For a regulatory body, particularly one as pervasive as the Financial Conduct Authority (FCA), reputation is everything. But after a damning parliamentary report, the City watchdog has been left with its tail between its legs.

Anyone wanting to examine the impact of conduct on a firm’s reputation would be hard pressed to find a better case study than that of the FCA and the historic scandals that have shaped financial services regulation in recent decades.

The FCA’s remit is to maintain the integrity of the UK’s financial markets. It was established to regulate the conduct of firms engaged in both wholesale and retail banking. In practice, this is a broad mandate, from authorizing lenders involved in billion-pound transactions, to making sure mortgage providers are treating customers fairly, and compensating account holders if a bank collapses. Responsible for an industry worth around £200 billion a year to the UK economy, the stakes are high.

But a recent report has cast doubt on its ability to do so. The All-Party Parliamentary Group (APPG) on Investment Fraud and Fairer Financial Services published the findings of a three-year investigation into the UK’s banking regulator at the end of November 2024. Drawing on testimonies from whistleblowers, former employees, and victims of fraud, the report paints an unflattering picture of regulatory inaction, conflicts of interest and even “incompetence”.

At the time of writing, trade association UK Finance, which represents over 300 financial services firms, is yet to comment. City reporters, however, were quick to pile on criticism of the regulator, with headlines including “dishonest” and “failure” splashed across the finance pages. Former FCA staff also took to social media to share their bad experiences, with one user calling it an “unholy mess”.

A reputational nightmare

As the sector’s conduct watchdog, many in the industry, and beyond, would argue that it should be leading by example. However, the report has revealed real concerns regarding internal culture. One former employee told the APPG that it was “the worst staff culture” they had ever experienced in their entire 40-year career, one dominated by exactly the type of attitudes and behaviours the FCA had been set up to reform in the first place.

There’s no sugarcoating it, this is not a good look. The report’s findings pose a reputational tight spot for the FCA, threatening to undermine its integrity and authority at a time when it already faces heavy scrutiny.

The watchdog is still licking its wounds following months of criticism by MPs and industry figures who claim its “heavy-handed” policies are hampering growth for the sector and the UK economy. It was forced to water down plans to “name and shame” companies it was investigating after backlash from MPs and industry figures. City groups warned of the potentially ruinous reputational damage to those firms named by the FCA even if a probe was later dropped or resulted in no further action.

Poetic justice perhaps, that from a public relations standpoint this swipe at the FCA’s internal culture has the potential to cut much deeper. To understand why, we must first delve into the events that led to its formation.

Taming the wolf

The FCA was formed in 2013 as the government and the Bank of England sought to restore public trust in the UK’s financial services sector. Markets were still tender from the financial crisis, and—in the aftermath of several high-profile scandals—regulators worldwide were forced to confront an uncomfortable truth: It was high time the wolves of Wall Street were brought to heel.

Dodgy deals, questionable ethics, and uninhibited greed seemed to be an open secret in the world of banking, at least that was the public perception. Gordon Gekko, Jordan Belfort, Ebeneezer Scrooge. Financial services needed to clean up its image.

A 2015 study commissioned by the Financial Services Consumer Panel into the impact of banking reforms on consumers, stated that “cultural shortcomings” in the preceding decade had led to:

• The 2008 banking crisis;
• The series of mis-selling scandals including PPI, investment products, packaged bank accounts, and interest rate hedging products; and
• Rate-rigging in relation to both Libor and foreign exchange.

If internal culture can be roughly defined as what happens in an organization when nobody is looking, then what was really going on behind closed doors?

It was a question UK legislators were grappling with after the notorious Libor fixing scandal and needed to be seen to be cracking the whip. The findings of a 2012 investigation into rate rigging brought to the surface many of the toxic behaviors and attitudes that had gone unchecked in the industry for far too long. For many, a cultural reform of the sector was overdue and the FCA was established to do just that, by tightening controls and stamping out bad conduct. The LIBOR scandal, in particular, would mark a turning point in financial services regulation, not just for the UK but for banking systems across the globe.

The LIBOR scandal

By this point, LIBOR (or London Inter-Bank Offered Rate) had been around since the 1970s and had fast become the primary benchmark against which lenders worldwide set their rates. Everything from mortgages to student loans relied on it as a reference. Calculated each day from submissions made by the major banks operating in London, it was meant to be a measure of their confidence and therefore the health of the financial system as a whole. These submissions were supposed to be an estimate of how much it would cost the bank to borrow funds, so the happier the bank the lower the rate.

However, a study in 2008 by the Wall Street Journal suggested banks may have intentionally understated their borrowing costs to seem healthier during the financial crisis. Doubt soon spread about the reliability of this globally recognized benchmark. Subsequent regulatory and criminal investigations revealed the true extent of rate manipulation.

In 2012, it was revealed that some bankers and traders had been rigging the system in order to profit from their LIBOR-linked portfolios—and had likely been doing so for decades. In some cases, the investigation found that senior executives had even pressured junior colleagues to submit falsified rates. It was an uneasy reckoning for the UK’s banking sector and had global implications. It revealed that fraud and collusion didn’t just happen in seedy backrooms, but in plain sight on the trading floors of some of our most trusted banks.

Either this was just the work of a few bad apples or banking was rotten to its core. Expert consensus at the time leaned towards the latter, indicating that rate rigging was symptomatic of a deeper cultural issue where profits came before principles. The Parliamentary Commission on Banking Standards put it plainly:

“Remuneration has incentivized misconduct and excessive risk taking, reinforcing a culture where poor standards were often considered normal.”