In its Financial services regulation: Adapting to change report published today (8 December), the NAO said there has historically been a considerable lag between problems arising in the industry or impacting consumers, and the FCA taking action to tackle them.
For instance, it highlighted that although the FCA had required crypto firms to comply with anti-money laundering regulations in January 2020, the regulator did not take any enforcement action against illegal crypto operators until February 2023.
The NAO report, however, acknowledged that, at times, the FCA requires additional powers to act, including legislation approved by parliament, before it can impose standards or take enforcement action.
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It also commended the regulator for tackling internal issues such as high turnover, and increasing staffing levels by 16% over the three years to August 2023.
The report noted the FCA itself had recognised resourcing as a "risk to achieving priority commitments such as reducing financial crime and preparing financial services for the future".
The NAO said there is a need for the regulator to change and adapt in tandem with the industry it supervises, highlighting the transformation programme it has undertaken since 2020-21, although recognising such efforts "will take a number of years to realise".
Recently, the Financial Services and Markets Act 2023 (FSMA 2023) has given the FCA more direct powers to develop regulation and facilitate the UK's international competitiveness, which it said should help closing the time delay between issues arising and the FCA taking regulatory action.
Overall, the NAO urged the FCA to "ensure it had the operational processes to manage the scale of change it has in motion", and called on the regulator to work with the Treasury and other relevant stakeholders to review the effectiveness of new accountability arrangements, as required under the FSMA 2023.
As a result, the NAO recommended the FCA to plan changes to provide greater clarity about its performance to stakeholders by autumn 2024. This could include the development of a core set of performance metrics alongside testing their presentation and reporting to ensure the regulator communicates its performance "more clearly and transparently".
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Gareth Davies, head of the NAO, said: "The FCA is undergoing significant reform, responding to changes in the financial services regulatory framework and making operational changes intended to improve performance. Its work includes a series of measures to re-shape the organisation and respond to its new role under the Financial Services and Markets Act.
"The FCA must complete its work on optimising its use of data, assessing whether it is achieving the outcomes it intends and whether it is able to direct resources to where they can have most impact. It must also be clear about which of the long list of activities it is monitoring internally are its priorities. If the FCA can do this, it will be well placed to meet the challenges of the changing environment in which it operates."
An FCA spokesperson said: "We welcome the NAO report which recognises the significant work we have undertaken to ensure we are fit for the future.
"We are committed to achieving the helpful recommendations as we continue to adapt to the changing and rapidly digitalising financial services landscape and progress the future regulatory framework, following the UK's departure from the European Union."