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Financial regulator's independence put to the test  

08 May, 2024

Chancellor Jeremy Hunt’s suggestion that the Financial Conduct Authority (FCA) should reconsider its proposals to name and shame firms under investigation has once again thrust the financial regulator’s independence into the spotlight. Occurring in the lead-up to a high-stakes election, we take a look at the factors fueling the current disagreement, the potential outcomes, and the implications for regulatory independence.

How independent is the FCA? 

Financial regulators are independent, but this independence isn’t absolute. The FCA’s independence is established by law but with clear accountability channels. HM Treasury (HMT) appoints the FCA’s Board and the Chancellor sets broad economic policy priorities for the FCA to consider. The FCA reports annually to HMT, is accountable to Parliament through the Treasury Select Committee and gives evidence to other committees, including the newly established House of Lords financial regulation committee.  

In reality, all these interventions are taken seriously by the FCA and influence its day-to-day activities, whether that is encouraging the FCA to take work forward or de-prioritise work in areas that the Government deems unhelpful. This means that politicians and HMT officials can influence what the FCA does, but it is harder for them to influence how the FCA does it.  

Regulators fiercely opposed the proposed ‘call-in power’ in the Financial Services and Markets Bill, which would have allowed HMT to revisit the FCA’s policy decisions. The FCA has also resisted pressure from the City Minister to speed up decision-making and it is likely to withstand the political pressure on its approach to enforcement.      

Driving international competitiveness is at the heart of the current debate 

The current row over greater enforcement transparency, in part, stems from the difference of opinion between the FCA and those in political power about how to bring the new secondary objective of growth and competitiveness to life. The introduction of this secondary objective was contentious, and the FCA successfully limited it to policy work and not supervisory and enforcement work as initially proposed.  

Now in place, the FCA is actively looking for opportunities to support international competitiveness. It believes that raising standards, in this case by deterring companies from perpetrating misconduct, should improve trust and confidence in financial services markets, thereby making the UK a more attractive place to do business.  

The political (and industry) perspective is that ‘naming and shaming’ those going through enforcement before any decision is made could scare off firms from operating in the UK. If firms are wrongly accused publicly, this could lead to a loss of confidence by consumers and/or investors. Furthermore, the proposals could signal that the UK has an overly-intrusive financial services regulator, making the UK less attractive. 

The evolving enforcement approach 

Despite being told the FCA would ‘shoot first and ask questions later’, its initial approach to enforcement was risk averse, and it only took forward cases it thought it could win. The risk appetite shifted under Mark Steward, the previous Executive Director for Enforcement, who wanted the FCA to take on more cases, even where it might not win. Under this approach, the FCA opened many cases, with around 65% closing without further action, compounding concerns about companies not being treated as innocent until proven guilty.     

The high level of case openings is unlikely to be sustained. Over time, the FCA and CEO Nikhil Rathi have moved to using enforcement as a strategic tool to deter misconduct. With new Executive Directors in place (Therese Chambers, who brings significant FCA experience, and Steve Smart, who joins from the National Crime Agency), we expect the FCA to open fewer, more targeted cases and take a more strategic approach, as signalled by the proposed reform.    

Where could this land?  

The current debate is contrary to the typical political pressure the FCA faces to increase transparency around investigations. The FCA hasn't set a clear framework for when it will and won't publicise cases. Without this, it risks setting a trap for itself, with commentators and some MPs likely to put pressure on the FCA to reveal cases even when it doesn't want to. 

Whilst public political statements can influence the regulator’s actions, they can also have the opposite effect with the regulators keen to demonstrate their independence. Firms are likely to have more success influencing the FCA by demonstrating the unintended consequences, with supporting evidence and alternative proposals.      

Notwithstanding this, the FCA has clearly felt the scrutiny on the matter and has made several public appearances trying to downplay the controversy by referencing other organisations (such as the Competition and Markets Authority) where this happens. Nikhil is personally invested as part of his desire to show the FCA is proactive, assertive, and front-footed.  

The reforms are still likely to go ahead, but the commentary from the City Minister and now the Chancellor will be testing this and we expect more conciliatory messaging. As part of this, the scope could be significantly narrowed to ensure names are only made public where suspected breaches of FCA rules pose a material ongoing risk to consumers (as with the FTX example cited by Nikhil).  

What does it mean for independence?  

Regulators don’t operate in vacuums. Despite the significant increase in powers handed to regulators as part of the Smarter Regulation Framework, politics will always have a bearing on the work of the regulator. The FCA is working hard to deliver on the Chancellor’s priorities, including the Edinburgh and Mansion House reforms. It is also preparing for a potential future Labour Government. While Labour’s detailed policy thinking is at an early stage in financial services, its recent financial services review will already be influencing thinking.  

Across many policy issues, there is a role for both regulatory and political dialogue, whether that is in shaping priorities, influencing policy, or holding the regulator to account. Understanding the role and the inter-relationship between the different stakeholders is often critical - knowing who to talk to, what topics to discuss, and when to do so. Flint helps companies navigate this to secure positive outcomes.  


This blog was authored by Flint Becky Young, Jaz Sansoye and Adam Hendry. The writers advise clients on regulatory and government affairs across industries.

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