Hundreds of businesses want a judicial review into the FCA's decision to scrap its report into banking culture
Only hours after Conservative MP Mark Garnier called the move by the regulator a "Machiavellian plot" between the government and the FCA, campaign group SME Alliance told Business Insider that its near 400 individual members are considering applying for a judicial review into the FCA.
A judicial review allows a court to review an administrative action by a public body.
"Launching a judicial review is not something you go into lightly but if there is no other way forward, that is a route we are considering to take as we can't carry on like this," said Nikki Turner, co-founder of SME Alliance, which represents small-to-medium enterprises and their directors.
"When I heard the news [about the FCA scrapping the review] I was gobsmacked and really disappointed."
Nick Gould, another co-founder of the SME Alliance and a practicing lawyer, told Business Insider, "I was disturbed by the news because it's very, very annoying because regulators are meant to regulate. They're not meant to go to cosy corners and speak to the banks."
"We are definitely looking into a judicial review for the lack of investigation into the banks by the FCA."
A focus on the culture in financial services firms remains a priority for the FCA. There is currently extensive ongoing work in this area within firms and externally. We have decided that the best way to support these efforts is to engage individually with firms to encourage their delivery of cultural change as well as supporting the other initiatives outside the FCA.
Business Insider pushed the regulator for a response to the criticism over scrapping the review and the potential for a judicial review of the decision, and the FCA added this paragraph to its statement:
Having undertaken an initial piece of scoping work we decided that a traditional thematic review would not help us achieve our desired outcomes and we would therefore take forward our work on culture through other routes. This was an FCA decision. HMT [the Treasury] were not involved.
The talks of a campaign body launching a judicial review into the regulator isn't an out of this world idea - it has happened before.
In February 2013, a group of individuals and businesses banded together and filed for a judicial review into the FCA's predecessor (the Financial Services Authority) for allegedly "acting unreasonably in establishing and changing the criteria for businesses to be within the review," where banks mis-sold interest rate hedging products to SMEs.
Why SMEs are thinking about launching a judicial review
The scandals include the fraudulent selling of payment protection insurance, the fixing of the LIBOR interest rate, and the sale of complicated interest rate swaps to businesses that were too small to handle them, driving many of them into bankruptcy.
Independent groups, like SME Alliance and Bully-Banks, formed after aggrieved small business owners sought resolution to individual cases as well as more widespread issues that affected thousands of businesses.
Meanwhile, two years ago, the Parliamentary Commission on Banking Standards published a 500-page report on the banking industry which blamed a "toxic culture" at banks which have led to market manipulation and mis-selling scandals. It even called for new laws to imprison more "reckless" bankers.
The ball was then passed to the regulator, the FCA, to take the investigation further. That's why the announcement in the Business Plan 2015/16 was a big deal - the FCA said it identified key areas of risk in the industry and it would look into it.
... forward-looking areas of focus continue to be of significant interest to us:
- Poor culture and control continues to threaten market integrity, including conflicts of interest.
Last year we noted that improvements in the culture of firms, as well as structures, processes and incentives, continued to be needed to ensure that markets work well. We maintain a strong focus on this area and these risks will continue to influence our business planning.
The risks around controls and behaviours go to the heart of our work as a conduct regulator. In this area we consider that there is a role for both frontline and senior staff to prove that lessons have been learned from the experiences of the past. Our findings on the attempted manipulation of FOREX mirrored some of those in relation to LIBOR. It is vital that firms, in wholesale and retail markets, ensure that cultural changes have been made to prevent poor conduct in future.
... We will, of course, do this openly and be able to clearly explain changes to our plans. This approach also helps us to be more transparent and predictable.
Since the FCA business plan was launched however, there have been some seismic changes in the government and regulator's approach to the banking industry.
The Conservative government rowed back on rules that would make senior executives guilty until proven innocent in the event of a scandal, scaled back the banking tax, and removed Martin Wheatley - who was seen as an intrusive regulator - as FCA chief.
The FCA has since taken a more friendly line with the banks. McDermott, the former head of enforcement and now acting chief executive of the FCA, has been meeting with top bank chiefs since taking the reins from predecessor Martin Wheatley in September, according to a report by Business Insider's Ben Moshinsky.
The SME Alliance's Turner told Business Insider, "The message isn't getting out there about what the banks are doing to SMEs individually. The FCA works directly with the banks but do not generally speak to individual businesses to whom the bank's culture and behaviour is affecting."
"We just want a resolution and direct contact with the banks but in the absence of that, we speak to the regulator. We don't want to constantly splash these issues across the papers all the time and don't necessarily want to do it nosily but sometimes a call for public opinion is the only time the banks and regulators seem to listen. That's why we're considering the [judicial review] route."
Turner told us that the SME Alliance has met with and is trying to establish a regular "dialogue" with members of the FCA from the whistleblower unit at the FCA as well as supervision and enforcement section of the regulator.
SME Alliance's Gould said, "where do you go for redress or a resolution when the banks are causing a problem and the regulator doesn't seem interested in justice? Today's FCA announcement is just another example of why it is not fit for purpose."