Davis reminds the reader that the FCAs overarching strategic objective is to ensure that the relevant markets function well. Many of us who have had dealings with the FCA and its predecessor have always known that the culture has fostered a dangerous ignorance of the functioning mechanisms of what it is charged to regulate. This was the case with our equity markets last March. In the same way a traffic warden knows how to hand out a parking ticket but doesnt know how the car he is ticketing works, Davis found swathes of the FCA ignorant as to what constitutes price sensitive information.
In their obsession with fulfilling supremo Martin Wheatleys edict that the use of the media is a necessary tool of regulation (para 8.4 of the Report), FCA employees forgot to consider market sensitive information when they briefed Daily Telegraph reporter, Dan Hyde, on what they were planning to examine in their upcoming Insurance Company Review. Shockingly this is not at all surprising as Davis discovered.
There is no dedicated section in the Employee Handbook relating to price-sensitive information specifically, nor does the Employee Handbook contain any detailed guidelines as to either the identification of price-sensitive information by FCA employees or procedures for the control and release of such information once identified (7.22). In other words it doesnt form part of employee culture.
On the other hand, no doubt senior FCA employees are well aware of Wheatleys observation that we deliver regulation over products that cater for every single person in this country. So if 50m people want to know whats going on they won’t get it from reading our website they will get it from stories that exist in the media. So my answer is the media is a very powerful tool, of course it is, and that is what we use (8.4).
Extraordinary! Simon Davis also unearthed that in their internal paper on whether to release to the media an intention to produce a thematic Review under the heading ‘Are There Any Risks involved ‘ A key reputational risk identified in announcing thematic reviews early is that the FCA could not reach the deadlines to which it had committed. The paper contains a series of boxes which were completed dealing with, for example, competition, equality and diversity implications of the proposal. There was no box required to be completed addressing the implication of the release of price sensitive information. Nor was the risk of disseminating price-sensitive information otherwise addressed ( 8.27,8.28).
So what happens when the Telegraph breaks the story they have been briefed on and prices of London Stock Exchange listed Insurance Companies start crashing The reactions and actions of very senior FCA employees is painfully revealing of just what is wrong with our regulator.
Simon Davis reports that:
At 9am Clive Adamson, director of Supervision, having been rung by a furious insurance company executive, realised that price sensitive information had been given to the Telegraph and ordered his team to make a public retraction. His team took that to mean that they should brief other media organisations rather than issue a retraction through the Stock Exchanges announcement system. Share prices continued to fall.
At 9.40am Mr Teasdale, the head of the UK Listing Authority (part of the FCA), told Mr Spens, head of market monitoring (one of the few real practitioners at the regulator as he had previously been head of proprietary trading at Citygroup) that the FCA may have briefed the Telegraph with price sensitive information.
At 10am, Spens informed Mr Lawton, director of the markets division of the situation. A few minutes later Lawton discussed the situation with Ms McMillan, director of communications as to whether they should make a Stock Exchange Announcement (an RIS). To quote Simon Davis Report: Lawton [stated] that the pro of an RIS was that the FCA would then have followed best practice in relation to price-sensitive information. However, the information was now publicly available and was being covered widely by the news media. The con, Lawton identified, was that announcing via an RIS would cause the market to question why the FCA was distributing the information via an RIS now, drawing attention to how the information had been disseminated by the FCA, and he was concerned about the FCAs reputation (paras 15.91 and 15.92).
At 10.25 Spens met with Martin Wheatleys executive assistant and said he was angry because the FCA might have breached its own guidance and might have committed market abuse . (15.120) The executive assistant relayed Spens concerns to Wheatley but said that Lawton felt a statement was not needed.
At 11am Wheatley was interviewed by the BBC and he said only after that, at 11.30, he appreciated that the FCA had a serious issue, that no-one appeared to have taken charge and that subject to confirmation from the UKLA, the FCA needed to issue a statement as quickly as possible (para 15.138).
Instead of calling senior staff together in one room in order to speedily hammer out the required statement, Wheatley made the mistake of allowing them to spend the next two hours drifting back and forth with emails and individual discussions. One of the more revealing ones was from Spens to Wheatleys executive assistant: I appreciate others may not get this point but our biggest mistake is if the FT pick up the ‘Market Watch Issue No. 37‘ (This was a bulletin issued to member firms about how to proceed with price-sensitive information). Ive read what we sent to the Telegraph and it is not as bad as I first imagined. We can probably spin that it was not price-sensitive and that the Telegraph spun it. I am stretching though.” (15.176)
At 1.40 pm the chairman of the FCA, Mr Griffiths-Jones spoke to John Kingman, the second permanent secretary of the Treasury. Kingman told him that HM Treasury were concerned that the FCA might have moved markets and insurance companies had been calling HM Treasury all morning, saying they were getting mixed messages from investors and FCA junior staff. Kingman questioned why the FCA was pre-briefing at all and said that if a listed company had acted in the same way, there would be serious consequences. Kingman advised strongly that the FCA make an announcement that day. Kingman also gave his view that the FCA should mount an independent enquiry into the events. (paras 15.192 and 15.193).
At 2.27, some six hours after the Stock Exchange had started trading, the FCA released an Exchange Announcement clarifying their position. Share prices of the affected companies immediately improved.
The Davis Report may have cost north of 3m but it carefully points to the inescapable fact that the FCA is culturally incapable of fulfilling its statutory requirement of ensuring financial markets function well. It has become fixated with the political pastimes of media and image and has, in doing so, forgotten the difference between what is right and what is wrong. Those whom it regulates and our country deserve much, much better.
The following must happen now:
- Martin Wheatley, the architect of the culture of using the media as a regulatory tool must be replaced;
- Adamson and McMillan left the FCA this week. They should be joined by Lawton and many others whose activities Davis described;
- There needs to be a root and branch re-training of FCA employees, so that they thoroughly understand their public responsibilities; and
- All those investors who sold stock in insurance companies between the opening of the London Stock Exchange on March 28th 2014 and 2.27 that day, must be recompensed for their losses by the FCA.
