Some of the key conclusions and recommendations contained in the statement are set out below. Quotes from the Chairman of the Treasury Committee, Andrew Tyrie MP, are in italics.
1. Overall comment
"The FCA’s work affects millions of consumers, and thousands of firms and their employees throughout the UK. It performs a role of the utmost importance: protecting consumers and ensuring that the markets function well. We rely on it to do a good job.
The FCA’s task is a difficult one. From the beginning, it has had to grapple not only with its own challenging role, but with the deficiencies of its predecessor, the Financial Services Authority. The FCA has been working hard to address these weaknesses, and to break the link with the failed FSA. On the evidence so far, these efforts to create a more effective conduct regulator are likely to take many years.
The FCA made a serious error in March last year. By breaching its own listing rules, it created a false market in life insurance shares. In doing so it put its own statutory objectives at risk. The evidence from this episode suggests that problems may still exist at the FCA. It is not yet clear to the Committee that the FCA has fully grasped this.
The FCA needs to do more to satisfy Parliament, and the public, that it has understood the implications of this episode for the FCA. In its Report, the Committee recommends several steps that the FCA can take to achieve this."
2. The FCA’s role as the listing authority
The FCA’s overarching strategic objective is "ensuring that the relevant markets function well". One of its secondary objectives is "protecting and enhancing the integrity of the UK financial system", which includes "the orderly operation of the financial markets". In selectively releasing information to the press about its work, the FCA put these statutory objectives at risk. By effectively breaching its own listing rules, the FCA itself created a false market in life insurance shares. This is a matter of serious concern. (paragraph 20)
The FCA would have considered this kind of conduct from a listed firm to be a serious failure, and it is reasonable to believe that the FCA might well have imposed a substantial fine on the firm or firms involved. The fact that the FCA failed to meet the high standards it expects of firms put its credibility at risk. (paragraph 21)
Simon Davis concluded that the FCA’s procedures in respect of price sensitive information were "inadequate and not of the standard which the FCA expects of those it regulates". Mr Davis’s report makes clear that on some of the most important issues on which the FCA imposes guidance on firms, it imposed no guidance on itself. In particular, there were no policies consistent with the guidance the FCA issues for regulated firms on the handling of price sensitive information, no guidance designed to help staff to identify price-sensitive information, and no relevant training provided to employees. Worse still, such limited controls as did exist were not adhered to strictly. Were a regulated firm to have behaved similarly, the FCA would—rightly—have considered it a serious omission. For a regulator to have behaved in this way was serious. For a regulator containing the UK Listing Authority, it was shocking. This was a case of ‘do as I say, not as I do’. (paragraph 132)
"By breaching its own listing rules, the FCA created a false market in life insurance shares—investors were trading on the basis of misleading information. It took the FCA over six hours from the opening of the market the next day to correct the misapprehension that its own communications approach created.
Had a regulated firm behaved as the FCA did last March, the FCA is likely to have imposed a considerable fine. There seemed to be one rule for the regulator, and another for the regulated."
3. The FCA’s communications strategy and pre-briefing
Martin Wheatley did not accept that the FCA’s communications strategy was to blame for the events of 27 and 28 March. However, the FCA’s Practitioner Panel believed that what happened was an “unavoidable consequence of the direction of travel of the FCA’s media policy”. The Practitioner Panel was right to draw attention to the risks involved in the FCA’s communications strategy. This strategy made the events of 27 and 28 March 2014 not just possible, but likely—one of its principal aims was to ensure that FCA communications reached a large audience through media coverage, and this media coverage was secured in part by the FCA handing more control to journalists over FCA announcements than was appropriate for a regulator. This inevitably increased the risk of the FCA’s intended message being lost. It is incorrect to claim, as Martin Wheatley has done, that the communications strategy was not in some way to blame for the events of 28 March 2014. The Committee is concerned that Mr Wheatley still does not acknowledge this. (paragraph 108)
Pre-briefing comes in many different forms. Properly controlled, it can be a useful tool, enabling announcements to be understood and accurately reported by the press. But ‘trailed pre-briefing’—in which journalists are briefed, and allowed to publish stories, on the FCA’s work before the FCA has published an official statement of its own—is unnecessary and ill-advised, whether the briefing given is written or oral. The use of the media as a substitute rather than a supplement for regulatory statements creates much greater scope for misunderstanding or partial communication of the intended message. Only by publishing an official FCA statement at the same time as any pre-briefed article can the FCA reasonably expect to avoid the risk of miscommunication. (Paragraph 96)
Simon Davis said that he was not convinced of the need for the FCA to conduct trailed pre-briefings, and that the FCA should better control the process if it wished to continue. The FCA has told the Committee that it intends to refrain from this particular type of pre-briefing altogether; the Committee welcomes this decision. However, the FCA has not ruled out giving ‘exclusives’ to individual journalists, which may be published at a time of the journalist’s choosing. The FCA has not made clear what the subject of such exclusives might be. It should confirm that it will not in future use exclusives to brief the media on forthcoming FCA announcements without publishing an official statement of its own. (Paragraph 97)
"There are advantages in the FCA seeking media coverage for its work. This can be of particular benefit to consumers, helping to inform them about scams and other risks. But the FCA’s strategy has in some instances gone too far.
It is inappropriate for the FCA to use the media to communicate specific regulatory information to firms. The FCA’s focus on achieving media coverage of its work led it to hand over editorial control of the announcement of its life insurance review to the media. In turn, this allowed certain aspects of the FCA’s intended message to be miscommunicated. The FCA’s communications strategy was therefore a major cause of the market disruption in March last year. It is concerning that the FCA still does not acknowledge that it was flawed.
The FCA needs to make sure that its communications strategy is consistent with achieving its statutory objectives, and does not create the risk of moving markets unintentionally. The FCA should refrain from offering ‘pre-briefings’ or ‘exclusives’ on forthcoming FCA announcements altogether, unless it publishes those announcements at the same time that any stories appear in the media."
4. The departures of Clive Adamson and Zitah McMillan
The FCA made no mention of Simon Davis’s investigation when it announced its new strategic approach, and a major restructuring, just two days before it published Mr Davis’s report. The FCA controlled the publication date in both cases. (paragraph 173)
The conclusions of the FCA’s strategic review have the appearance of being rushed out in an attempt to mitigate the effect of the publication of the Davis report on the FCA’s reputation. John Griffith-Jones acknowledged in evidence to the Committee that the new strategic approach would not have been published so quickly had it not been for the departure of senior individuals. The restructuring involved the departures of Mr Adamson and Ms McMillan—two people heavily involved in the pre-briefing incident. 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. (paragraph 174)
"Clive Adamson and Zitah McMillan were the two senior executives most heavily criticised by Simon Davis in his report. Yet their departures from the organisation, announced by the FCA two days before the publication of the Davis Report, were presented as being unrelated to the incident. This might reasonably lead to suspicions that Mr Adamson and Ms McMillan were being made to take the blame in a contrived media-handling operation for the mishandled pre-briefing, while allowing the FCA to claim that this was not the case."
5. The independence of the Davis Report
It was misguided of the FCA’s Board initially to announce that the Board itself should conduct the inquiry into the events of 27 and 28 March. The FCA’s statement—released on the evening of 28 March—said that the Board would "conduct an investigation into the FCA’s handling of the issue involving an external law firm". The fact that the Board, in drafting this statement, 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. (paragraph 26)
John Griffith-Jones told the Committee that it was not the Board’s intention that the inquiry should involve the executive. It is clear from his evidence, and from the Board’s minutes, that the Board intended its non-executive members to be involved. This was another misjudgment. On 28 March, the role of the FCA’s Chairman in the events was unclear. Moreover, it should have been transparent to the Board from the outset that its own role—including the role of the non-executives—in what had happened would need to be examined by the inquiry. The FCA Board initially considered that an inquiry with some independent support was sufficient, not recognising the need for demonstrable independence. (paragraph 27)
The terms of the protocol produced by the FCA were designed to safeguard the independence of the inquiry and to ensure that there could be no suggestion that the FCA itself had influenced Mr Davis’s conclusions. Mr Davis made a mistake by sharing his whole report—including his recommendations—in draft with the FCA’s Board. Mr Davis considered that it was necessary for him to do this as part of the Maxwellisation process. However, the Maxwellisation process, as set out in the protocol, was intended to give individuals, groups or organisations criticised by Mr Davis a reasonable opportunity to make representations about those criticisms that related specifically to them. Mr Davis’s recommendations did not contain direct criticism of individuals or groups. The Committee therefore does not accept that it was necessary for Mr Davis to share his recommendations with the Board as part of this process. In sharing them with the FCA’s Board, Mr Davis acted contrary to the purpose of the protocol that had been drawn up by the FCA to protect his own independence. (paragraph 47)
The FCA Board should not have accepted Mr Davis’s invitation to read his report in full. They failed to recognise, and tell Mr Davis, that their doing so was a breach of the spirit of the protocol. (paragraph 48)
In the event, not only did the FCA Board have the opportunity to suggest to Mr Davis that he alter his recommendations; it took that opportunity. This too was an error of judgment by the FCA Board. (paragraph 49)
Regardless of the nature of the representations it intended to make, it should have been obvious to the FCA Board, and particularly to its Chairman, that it was improper to write to Mr Davis about his draft recommendations. This was another reflection of the FCA Board’s lack of understanding of the necessity for Mr Davis’s inquiry to be, and to be seen to be, wholly independent. (paragraph 50)
"The FCA’s Board made a misjudgement in announcing initially that the report into the events of 28 March would be conducted by the Board itself. The Board did not appear to have recognised the importance of the report being, and being seen to be, demonstrably independent. The FCA agreed to an independent report only after vigorous requests from MPs and the Treasury among others.
Mr Davis’s independence was protected by a ‘protocol’ drawn up to set out how his inquiry was to be carried out. By sharing his full draft report with the FCA, Mr Davis acted contrary to the purpose of this protocol. By suggesting changes to Mr Davis’s draft recommendations, the FCA Board similarly acted contrary to this purpose.
In the event, no substantial changes were made to Mr Davis’s report. But it was improper of the FCA Board to offer any views at all on his draft recommendations—in doing so, it risked creating the perception that Mr Davis’s independence had been compromised. The fact that the Board took the opportunity to comment on Mr Davis’s recommendations suggests that, even six months after the commencement of the inquiry, the Board still hadn’t understood the vital need for it to be, and be seen to be, wholly independent."
6. Has the FCA learned lessons from the Davis Report?
Simon Davis’s report sets out factually what happened in detail. It makes sensible recommendations for improvements to the FCA’s internal processes—which, implemented in full, should go some way towards bringing the FCA into line with the high standards it sets for firms. But Simon Davis himself told us that he had not examined the wider implications of his findings for the FCA and its governance. He said that this was for others to do. This Report considers the extent to which the events of 27 and 28 March 2014 were simply the result of a failure of controls, or whether they might reflect broader problems at the regulator. (paragraph 195)
The FCA accepts that there were multiple failures across the organisation, both in the days and weeks leading up to the publication of the Telegraph’s 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. Simon Davis concluded that “the system broke down”, and the overall impression left by the multiple failures he identified is of a dysfunctional organisation. In a regulated firm, these failings might lead the FCA to consider whether to initiate ‘special measures’. Using this tool—recommended by the PCBS—the regulator can examine whether individual failings are underpinned by a systemic problem throughout the organisation, and require the firm to take remedial action if this is found to be the case. (paragraph 196)
If the Executive Committee has failed properly to discharge its responsibilities, then the Board has consequently 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. (paragraph 197)
The events of 27 and 28 March have been a major self-inflicted distraction from the FCA’s core purpose: ensuring that markets work well. It is not clear that the FCA has yet fully grasped the extent of the failings revealed by Simon Davis’s report. To address this:
- The Executive Committee should examine the FCA’s communication methods and poor working relationships between divisions;
- The non-executive members of the Board should investigate whether the FCA has a problem of inadequate sharing of expertise, and whether standards and culture contributed to the events of 27 and 28 March;
- The Board should commission an external review of its own effectiveness, particularly its approach to managing risk; and
- The FCA should produce a ‘Responsibilities Map’, as it expects banks to do, which sets out clearly where senior responsibility lies. The PRA should produce an equivalent document.
- Individually, most of these pieces of work, and the remedial proposals of the Davis report, focus on relatively specific questions about the operation of the FCA. Taken together, they amount to an examination of whether the FCA is suffering from a systemic weakness in standards and culture. The FCA should prioritise this work, which is essential for the FCA to be able to assure itself and Parliament that it is not suffering systemic weaknesses. The Committee expects the FCA to publish the results of this work within six months. (paragraph 198)
Since its inception, the FCA has needed to grapple with the legacy of the serious problems it inherited from the FSA. This episode, and the evidence of the Davis report, suggests that the FCA may have a good deal of further work to do fully to address that legacy. The FCA now has an opportunity better to identify the scale of these problems and put them right. By grasping the scale of what remains to be done, the FCA’s leadership will be better placed to be able to use its new powers effectively, to perform its consumer protection function to the highest possible standard, and to develop a much higher level of constructive engagement with industry, which this incident may have prejudiced. (paragraph 199)
Millions of financial services consumers need a robust consumer protection body on which they can rely. It is the role of Parliament to do what it can to ensure that this independent regulator is working well on their behalf. When the FCA has published the results of the work that we have recommended, the Treasury Committee in the next Parliament should 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 standards and culture throughout the organisation, is necessary. (paragraph 200)
"Simon Davis’s report uncovered a number of serious control failures at the FCA, which contributed to the particular incident on 28 March 2014. The FCA has now made a commitment to address these failings.
The evidence in Mr Davis’s report, however, suggests that there may be broader problems at the FCA, which range far wider than points of process and procedure. The events leading up to and in the aftermath of the pre-briefing demonstrate a failure to share expertise – not least on listing requirements – throughout the organisation, a tendency not to co-ordinate, a failure of staff to take initiative and an at times overbearing treatment by the communications area of other parts of the FCA.
Furthermore, the FCA seems to have lost sight of its overarching objective: to make sure that relevant markets work well. The Executive Committee failed to pay sufficient attention to the risk that its own communications could move the markets. When this risk materialised, they failed to act with sufficient urgency to put things right.
It is not clear to the Committee that the FCA has considered seriously whether there might be wider problems—setting aside the detailed control failures identified by Mr Davis—that help to explain how such a serious incident was allowed to occur. In order for the FCA to put this episode fully behind it, it will have to examine these issues in detail in the months ahead. The Treasury Committee has made some recommendations on how the FCA should go about this. In the light of the investigations – including into the FCA’s effectiveness and its standards and culture – proposed in this report, it will be for the Treasury Committee in the next Parliament to consider what further work is appropriate."