On the evening of 27 March 2014, a newspaper published an article describing a forthcoming thematic review by the Financial Conduct Authority (FCA) into the UK’s life insurance market. The story, based on an FCA advanced briefing, gave a misleading impression of the scope of the review, and was published before the FCA made its own announcement. When the markets opened on 28 March, the share prices of several life insurers fell heavily. When the FCA published a clarifying statement about the scope of its review several hours later, these prices recovered.

On 29 March 2014,  the Treasury Select Committee (TSC) called for a “full and transparent explanation about how such an apparently serious mistake came to be made“. An experienced solicitor was appointed to investigate, and he reported in December 2014.

On 27 March 2015, the TSC published a report of its own, and it’s damning.

Here’s a summary:

  • Although the FCA’s task is “difficult“, and it’s working hard to “break the link with the failed FSA“, it will be “many years” before it succeeds;
  • The FCA made a serious error in March [2014]. By breaching its own listing rules, it created a false market [and] put its … statutory objectives at risk. … problems may still exist at the FCA. It is not … clear [it] has … grasped this“;
  • The FCA didn’t have internal policies “on the handling of price sensitive information, no guidance … to help staff to identify price-sensitive information, and no relevant training [for] employees. Worse still, such limited controls as did exist were not adhered to strictly … For a regulator … this was serious. For a regulator containing the UK Listing Authority, it was shocking“;
  • It was “misguided” for the FCA’s Board to announce, as it did at first, that it would conduct an inquiry into the events of March 2014. “The fact that the Board … 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 … On 28 March, the role of the FCA’s Chairman in the events was unclear … it should have been transparent to the Board … that its own role … in what had happened would need to be examined … The FCA Board initially considered that an inquiry with some independent support was sufficient, not recognising the need for demonstrable independence“;
  • “The FCA Board should not have accepted [the investigator’s] invitation to read his report in full. They failed to recognise, and tell [him], that their doing so was a breach of the spirit of the protocol” they had agreed to safeguard his independence. “In the event, not only did the FCA Board have the opportunity to suggest to [the investigator] that he alter his recommendations; it took [it]. This too was an error of judgment...it should have been obvious to the FCA Board, and particularly to its Chairman, that it was improper to write to [the investigator] about his draft recommendations. This was another reflection of the FCA Board’s lack of understanding of the necessity for [the] inquiry to be, and to be seen to be, wholly independent … “;
  • Martin Wheatley, the FCA’s CEO, didn’t accept that the FCA’s communications strategy was to blame for these events. In truth, it made them “not just possible, but likely“. Mr Wheatley claimed that the FCA’s communications strategy was not to blame, but that was wrong. The TSC is “concerned that [he] still does not acknowledge this“;
  • It was “inappropriate for the FCA to use the media to communicate specific regulatory information to firms“; and to “hand over editorial control of [an] announcement … to the media” in a way that allowed its message to be “miscommunicated“. The FCA’s communications strategy was “flawed“, and “a major cause of … market disruption“. It is therefore especially “concerning that the FCA still does not acknowledge” this either;
  • Before the conclusions of the solicitor’s investigation were published, the FCA carried out an internal strategic review, and acted on the results. The conclusions of this review “have the appearance of being rushed out in an attempt to mitigate the effect of the publication of the [external] report” two days later. The strategic review led to a restructuring, and two senior individuals left. This gave the “awkward impression” that a “contrived media-handling operation was being rolled out [and that these individuals] were being made to take the blame for the pre-briefing incident“;
  • The FCA accepts that there were multiple failures across the organisation, both in the days and weeks leading up to the publication of the [newspaper] 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 … the overall impression left by [these] failures … is of a dysfunctional organisation… If the Executive Committee has failed properly to discharge its responsibilities, then the Board has … 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 ... It is not clear that the FCA has yet fully grasped the extent of the failings …” The evidence suggests that there may be broader problems at the FCA, including a failure to share expertise, a tendency not to co-ordinate, a failure of staff to take the initiative and an overbearing treatment by the communications area of other parts of the FCA;
  • The TSC in the next Parliament should therefore 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 its standards and culture, is necessary.

This is extraordinary. It’s also reminiscent of the TSC’s recent criticism of the Bank of England – another organisation that prefers to mark its own homework if it can (our blogs about the Bank of England’s FX inquiry and the TSC’s response to that are here and here). In some ways, things are actually worse than the TSC suggests. For example, three senior people left the FCA when the strategic review and reorganisation were announced. One was responsible for implementing the FCA media strategy that others had chosen to adopt. The second was quoted in the newspaper story, but he didn’t brief the newspaper. Instead, colleagues had briefed the newspaper and given it permission to use their comments in its story, and to attribute them to him. And the third hadn’t been a party to any of these events. She was leaving after a long and successful career, at the end of a long notice period, for personal reasons. But the timing, and perhaps the drafting, of the FCA’s announcements somehow gave the impression, at least to some newspapers, that she was also mixed up in these events, and that was why she was leaving too.

As the TSC put it, in its report: If you’d done anything remotely like this, we would have imposed a significant fine on you. So, do as I say, not as I do.