The FCA’s Christmas Party is unlikely to be an upbeat affair.
In the latest broadside against the UK’s financial regulator, MPs on the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services have produced a withering assessment of the watchdog.
Political perspective matters, however.
An APPG is simply an upstart committee of MPs of different stripes. It can form cross-party consensus on issues and come up with bills to change the law, but it is below a “select committee” in the parliamentary pecking order.
Possibly to attract the attention of ministers, then, and possibly because it is genuinely shocked by the outcome of its investigation, its report is damning. Across a 358-page report filled with witness and incident reports, it paints perhaps the grimmest picture of the regulator yet.
It argues the FCA is a financially-wasteful organization paralyzed by its own middle management and somehow simultaneously actively “captured” by the lobbying agendas of big financial institutions.
Why Does This Matter to Investors?
The FCA is tasked by parliament with overseeing the conduct of retail financial institutions and promoting healthy competition in financial services. But it is also supposed to protect investors from things like fraud and scams. Where wrongdoing has occurred, it is expected to act with its own statutory powers. Where people blow the whistle to allege wrongdoing, it is expected to protect complainants and investigate.
Numerous incidents, the APPG alleges, show the FCA to be deficient in almost all of this mandate.
Some of the most shocking examples involve investors who lost money in schemes that were FCA-authorized (and therefore fall within its so-called “perimeter”) but turned out to be illegitimate.
As part of the report, the APPG surveyed people with experience of dealing with, and working at, the FCA. Over 174 people responded, including the victims of one of the highest-profile financial scandals of recent years: London Capital & Finance.
London Capital & Finance was an FCA-authorized mini-bond firm that marketed mini-bonds to unadvised retail customers online and via social media. One victim in particular, Ian Davis, lost £618,600 as a result of the firm’s eventual collapse.
Davis later took his own life in 2023.
In the evidence he gave to the APPG prior to his passing, he blamed the FCA wholeheartedly for the incident.
“I hold the FCA responsible for my loss as they authorized a bunch of fraudsters and criminals. All this could have been avoided,” he said.
“Had they done any fit-for-purpose due diligence they would have noticed there were already two warnings from 2013 connected to the directors and borrowing companies. One person directly connected to [an] LCF ‘borrowing’ company is now serving 13 years in jail.”
What Else Does The Report Allege?
The APPG’s evidence also covers non-investment scams.
Pauline Creasey, a businesswoman who lost nearly £500,000 when an FCA-authorized platform called Premier FX ceased trading, said this of the FCA’s initial response to her raising the alarm:
“As the sums missing were significant, I spent several hours on 27 July 2018 from 09:30 raising an alarm with various UK authorities that something bad and illegal was happening,” she said.
“Initially I received total disinterest from the FCA contact center. After a while the representative said they would write to the firm and the firm had 15 days to reply.
“I persisted and asked to speak with a supervisor. The supervisor made some inquiries, and a second call was held during which I asked […] the FCA to contact the firm’s bank Barclays to assess the situation.
“My concern was increasing because the FCA was telling me they did not know the original owner-director of the firm Peter Rexstrew had died on 16 June, and there were two new directors running the firm from 18 June.”
Alongside issues raised by consumers, there is also concern over cases involving financial services whistleblowers.
In a now much-discussed case, the FCA has already apologized to Connaught whistleblower George Patellis, who claims in the APPG’s report that the regulator’s handling of his uncovering of serious misconduct was deficient.
“There were multiple red flags and very clear warning signs the regulators were aware of years before I blew the whistle,” he said.
“This simple fact makes their dismissal of my claims even more reprehensible.”
Who Does The APPG Blame For The FCA’s Failures?
The FCA’s leadership attracts a lot of scrutiny in the report, including from current and former members of staff.
One such former employee says the three years they spent at the regulator were “miserable”, and ultimately led them to retire.
Former CEO Andrew Bailey, who is now Governor of the Bank of England, also comes in for significant criticism.
Survey respondents variously accuse him of being slow to act, making promises he could not keep, and being a “revolving door banker.”
What Does The APPG Recommend?
Notably, it wants the FCA itself to be supervised via the establishment of a Financial Regulator’s Supervisory Council, which would conduct “periodic reviews” of the watchdog’s operational effectiveness.
The watchdog needs its own watchdog, it argues.
It then recommends the FCA be stripped of its immunity from civil liability to consumers; that there be restrictions on its appointments from the private sector and vice versa; that its Financial Services Consumer Panel be given a statutory remit; that there be a new non-governmental organization to regulate industry lobbying; and, if necessary, that the FCA’s leadership team be replaced.
If all of this fails, it says an Australian-style Royal Commission should be launched to redesign financial regulation in the UK.
What Will Happen Now?
With a general election in the rearview mirror, there is now a degree of political stability in the mix. Committee members have the remainder of the parliament to continue their work without worrying about the disruption caused by elections.
What’s more, the cross-party nature of the report itself, and some of the troubling descriptions within it, will make for compelling reading in Whitehall.
And then there is the question of events. Further scandals like the ones listed above will doubtless pile more pressure on senior politicians to change the face of the FCA. As such, it might not be long before the government does something.
As a result, one conclusion is clear: This is not the last investors will be hearing of this.
A spokesperson for the FCA said: “We sympathise with those who have lost out as a result of wrongdoing in financial services. However, we strongly reject the characterization of the organization. We have learned from historical issues and transformed as an organization so we can deliver for consumers, the market and the wider economy.”
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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
