The Financial Conduct Authority (FCA) is set to radically overhaul its processes and procedures with a raft of "significant and necessary changes", following the publication of independent reports into its handling of the London Capital & Finance (LCF) and Connaught fund scandals.
Both reports, published today (17 December), reveal significant failures in the regulator's handling of the multi-million pound scandals, and include recommendations for change at the FCA, all of which it has accepted.
Most significantly, changes include "restructuring the FCA", several new hires, and implementing a "use it or lose it" policy whereby firms may have their authorisations revoked as a result of inactivity.
Those failures include the FCA's failure to respond to the specific and detailed allegations made to the FCA by third parties that LCF was engaged in fraud or irregularity."
In addition, discretionary pay awards for the FCA's executive committee members, which had been deferred in respect of the 2019/20 year, will now not be paid.
In September, the FCA's chair Charles Randell and its outgoing chief executive Chris Woolard flagged that the regulator was expecting some "painful lessons" from the impending reviews, promising to "transform" its processes in light of past failures.
In response to the publication of the reports, Randell said the FCA was "profoundly sorry for the mistakes we have made," adding the regulator has learned "considerable lessons from what happened with LCF and Connaught" and "will provide public updates as we implement the recommendations".
"Consumers must have trust in the FCA to do its job properly," he added. "We need to reinforce a culture in which people at the FCA are empowered and confident to take responsibility for bold interventions.
"The FCA board and I have every confidence that continuing the transformation of our organisation is the right way to bolster trust in the FCA and realise our ambitions for change."
Chief executive of the FCA Nikhil Rathi, who joined the regulator in October, said the reports had made "sobering reading", and is "committed to implementing the recommendations and lessons learned".
"We know that the FCA must make faster and more effective decisions, prioritise the right outcomes for consumers, markets and firms, and reform our approach to intelligence and information sharing," he added.
"Our continuing action plan, specifically on our wider transformation programme and high-risk consumer investments, seeks to do this.
"The FCA is always going to have to make difficult risk-based choices about where to allocate resources and to strike a balance between regulatory action and consumer choice and responsibility.
"I hope that the mistakes the FCA made in these cases do not detract from the work and dedication of my colleagues over several years."
LCF: 'Serious failings'
Dame Elizabeth Gloster DBE's review into the FCA's regulation of LCFfound "serious failings" by the regulator in respect of information provided by third parties.
"Those failures include the FCA's failure to respond to the specific and detailed allegations made to the FCA by third parties that LCF was engaged in fraud or irregularity," it concluded.
It said the FCA's failure to "respond appropriately to information provided by third parties regarding LCF occurred because of deficiencies" in its policies
The report found that the LCF scandal, of which criminal investigations are still ongoing, demonstrated a "failure of the [FCA's] senior management to implement and embed operational change at the lower levels of the organisation", which "contributed to the FCA's failures of regulation in respect of LCF".
It also pointed to the "inadequate training" of FCA case officers and a lack of urgency to act by the regulator.
"[It is] self-evident…[that] had some or all of the FCA's failures in regulation… not occurred, then it is, at the least, possible that the FCA's actions would have prevented LCF from receiving the volume of investments in its bond programmes which it did," the report added.
"Such earlier intervention may, in turn, have prevented LCF from receiving investments in its bond programme sooner, thereby reducing the exposure of investors to LCF's collapse.
'Not appropriate or effective'
With regard to the 2012 collapse of the Connaught fund, the investigation was complementary of the FCA's work to ensure a "considerable proportion" of investors' capital was returned to them.
However, the report found that the FCA's regulation of the relevant entities and individuals connected to the fund "was not appropriate or effective".
The report also said that the FCA's response when initial concerns about the investment scheme were brought to its attention was "generally inadequate", while there was also evidence of "insufficient information-sharing between regulator divisions, departments, and teams".
Also noting that the FCA missed so-called "red flags", the report said measures to deal with the worsening problems with regard to the funds "were not properly coordinated or sufficiently robust".
Listing a plethora of other failings found in their investigation, the report's author said: "I recognise that the regulator's approach may not have been at material variance from the regulatory orthodoxy at the time in some respects, but overall it remains my view that it could have acted in a more effective way to protect investors in the fund."
Next steps in full
Over the next six months, the FCA will implement eight specific actions to help rectify the failings found in the reports.
There will be a "restructuring" of the FCA in efforts to "join up its policy, supervision and competition functions" under two new executive directors "so we have a better approach to translating insights into risks and warnings before taking action to tackle them".
The regulator will also become "more data-enabled" through the recruitment of a chief data, information and intelligence officer, and the establishment of a separate programme of change that "transforms the way we handle and prioritise information and intelligence".
A new "use it or lose it" policy will be put in place, which will see firms that have not used their regulatory permissions to earn any regulated income for the last 12 months at risk of having their authorisation revoked.
The FCA said this step would "reduce the risk of firms having a permission to carry out regulated activity purely to add credibility to their unregulated activities".
New measures will be implemented to tackle pension scams with DWP, once the Pension Schemes Bill has received Royal Assent.
Frontline supervisory, authorisation and enforcement staff will undergo "enhanced training".
The FCA will recruit prudential specialists to act as "quality assurance" and assess firms with complex business models.
Working alongside the government, the FCA will strengthen its work to tackle scams advertised and promoted on Google, and other online platforms.
Finally, the FCA said it would disrupt scams and warn consumers of the risks by "stepping up our own consumer campaigns."