United Kingdom Parliament Treasury Committee Update: Financial Conduct Authority Internal Audit Report Published

27 July 2016

The Treasury Committee publishes copies of the latest FCA internal audit report summaries given to the Committee by the FCA's Audit Committee.

Chair's comments

Commenting on the publication, Rt Hon. Andrew Tyrie MP, Chairman of the Treasury Committee, said:

"The first three years of the FCA’s life have been very difficult, to put it mildly. The regulator has been in ‘special measures’ for some time.

In 2014, the Committee decided to extend its scrutiny of the FCA to internal audit reports. The regulator’s subsequent extraordinary and incompetent briefing of the press on its plans to investigate the insurance industry reinforced concerns already held by the Committee.

Scrutiny of the internal audit reports reflects the determination of the Committee, on behalf of Parliament, to engage in more rigorous examination of regulators, and much more than had been the case prior to the financial crisis.

These latest reports highlight concerns over, among other things, the level of specialist support for those supervising the wholesale activities of retail banks, and the extent to which the supervision strategy adopted across the largest diverse groups was being challenged. The Committee would expect the FCA’s management to have dealt with these issues."

Background

The FCA's internal audit report summaries relate to reports on IS maintenance, effectiveness of the FCA's Pillar 1 supervision of large firms, the publishing process for the FCA handbook, and health and safety and wellbeing.

Evidence sessions

During a session on 4 February 2014, the Chairman of the FCA, John Griffith-Jones, undertook to consider and respond to the request to share their internal audit reports with the Treasury Committee. This followed questioning of Martin Wheatley, (now former) Chief Executive of the FCA regarding Section 166 reports (also known as ‘Skilled Persons Reviews’):

Q169  Chair: We have mentioned section 166 reports, and of course as a committee we have been using indirectly the 166 process to complete the investigations into HBOS and RBS, as you know. Do you know how much is spent annually on 166 reports?

Martin Wheatley: I do not have the figures at my fingertips.

Q170  Chair: I think it is reasonable that you might not know. I think it would be helpful if this Committee could have that figure and could see the figure for past years, as many as you have. I think it is a series that we ought to keep now, bearing in mind that there is a risk of moral hazard here. After all this is something where, at a firm’s expense, the FCA commission an inquiry effectively. It is free to you, in the sense that it is not coming out of your fees, but it is certainly not free to the firm, their shareholders or their customers. I think it is something that someone has to keep an eye on and it had better be us. So would you undertake to do that for us?

Martin Wheatley: I suspect it will be a significant information request of firms, but we will certainly look at what information we can get from them. Whether they have kept records over the years is something I do not necessarily know.

Q171  Chair: You must know what you have commissioned as 166 reports.

Martin Wheatley: But I do not know if we have full records of the payments because sometimes the firms will be paying the rate through us, depending on how it is commissioned. But we will certainly try to get the information that we can.

Q172 Chair: I think we would like all the information that is available. The FCA also does internal audit reports. Do those come directly to you Mr Griffiths-Jones?

John Griffith-Jones: They do, or at least the executive summary comes to me and the full report goes to the audit committee that meets four times a year, on which I sit but I do not chair.

Q173 Chair: The Committee would be very grateful if we could see those henceforth.

John Griffith-Jones: Can I take a rain check on that one?

Chair: I think you can take a rain check on a discussion with me about whether any redactions may be necessary. But if you are telling me you want a rain check on whether they can be supplied to the Committee, I think there will be a major problem.

On 3 March 2014, the Chairman of the FCA wrote to Andrew Tyrie MP, Chairman of the Treasury Committee to turn down this request.

During a session on 9 September 2014, the issue was again raised with the Chairman of the FCA:

Q154 John Thurso: I will come to you first, Mr Griffith-Jones. All my questions are about the relationship between yourselves and this Committee—the co-operation with the Committee. There are three areas where we have asked for papers or asked to see things recently where, for one reason or another, you felt unable to comply. The first was over a request to see internal audit reports, the second was on some legal advice, and the third was relating to deals with banks. I will take you to those in turn and start with the internal audit reports: if we were to insist on seeing those, on what grounds would you resist us?

John Griffith-Jones: My understanding is that if you insist, you insist. As I said—I think in real time at the last hearing, and as I wrote to your Chairman subsequently—I beg you to consider the arguments about giving us a protected space in which to do our work, of which receiving reports about things that are not quite right, frankly, and putting it right is a wholly necessary part of every organisation’s function. If you shed a spotlight into that in real time, you alter the behaviour of the people in the protected space and make my job more difficult to do regulation work. That is my only reason. I completely understand that if something goes wrong, you hold us to account afterwards, and if you say, "Was there an internal audit report on this, and did you act on it?" that is completely for the public domain.

Further information

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