Students of the Financial Conduct Authority will appreciate the FCA’s Business Plan 2015/16 which mostly sets out what it does, but also touches on what it achieves and its value for UK citizens. It is as close to accountability as the FCA gets.
What does the FCA do?
The core business is the supervision “of about 73,000 financial services firms operating in the UK, and we prudentially supervise those that are not covered by the Prudential Regulation Authority (PRA). We look closely at firms’ business models and culture and use our judgement to assess whether they are sound and robust.” (p.63) Understanding each of 73,000 firms better than the manager of that firm is a Herculean task even with 3,060 staff and a budget of £460M. But that is only part of the FCA’s business.
Annex 2 lists 106 new EU regulatory initiatives in which the FCA is involving itself. It would be good to believe they were seeking to reduce the number, and simplify and reduce the burden, of the on the British financial sector and its consumers. There is no hint that such is the case. The FCA seeks “active engagement” which can be translated as assisting more rather than less.
In addition, the FCA has a programme of domestic regulation. Yet the FCA should not now be creating new financial regulations at all. Under the Brown administration’s agreement with the EU, Brussels is responsible for all new financial regulation leaving the UK solely with supervision. For the FCA to add new rules is not merely piling Pelion upon Ossa, it is undermining the City’s competitiveness and unnecessary. In a single market, a regulation is either needed everywhere or nowhere.
In June 2014, the Chancellor created a Fair and Effective Markets Review (FEMR) of financial services, co-chaired by the Bank of England, FCA and HM Treasury. The report is due next month but has been widely trailed. Before we see that review (due July), and in an effort to keep itself busy, the FCA has announced a further review (due spring 2016) covering some of the same ground, the Investment and Corporate Banking Market Study (ICBMS): “We are examining issues around choice of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services.”
In addition Annex 1 lists 30 “current and planned market studies and thematic work” not all of which will lead to new regulation. Perhaps the most significant is the “Culture review”. There is no mention of whose culture, nor how and why it should be reviewed. Reassuringly the start and finish dates have yet to be decided.
So far as one can see from the business plan, the FCA has no central guiding principle to determine what it should do. The Financial Ombudsman Service deals with consumer complaints and the Competition and Markets Authority deals with policing fair markets and competition. By contrast, the FCA seems to involve itself without restraint in anything it feels like doing. It is no surprise that its costs are growing at 6% p.a.
Measuring performance against the statutory objectives
The Chairman, in his foreword to the plan, highlights the FCA’s “principal tool [for measuring success], our outcomes-based performance framework” (p.7). As searching that description did not reveal such a framework, he presumably is referring to the table below.
It is unusual, to say the least, to have a set of performance measures without a single number. And there is no discussion about whether these objectives, for that is all they are, can be attributed to the FCA or not. Most of them are what the firms do but it is impossible to know whether the firms’ performance improved, or quite possibly deteriorated, as a result of the FCA intervention. It may be hard for the firm to keep the consumer at the centre of its attention if the FCA is knocking on the door.
The paperwork I now have to complete for my stockbroker has multiplied two or three times as a result of “compliance” which I also have to spend £20 a time for. In all other respects, the service is exemplary, but this has tipped my stockbroker experience from satisfaction to complaint.
The “respected regulatory system” will let only the good firms know where they stand, leaving the miscreants, presumably, in the dark. Is low financial crime an indication of the FCA doing well or failing to detect crimes or, just possibly, the police deterring crime and catching criminals?
The Business Plan refers the reader to their quarterly data bulletin for the actual figures but, guess what?, these have little to do with the table above. They are:
Monthly number of people contacting FCA about consumer credit.
Outcomes of upheld complaints.
Annual volume of “approved persons”. There are about 20,000 p.a. and, in the last two years, not a single application has been rejected.
Attestations “are a supervisory tool used to ensure clear accountability and a focus from senior management on putting things right in regulated firms.” Basically they are individual senior executives promising to put things right. There were 74 of those in the year to March 2015.
Skilled person reports. There are 50-60 cases a year of consultants being called in to investigate matters more closely. The great majority are conducted by accounting firms at a cost of over £150M p.a. The quarterly data simply give the number, not the cost nor whether they are value for money, still less whether the FCA adds any value.
The number of financial promotions. The relevance of this item to FCA performance measurement is opaque.
The simple bottom line of this section is that there is no performance measurement of the FCA. It is an elaborate charade.
Value for Money?
In his Foreword, the Chairman also stated “We are also committed to working as efficiently as possible with firms to deliver value for money, as well as the right outcomes for consumers and the financial markets.” (p.7). This topic next arises, in any substantive way, on p.37: “We remain focused on the principles of good regulation and advancing our objectives in the most efficient and effective way. We will continue to measure and evaluate our impact and report publically [sic] on this. Our aim will be to be as effective as possible and focus our resources on the front line of regulation. In 2015 we will launch an Efficiency and Effectiveness Review, which will look at the value for money of areas of higher expenditure. As part of this we will review our governance and decision-making processes. To embed this we will have a new structure,”
This good intention is repeated a number of time in the pages following, e.g. “We will achieve this by delivering year-on-year improvements in effectiveness, efficiency and economy. One of the key drivers of our strategy is to increase our efficiency and effectiveness.” (p.72).
Nowhere does the plan indicate how the FCA’s effectiveness, efficiency and value for money should be measured, still less what the numbers are or should be. The nearest we get is the p.37 quote above. As some army wag wrote on a Berlin wall in the 1940s: “we tend to meet any new situation by reorganising; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency and demoralisation.”
There is no evidence of the FCA providing value for money or even understanding how that might be measured.
All the things the FCA does could be done as well, if not better, by other agencies:
Consumer complaints have vastly increased since the FCA and Ombudsman services were created. In the year to Match 2015 the FCA had 150,000 consumer contacts (almost all complaints) and the Ombudsman contacts have risen from 62,170 in 2003 to 512,167 in 2014. One has to wonder about cause and effect. There are undoubtedly too many cases coming to the FCA and Ombudsman Service but the answer to that is not to increase these quangos, and allow malpractice to grow, but to take systemic action to minimise malpractice and when it does not arise, pressure the firms to deal with the complaints themselves, e.g. by massively increasing the penalties on complaints upheld by these two quangos, including gaol sentences.
Consumer complaints do, and should, go to the Financial Ombudsman Service which has 2,400 staff of its own. The FCA deals with only about 25% and is not now needed.
As noted above, the FCA should not now be creating new financial regulations at all. It should be helping the EU deregulate, simplify and reduce the burden of financial regulation, not assisting the EU in undermining the City’s competitiveness. In a single market, a regulation is either needed everywhere or nowhere.
Much of the wholesale side of the FCA’s supervision is purely “prudential” because it overlaps with supervision by the Bank of England through the Prudential Regulatory Authority. The BoE should be left to get on with it.
About one third of the cost of the FCA relates to the investigatory work contracted out to professionals, largely accounting firms. It should not take more than a couple of people to choose the firms, the terms of reference and make out the cheques. This, and all remaining FCA functions, could be handled by the Competition and Markets Authority. Indeed that would be a better solution anyway to bring consistency to markets and competition policy.
It is hard to resist the conclusion that the FCA is not simply redundant but a drain on the effectiveness, resources and efficiency of the vital financial services sector. It should be abolished.