The Treasury Select Committee (TSC) described the FCA’s briefing of a Daily Telegraph journalist about its review of the life insurance market ahead of publication as a “serious error” which sent the price of shares in a number of insurance companies – including Prudential and Aviva – tumbling.

In its report, the committee says, “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.

“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.”

It points out that having made the error, the FCA then took over six hours from the opening of the market the next day to correct the misunderstanding that its briefing had created.

The TSC also accuses the regulator of failing to learn the lessons from the episode, despite the conclusions of last December’s highly critical Davis report, which found the FCA’s procedures in respect of price sensitive information to be “inadequate and not of the standard which the FCA expects of those it regulates”.

Simon Davis, a Clifford Chance litigation partner who was brought in to review the FCA’s procedures following the briefing, said that the FCA had no policies consistent with the guidance it issues to regulated firms on the handling of price sensitive information, no guidance for staff on identifying price-sensitive information and no relevant training for them. And what policies it did have in place were not strictly complied with.

As he said, “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’.”

The committee also says that it is not clear that the FCA has fully grasped the wider implications of the episode that help to explain how such a serious incident was allowed to occur.

“The evidence in Mr Davis’s report…suggests that there may be broader problems at the FCA, which range far wider than points of process and procedure,” said TSC chairman Andrew Tyrie.

“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,” he added, “the FCA seems to have lost sight of its overarching objective: to make sure that relevant markets work well.”

The FCA said today it recognised that it fell short of expected standards. It said, “Simon Davis produced a comprehensive and rigorous report based on a forensic analysis of a huge amount of evidence, both written material and interviews with individuals. As a regulator we expect the highest standards of ourselves. Clearly as the Davis Review identified we fell well short of those standards.

“The report made twenty-two recommendations across seven areas about changes to our systems, processes and ways of working which would help to avoid the situation occurring again.  We accepted all of these recommendations and have already made significant progress in acting on them.

“The FCA is determined to learn the lessons and ensure that this will never happen again and will study the Committee’s recommendations and respond in due course.”

The TSC has come up with a number of recommendations for action. They include:

• ● the FCA executive committee should examine the FCA’s communication methods and poor working relationships between divisions;
• ● non-execs on the FCA’s 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 committee wants the FCA to report back to it within six months.

Julia Irvine

 

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