National Audit Office Publishes Report into FCA

A close-up of a person holding a pen.

The UK’s independent public spending watchdog, the National Audit Office (NAO), has published its report into the effectiveness of the Financial Conduct Authority (FCA) amid concerns about the financial regulator’s ability to manage a growing list of responsibilities.

According to the NAO’s report, ‘Financial Services Regulation: Adapting to Change’ (8 December 2023), the FCA is making significant changes in response to its new responsibilities and past regulatory failures. However, the NAO believes that it needs to manage the related risks to meet its commitments, including reducing and preventing financial crime.

The FCA was established in 2013 to oversee the conduct and regulation of firms within the financial services sector. It currently regulates approximately 50,000 firms across an industry worth more than £170 billion to the UK economy.

Technological innovations, such as crypto assets and developments in artificial intelligence (AI), have broadened its remit in recent years, and the regulator has wrestled with the “challenges and opportunities” these developments have raised for the regulation of financial services.

The recent Financial Services and Markets Act 2023 (FSMA 2023) gave the FCA more direct power to develop regulation and a new secondary objective to facilitate the UK’s international competitiveness.

However, the NAO’s report found that there remains much work for the regulator to do to respond to its new regulatory powers and environment, as well as to the pace of change in the market. 

The NAO found that there can be a significant delay between the FCA identifying an issue and taking action. For example, while the FCA has required crypto-asset firms to comply with anti-money laundering regulations and engaged with unregistered firms since January 2020, it only began to take enforcement action against illegal operators of crypto automated teller machines (ATMs) in February 2023.

In some cases, the FCA requires additional powers to act, such as needing legislation approved by parliament before it can impose conduct standards on Buy Now Pay Later credit providers, said the NAO.

Staffing has also been an issue for the FCA. A shortage of crypto skills meant the FCA took longer than planned to register crypto-asset firms under money laundering regulations in 2021, and it still finds it difficult to recruit and retain staff with these skills.

However, overall staffing levels have increased by 16 per cent from August 2020 to August 2023, and the NAO acknowledges that the transformation programme the FCA began in 2020-2021 will take a few years to realise.

“The FCA is undergoing significant reform, responding to changes in the financial services regulatory framework and making operational changes intended to improve performance. Its work includes a series of measures to re-shape the organisation and respond to its new role under the Financial Services and Markets Act,” said Gareth Davies, head of the NAO.

“The FCA must complete its work on optimising its use of data, assessing whether it is achieving the outcomes it intends and whether it is able to direct resources to where they can have most impact. It must also be clear about which of the long list of activities it is monitoring internally are its priorities.

“If the FCA can do this, it will be well placed to meet the challenges of the changing environment in which it operates,” commented Davies.

Click here to read the full report.

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