Has the Financial Conduct Authority gone rogue and become an unaccountable elite?
Watchdog’s failures litter the financial landscape – but it has succeeded in strangling capital market
The failures of our financial regulators – the Financial Services Authority (FSA), the Financial Conduct Authority (FCA), and the Prudential Regulation Authority (PRA) – are well documented. After each failure, we had to listen to them squirm as they explained how they missed balance sheet anomalies that led to systemic failures, or why they did not act sooner to protect investors.
Sometimes an inquiry, years after the event, tells us what we already knew: that financial regulation in the UK is ineffective and does not prevent wrongdoing.
Where regulation has succeeded, however, is in the asphyxiation of our capital market. Regulation has reduced the London Stock Exchange (LSE) to a fraction of its former size. It has destroyed confidence with the imposition of ever-evolving obstructions on regulated firms, entrepreneurs and investors with new layers of red tape under the wide ranging and conveniently loose interpretation of the Financial Services and Markets Act 2000 (FSMA), and its EU cousin the Markets in Financial Instruments Directive (MIFID) I and II.
This matters, because firms quoted on the LSE generate wealth, create employment, pay pensions, make tax contributions and contribute to the economic growth of the country. Democracy, in the end, costs money.
The FSA was “abolished” after the 2012 financial crisis, but it was seamlessly replaced with the FCA and PRA in what seemed more like a reshuffle of activities and a corporate rebrand. The FCA states that its role
and objectives are primarily defined by the FSMA and that it is accountable to the Treasury and to Parliament; it claims that its strategic objective is to “make sure relevant markets function well”. But if the ever-diminishing capital value and relevance of the LSE is a metric of “functioning well”, it fell at the first hurdle many years ago.
The Government spotted this and added, in 2023, a secondary objective of “facilitating, subject to aligning with relevant international standards, the international competitiveness and growth of the economy of the United Kingdom … and its growth in the medium to long term”. But having muddled contradictory top-level objectives is a recipe for confusion and failure.
In addition, the FCA has “operational” objectives that are seemingly not subordinated to its strategic objective. However, there is no indication that these objectives – to protect consumers, to protect and enhance the integrity of the UK
financial system, and to promote healthy competition between financial services providers in the interests of consumers – are subordinated to the new secondary objective at all. This continuing muddle appears to allow the FCA to do much as it pleases on a day-to-day basis, delivering more crazy initiatives, red tape and pictures of grinning employees, as anyone who receives its monthly emails will attest. It is probable that these contradictions will surface in strategic and systemic failures in the future. In the armed forces, strategy delivers the aim, which translates to subordinated orders that are delivered on the ground. This usually works well, unless the strategy is wrong in the first place. The FCA may claim that it achieves some of its “operational” aims, but as things stand it will always fail on the execution of a strategic aim – and at what cost?
The FCA’S strategic failures litter the financial services landscape. It was accused of negligent complicity over the Woodford and London Capital &
Finance scandals. According to the Financial Times, the FCA was reportedly warned of problems at Woodford in 2015, four years before its collapse. The Gloster report into LCF concluded the “FCA did not discharge its functions in respect of LCF in a manner which enabled it effectively to fulfil its statutory objectives”.
Nikhil Rathi, the FCA’S chief executive, earns £455,000 pa. According to The Observer, the FCA paid bonuses of £125m to staff between 2016 and 2021. Presumably this was needed to attract talent
Has the FCA gone rogue? Has its model of raising fees from the firms it regulates (rather than the taxpayer) encouraged the capture of fees and fines, as opposed to investigation of wrongdoing? Is the FCA simply an unsupervised, untouchable, selfserving, elite operating almost at arm’s length from our democratic system?