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FCA explains procedure for investigating own failings

FCA chief executive Martin Wheatley

The Financial Conduct Authority has set out how it will decide whether to investigate and report on possible regulatory failure.

As the FSA, the regulator published reports examining its role in the failures of Northern Rock and Royal Bank of Scotland and in Libor rigging.

Under the new regulatory structure, the FCA will have to investigate itself and produce a report where it meets the requirements of a two-part test. The first part is where there has been a significant failure to secure appropriate consumer protection, or where a failure has had, or could have had, a significant adverse effect on the FCA’s integrity or competition objectives.

The second test is where events might not have occurred or the adverse effect might have been reduced but for a serious failure in the regulatory system or the FCA.

The regulator has set a threshold to trigger an investigation of £150m or more of total consumer detriment, unless the only detriment suffered is to large or sophisticated financial firms.

It says where there is consumer detriment of between £30m and £150m, it will consider other factors when deciding whether to carry out an investigation into regulatory failure, such as the consumers concerned, the loss per consumer or the size of the market.

Reports must set out the result of the investigation, the lessons the FCA should learn and any recommendations.

FCA chief executive Martin Wheatley says: “The instances where we investigate and report to the Treasury will be significant events and serious failures.”

Essential IFA managing director Peter Herd says lessons need to be learned from previous failures. “What we need is a Leveson-style inquiry into the failures of the FSA.”

Examples for guidance

Example of when the FCA will investigate itself: The FCA receives intelligence about poor sales practices for a product mainly sold to retail consumers. The regulator sets rules about suitable sales, reviews compliance with these rules and takes enforcement action. It does not carry out analysis which shows profits outweigh enforcement fines. After some time, the FCA bans the product, with redress totalling £10bn and averaging £3,000 per customer. The FCA says it would regard this as a significant failure to protect consumers.

Example of when the FCA will not investigate itself: An individual carries out unauthorised investment business resulting in £25m of consumer detriment. Products have been sold to retail investors who will not be eligible for compensation as this is unauthorised business. The FCA had information about the business but prioritised other cases. The FCA says this does not meet the criteria for investigation but it would consider the type of consumers affected and whether the detriment is significant enough in relation to this activity to merit an investigation.


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  1. Given the track record of its predecessor, it really isn’t good enough for an organisation with as much power and control over other people’s lives as the FCA to be allowed to investigate its own failings, to define for itself the parameters for any such investigations and to decide how and when it reports on any such failings.

    Such matters should be firmly and exclusively the responsibility of an Independent Regulatory Oversight Committee with unassailable powers to say either This is wrong and you aren’t going to do it or You’ve screwed this up and you’re going to have to put it right, on which the Committee awaits your full report within three months. And what about the Statutory Code of Practice For Regulators, from which the FCA, like the FSA before it, seems to enjoy the privilege of exemption?

    The FCA should be required to deal with the Committee in an open and cooperative manner, which will include naming names, holding indiiduals to account (none of this hogwash about “collective failure”) and, where appropriate, applying suitable sanctions to those individuals, in just the same way as the FCA has the power to do all those things to those it regulates.

    The FCA’s budget, not to mention those of the FSCS and the MAS, should also be subject to independent controls and restraints.

    Only then can the industry have confidence in any sort of accountability on the part of the regulator. If Martin Wheatley is genuinely determined that under his leadership the FCA will not repeat and be allowed to get away with failings similar to those of its predecessor, he should not only welcome such a structure but he should actively endorse it.

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