Regulation post Covid: Part 2 (8): 12/1: FCA response to the Swift Review

When Jonathan Swift QC's Review into the FCA's intervention around Interest Rate Hedging Products (IHRP) [here] was published in December, I posted about "the risks of being agile" [here] that it highlighted, and promised to return to the FCA's response [here] early in 2022.

At the outset, it's worth noting that the Swift Review was commissioned over 6 years ago and that its original target date for completion was March 2020. This delay was caused by several factors, including the volume of evidence and, most recently, a "substantial representations process", and some of this is evident in the length and complexity of both the review itself and the FCA's response (e.g. Rec E6 - "The FCA should consider including post?termination cooperation obligations in the employment contracts of all senior FCA personnel").

Swift's 21 recommendations (of which the FCA fully accepts 19) are split into five groups: A - General (3 Recs); B - voluntary redress scheme (6); C - use of statutory powers (2); D - ownership and control over regulatory interventions (3); and E - decision-making and processes (7). The spread gives a reasonable picture of the problems he identified, with the redress scheme and FCA decision making the major culprits.

Of the two recommendations the FCA doesn't fully accept, A2 (partially accepted) concerns the regulator's decision to divide the consumers affected into "non-sophisticated" and "sophisticated", and B4 (not accepted) concerns strengthening the oversight role of skilled persons. In both these cases, the FCA makes reasonable points but its commitment to start a "public debate about what ‘appropriate protection’ should mean in practice" (Rec A2) is an enormous undertaking. The regulator has attempted this several times before without success, and the FCA will need to do some new thinking to have a realistic chance of achieving a better result this time round.

Of the 19 recommendations that the FCA fully accepts, its responses fall into five categories:

1. Extensive but hard to track (e.g. Rec A1 - more proactive regulation), where there are numerous strands of activity involved (both past and future), with some broad judgements about the extent of their contribution.
2. Dependent on a substantial future commitment (e.g.A3 - clear and detailed rules).
3. Consideration of use of additional powers (e.g. B2 - possible use of VVOP or VReq).
4. Hard to argue with, hard to apply/measure (e.g. B3 - redress schemes should be as "simple, clear and easy to implement" as possible).
5. Better management (e.g. D2 - timescales and deadlines of a redress scheme should be realistic).

Responding to such reviews is usually a balancing act, wanting to show you have already learned many of the lessons, while accepting more needs to be done, and possibly pushing back in a small number of cases. The FCA's response to Swift demonstrates each of these, although it seems to have struggled to identify concrete examples where the lessons have already been learned or can be quickly implemented.

Much of this difficulty may be because the FCA is going through a "Transformation" programme, and the next step internally will be to establish, probably as part of this programme, a visible tracking of how and when the recommendations will be implemented.

As a final thought on how difficult some of this can prove, recommendation E2: The FCA should maintain "a detailed, comprehensive and reasoned audit trail", was also a feature of at least two previous regulatory failure reports - the 2001 Baird Review of Equitable Life and the 2014 Davis Review of the publication of market sensitive information. The FCA is relying heavily on its application of SMCR to meet this one; more on that another time...

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