at whether and how the FCA is going to handle the significant additional responsibilities it is taking and facing as a result of macroeconomic changes and specific decisions to expand its remit into new areas.”

But, she says: “There are a number of other issues which are not being specifically addressed, for example, is it wise for the FCA to be taking so much on at the same time? Will this lead to it losing regulatory focus? Is it getting the ministerial support it needs? Will it get the expertise it needs to tackle some technically difficult issues, for example in relation to AI and cryptocurrency matters?”

Expertise in government

While much has been said about how the FCA is handling change, Barry-Walsh also wonders: “Is it sensible for the NAO not to look at how the FCA is dealing with its normal business-as-usual responsibilities? There have been a number of recent failings by the FCA in this regards in recent years. If it can’t get this right – and if it doesn’t learnt the lessons from those failings – how can anyone be confident that it will deal with these new matters well?”

Finally, and pertinently after a week in which the level of expertise and ability to understand complex detail in the most senior government circles has come under scrutiny, she says: “It is vital that there is effective ministerial and Parliamentary scrutiny, no matter how good the FCA’s reports and metrics are. If these are not read or not understood or simply accepted without question, then it really does not matter what they contain.”

“This really needs to be properly addressed by the NAO. The well-attested problems of the Post Office are as much – and fundamentally – a  result of a failure of ministerial governance and scrutiny. This aspect should be looked at by the NAO, especially since there is likely to be a change in government soon and establishing clear requirements for what that ministerial governance and scrutiny should be is vital.”

Vital indeed, as Mason concludes. “UK markets need strong oversight and supervision which requires enforcement when appropriate. Without it, investment in UK plc will ultimately suffer.”