The National Audit Office’s (NAO) value for money report is widely critical of the FCA, which it rebukes for, as the Financial Times puts it, “being too slow to act on regulatory risks and for failing to give the government the information it needs to judge the success of a controversial overhaul”.

Some of the report makes predictable reading and it’s not a great picture of the FCA… but I’m not sure how well the NAO comes out of it either. (GRIP has already carried some commentary making similar points).

A quick read out…

• When the FCA Board’s May minutes were published In July, I wrote that the regulator might well get a rocky ride from this NAO report. The regulator was in a weaker position compared to previous reviews, and there were potential gaps between FCA rhetoric and reality in areas such as data and outcomes. So the NAO’s criticism is not a surprise.
• The scale of the FCA’s Transformation programme continues to impress. A 16% increase in staff numbers against a background of historically high turnover (17% – para 13) is a lot of disruption for a regulator, where reputation is bound up with its consistency and predictability. And £317m ($397m) over two years is a lot for the FCA to spend on change programmes.
• There’s an emphasis in the report on the FCA’s “operational effectiveness” but the example the NAO uses – Authorization “service targets” (para 6) – is essentially a set of efficiency measures, typically with a masochistic target of 100%/+98% Green. Moreover, one of the risks of these targets is that the pressure to meet them leads to rushed and wrong (or ineffective) decisions. There might be an effectiveness issue here, but as written, without context, this is a poor advert for the NAO’s understanding of how the regulator works.
• The delay the NAO identifies (para 11) between identifying issues and taking action is a more substantive criticism and will be linked to the above disruption. If the right metrics were identified, this would be a better gauge of operational effectiveness, but the example used – crypto asset firms – is again a poor one, as crypto is still sitting at the edge of the FCA’s remit, with regulation of the the products themselves only just under consultation.
• The FCA’s Data Strategy (para 12) is evidently a work in progress, and it remains hard to gauge when it will bear fruit, especially when the “significant risks” identified won’t be mitigated “before 2025”. It isn’t new for FSA/FCA data strategies to be announced with fanfare only to be undermined once they look properly under the bonnet, but it is disappointing that it keeps happening.
• Setting and measuring outcomes remains a challenge (paras 16-18), and a legitimate area for the the NAO to criticize. But the nature of its criticism – essentially that the FCA should have fewer, simpler metrics – misunderstands the nature of outcomes for a financial conduct regulator. Rarely if ever is there a direct metric that covers the whole of the outcome, so we have a choice between a small number of metrics with only partial coverage or a larger number that is more comprehensive. In both cases, we are dealing with a basket of proxies. Imagining this choice is simple does no one any favours.
• It’s looking increasingly doubtful that the FCA’s reward strategy will work. Two of the NAO’s recommendations (para 21, c & d) relate to the potential need for additional staff to finish projects and what sounds like – the language is woolly – the continued lack of long term workforce plan. Given the changes that were made a couple of years ago, and the increase in headcount, and the scale of turnover since then, I suspect the FCA’s workforce planning is turning into a competitive scramble for money and headcount.