The Financial Conduct Authority (FCA) broke its own rules when it botched the announcement of a review of life assurance policies, and if it had been a company being regulated by the FCA, it would have faced a heavy fine, the Treasury Select Committee has said in a just-released report.
The report also questioned whether the problems at the FCA had been solved and asked the regulator to report back within six months.
In March 2014 the life assurance market was thrown into turmoil when the FCA head of supervision Clive Adamson was quoted in a newspaper as saying that the regulator would investigate whether people being held inside pension plans were victims of unfair treatment.
That led to funds dumping stock in Aviva, Legal & General and UK Prudential and excessive volatility in prices. Part of the remit of the FCA is that it should act in order to keep markets orderly, and the report described the events of March 27 and March 28 2014 as "a major self-inflicted distraction from the FCA's core purpose: ensuring that markets work well".
The report said that there had been multiple flaws in the FCA's processes and practices and that these went to the top of the organisation. including the chairman and CEO.
Tellingly, it noted 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 report by Simon Davis talked of a dysfunctional organisation, the Committee said.
The initial report found that there had been a failure of co-ordination between senior staff on March 28 last year. At 8.53am Clive Adamson became aware that a price-sensitive event had occurred after receiving a call from "furious representatives of a major insurance company" who asked the FCA to issue a retraction.
Unfortunately, the clarifying statement was not issued to the market as a whole and its phrasing was felt to be such that it would not calm the markets, but make them even more volatile.
One thing that has caused concern to the Treasury Committee has been the FCA's reaction to the Simon Davis report, published on December 10. On December 8 the FCA announced "a new strategic approach" and the departures of Clive Adamson and Zitah McMillan, who was director of communications. Two FCA senior executives told the Committee that the new strategic approach was not connected to the Davis report, effectively stating that the departures of Adamson and McMillan were unrelated to the criticism of them in the report. Also, the FCA made no mention of the Simon Davis Report (released December 10) in its announcement of a new strategic approach on December 8, even though it was in control of the timing of both releases.
"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".
The Simon Davis report does not get off scot-free, with the committee stating that "Mr Davis should have paid closer attention to individual responsibility in reaching his conclusions".
It is interesting to read the Treasury stating that the core purpose of the FCA is to ensure that markets work well, rather than the protection of the consumer. Of course, part of consumer protection is markets working well, but most of it goes beyond that, and it has been something of a concern for the industry, which has felt that it is dealing more with a consumer protection agency than with a financial conduct authority in the narrower sense of the term. However, at the end of the report it refers to the need for "a robust consumer protection body" on which financial services consumers can rely.
The Committee report said that the FCA had since inception had to cope with "the legacy of serious problems it inherited from the FSA". It cannot be comforting for the FCA to be compared with its rather inadequate predecessor, whose "soft touch" approach was seen by many as at least a factor in exacerbating the UK arm of the global financial crisis that occurred in 2008/09. The Treasury Committee said that "this episode, and the evidence of the Davis report, suggests that the FCA may have a good deal of further work fully to address that legacy".
Under Martin Wheatley the FCA took what many in the industry felt to be an unnecessarily confrontational approach, perhaps in reaction to the feeling held in some circles that the financial sector had walked all over the previous regulator, with disastrous results.
However, moving too far in the other direction can have similarly unfortunate consequences, particularly if the new organisation suffers from poor working relations between divisions.