The FCA and its labyrinthine rulebook need a serious shake-up
Slow, inefficient and high-handed are all epithets flung at the UK financial watchdog
Here’s a small vignette from the latest report of the financial services complaints commissioner that says a lot about the prevailing culture at the UK’s main regulator, the Financial Conduct Authority.
In 2016, an investor purchased bonds from Horseshoe Credit Union, a non-profit-making lending co-operative. She wasn’t naive; she first did her homework, checking the FCA’s register to make sure it was regulated, and also with the Financial Services Compensation Scheme to check there was no evidence of default. All seemed in order, so she invested.
Unfortunately, it turned out that the credit union had been dissolved four years previously and its identity cloned by fraudsters. The FCA had simply failed to update its register, despite long awareness of the closure. The investor lost £45,000. Her offer of compensation from the watchdog? A paltry £150.
Or take a more recent case involving London Capital & Finance, an investment firm that collapsed in January, taking with it £236m of investors’ funds. An independent financial adviser, Neil Liversedge, warned off clients after being alerted to the existence of its “mini-bond” scheme, claiming that “it raised more red flags than the Soviet Union”.
He wrote to the FCA in November 2015 warning that this was not a suitable investment for the retail market. At the time, LCF’s website marketing had taken in less than £10m. He received no reply.
Slow, inefficient, high-handed, and lacking a grip on its own rules. These are not welcome epithets for any regulatory organisation. Yet they have all been flung at the FCA in the past week.
Much attention has been focused on the tutting about the tortuous way in which complaints are handled. In the words of the commissioner, “complainants, many of whom are anxious/and or angry and/or vulnerable, have found that the [FCA] has exacerbated their difficulties”. But we’ll get to that later.
First, it’s worth reflecting on the admission of the FCA’s chairman, Charles Randell that it was “almost impossible to explain” the FCA’s regulatory perimeter (ie the boundary where its regulatory writ kicks in). Now clearly it is not ideal if you don’t know exactly when your edicts might apply and to which firms or products — especially when this confusion can have a critical impact on the wealth of members of the public.
It’s particularly bad news if that weakness has been spotted by scammers, whose dubious financial schemes now dot the internet. But that’s just one of many problems with the agency’s rules.
The FCA exists to police a series of clear general principles, such as the obligation to treat customers fairly and conducting business with integrity. But beneath this are reams of detailed regulation, setting out processes and prescriptive rules. It runs to about 10,000 pages and is yours for £3,641.
The regulations are so complex that they sometimes bamboozle the regulators themselves. Take a lawsuit last year, when the FCA was criticised in the High Court for not understanding its own rules concerning pensions after the watchdog changed its mind on some critical evidence mid-case.
The rules often conflict with — and eclipse — the general principles. When fund manager Neil Woodford cleverly worked round regulations designed to stop him piling illiquid investments into a fund offering daily liquidity, he was surely not being transparent with investors. It’s not good enough to bleat, as FCA boss Andrew Bailey did, that Mr Woodford was “following the letter but not the spirit of the rules”.
Capping all this is the question of recourse — or rather the lack of it. Not only are investigations slow (think of the aeons taken on the HBOS and RBS Global Restructuring Group cases), but the FCA often in effect marks its own homework. Take its probe into Lendy, a peer-to-peer lender that collapsed in May leaving investors with big questions about the assiduousness of the FCA’s own oversight.
Lord Myners, the former City minister, has called for an independent review of Lendy on the grounds that it might not only have more credibility but could report far more quickly. That speaks volumes, and not in a good way.
The answer is not ever more mind-bendingly detailed rules, but greater focus on principles and more vigorous use of the checks and balances the system already provides. Directors of dubious schemes should face the most ferocious sanctions following findings of malpractice, as should auditors who sign off on their duff accounts. Meanwhile, recourse should be far quicker, whether in investigating regulated firms and people or responding to customer complaints.
Mr Bailey might usefully ponder the fate of Britain’s accounting watchdog, the Financial Reporting Council, which was recently scrapped for failing to live up to its duty to investors. To avoid spiralling towards that plug hole, the FCA needs a new approach.