Lloyds Market Association – Written evidence (EGC0026)

Thank you for the opportunity to input into the committee’s inquiry. We welcome the committee’s further consideration of the FCA’s approach. 

About the LMA

The Lloyd’s Market Association (LMA) represents the fifty-two managing agents at Lloyd’s, with ninety-four active syndicates (including SPV’s) underwriting in the market and the four members’ agents, which act for third party capital.

Managing agent members are “dual regulated” firms, regulated by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA); whilst members’ agents are solo regulated by the FCA. For 2023, total gross premium was £52.1billion. The Lloyds’s Market distributes through both the UK and over two hundred countries worldwide forming a key part of the London and UK economy.

In addition to the PRA and FCA, Lloyd’s managing agents are subject to byelaws and an oversight framework set by the Corporation of Lloyd’s which is, itself, a statutory regulator.

Our Response

We agree with the FCA that effective enforcement of the rules is essential to a well-functioning market and helps give consumers and investors’ confidence. Failing to hold bad actors to account creates an unlevel playing field for firms that actively seek to meet regulatory rules and requirements.

We agree with the three stated ambitions in the foreword:

• Building trust and public confidence in the system based on robust enforcement;
• Providing clarity on the types of conduct that warrant investigation and building better standards within the market; and
• Shining a light of accountability on the FCA and ensuring that FCA resources are appropriately deployed.

The LMA and its members also welcome the FCA’s ambition to speed up investigations and that enforcement should not be seen as the only, or best, way to tackle harm to the consumer.

Early publication

The LMA recognises that in limited and exceptional circumstances earlier publicity of enforcement action will be important to prevent further harm to consumers, particularly if a firm is not co-operating with the FCA.

However, we have received material concerns from across our membership on the possible impact of the proposal. This is particularly in the light of many investigations being based on interpretation of principles and outcomes-based regulation.  A presumption of naming firms at such an early stage, where only 19% of investigations result in enforcement, will be unbalanced and will lead to material reputational consequences for firms, senior managers, and the wider public perception of financial services without reasonable justification.

It is our understanding that Parliament envisaged due process when it set out conditions within Financial Services and Markets Act before the FCA could publish any form of censure. The proposals by the FCA to publish a summary of wrongdoing will form a de facto censure of the firm, or this would not have the deterrent effect the FCA seeks. It is not appropriate that the FCA should presume to depart from the concept of due process laid down by Parliament.  

We therefore do not agree with the proposals outlined in the FCA’s consultation. We believe a more balanced approach to the public interest test, without a presumption of publication, would be more appropriate.

We welcome the comments made by Therese Chambers in a webinar on 25th March and the letter to Lord Forsyth[1] of 25th April in which it is acknowledged that the proposals may need to change, and that the FCA does not intend to publish firm details in all circumstances.   We are concerned that the recent speech by Therese Chambers   Change for the better: the FCA’s evolving approach to enforcement, gave a narrative that consumer groups were supportive while regulated firms were not, without giving context to the objections being raised by the regulated entities. The objection by firms is not a blanket rejection and indeed we have already welcomed the principle of dealing with investigations more rapidly. 

We also note the clarification in the letter to Lord Forsyth that all factors including firm harm will be considered before publication. However, this is not consistent with the wording of the consultation, and particularly the proposed framework in EG 4.1, or chapter 3. The consultation confirmed the framework expressly excludes the potential harm to firms.

Impact on individuals

We welcome the FCA’s intention not to name individuals subject to investigation. However, the reference to GDPR rather than more fundamental rights highlights that the FCA has not appropriately considered its responsibilities to ensuring due process or the assumption of innocence until proven guilty with the UK legal system.

We would have expected the FCA to expressly consider the impact of Article 6 of the Human Rights Act on their proposals. This fundamental right is not only applicable to criminal matters but also civil and licensing decisions. Failure to comply with due process may also result in interference in undertaking lawful trade.

Where firms are named, but individuals are not, this approach could easily lead to individuals being subject to rumour and speculation in the media in circumstances where there are only allegations, but no finding of fault has been made.

It is not apparent how anonymity will be maintained when a firm is named. For example, at the Treasury Committee in Q740[2] Mr Rathi referred to cases of non-financial misconduct being published. This appears at odds with the proposals to not naming individuals. It is not clear how a firm could be named, and summary details published, without this being attributed to individuals within a firm. It will be important to better understand this aspect of the proposals from the FCA.

Speed of investigations

We believe that these proposals would be unnecessary if investigations did not take so long to conclude. We therefore agree with the ambition of expediting investigations but not at the expense of reducing the number of cases investigated or departing from appropriate due process, given the harm this could bring to firms and individuals.

We therefore urge the FCA to ensure that appropriate resources are allocated to enforcement teams to bring more timely case resolution.

Risks to the FCA and market participants

There is historical evidence that poorly handled public announcements and enforcement can lead to worse outcomes for firms, consumers, and investors. We therefore are surprised that the FCA has not reflected the findings in the Green Report or Davis Review when making proposals.

1. Andrew Green considered how the FSA handled enforcement into the failure of HBOS. This report recommended more robust decision making and that clear information should be made available for all subjects under investigation. This led to changes in enforcement practice implemented through PS17/1. However, it seems that significant numbers of investigations still fall away implying that decision making may not be sufficiently robust.
2. Simon Davis considered how a poorly managed media strategy and briefing by Martin Wheatley, then FCA CEO, impacted share prices of insurance firms, investors and the wider market reputation. There were significant findings and lessons for the FCA, including the Practitioner Panel’s report to the board highlighting the “inherent danger in the FCA’s desire to court headlines to raise the profile of its work”.

It is disappointing that neither event is considered as significant in the consultation by the FCA. This may reflect the lack of corporate memory within the regulator.   

Lack of evidential basis for change

The FCA has stated greater public and parliamentary scrutiny necessities greater transparency. But, the FCA already publishes performance statistics and has the ability to be accountable without naming firms or individuals.

This initiative is not in the FCA’s business plan or in the regulatory initiatives grid. Unlike other policy changes the FCA has not issued a discussion paper, call for input or occasional paper on the subject to seek views or evidence before issuing the consultation.  It is therefore not clear there are sufficient benefits to consumers to outweigh the burden and risks. 

Lack of cost benefit analysis

It is troubling that the FCA has not conducted a cost benefit analysis of these proposals. The text as presented concentrates on the consumer protection objective and the FCA’s own operational or political concerns.

The FCA is expected to advance its secondary objectives when engaging in advancing its primary objective. However, the consultation does not consider the risks to the FCA’s competition objective or the recently added international competitiveness and growth objective.

Lack of future consultation

Although the FCA is clear in Therese Chamber’s recent speech that it is reflecting on the concerns raised, it also states that it does not intend to consult on any future changes, and will remove guidance from the handbook. The FCA should clarify how this is consistent with the requirement to consult on rules and process changes contained in FSMA. We also note that the FCA intends to proceed with their consultation process without waiting for the Financial Services Regulatory Committee to complete this important work.

We are therefore concerned that this proposed approach to removing consultation on future change will lead to inferior outcomes. This current consultation has highlighted the potential deficiencies in policy making without proper consultation and due process.

Conclusion

The FCA should not seek to use headlines and media attention as a supervisory tool or to promote its work without conducting due process.

In summary, we believe that the existing approach to enforcement and publicity better balances the outcomes for consumers, firms and individuals. In exceptional circumstances the FCA can already use their existing powers. This is without the need to change their overarching approach to publicity.

Where there are concerns regarding the length of time taken to bring about and conclude enforcement action, this is the wrong remedy to meet this challenge. We therefore oppose the changes as proposed. 

We would be happy to engage with you to discuss any of the points raised.

11 October 2024