Written by Catherine Ruberry
Regulatory Policy and Development Manager
The FCA is proposing to change its approach to enforcement and publicising enforcement investigations, the idea being to “increase transparency about our enforcement work and its deterrent effect and to disseminate best practice” – an initiative discussed in our February article. Consultation CP24/2 closed on 30 April 2024 but the storm of protest thereby generated shows no signs of abating, with even the UK Chancellor of the Exchequer voicing his concerns.
The Financial Services Regulation Committee, chaired by Lord Forsyth of Drumlean, wrote to the FCA on 18 April with concerns about the consultation’s proposals.
Lord Forsyth noted that “currently the FCA does not normally comment on whether it is investigating an issue and public notice of it appears only when the case has been resolved. The consultation paper proposes changes to how the FCA publicises its enforcement investigations, namely by announcing investigations when they are opened, without prejudice to the outcome. The foreword to the consultation paper justifies the proposal on the grounds of deterrence, not least since publicising investigations will educate the whole sector on the FCA’s expectations and indicate where others have fallen short. It also says greater transparency will help to reassure the general public, and drive the FCA’s own accountability.”
Under the proposals, the FCA may consider within a public interest framework whether to name the firm under investigation, weighing a series of factors for or against publication.
Factors in favour of publication:
- Where an announcement would benefit the investigation, e.g. by prompting whistleblowers to emerge;
- Address public concern;
- Reassure the public that action is being taken; and
- Deter future breaches.
Factors against publication – Possible adverse impacts on:
- Other ongoing investigations;
- Interests of consumers;
- Stability of the UK financial system; and
- Impact on the FCA’s exercising its statutory functions.
The consultation here excludes considering the impact of disclosure on the subject of an investigation because publicising “in the public interest” should be primarily focussed on promoting statutory objectives:
- Supporting the investigation;
- Increasing the FCA’s accountability; and
- Offering the public reassurance that it is acting in consumers’ and investors’ interests.
The proposal generally cites data protection issues with naming individuals but envisages publishing names where lawful and necessary for the investigation, or the execution of statutory functions – including encouraging witnesses to come forward, or fulfilling accountability to Parliament.
The letter notes that the FCA has not carried out a cost-benefit analysis under the Financial Services and Markets Act 2000 section 138l because it is “not proposing to make any new rules”.
However, in the Committee’s view, the FCA’s proposal may have a disproportionately adverse effect on named firms which are subsequently cleared of wrongdoing – especially given the length of a typical FCA investigation. This may impact overall market integrity, including share prices. Individuals, named or otherwise, may have their reputations unfairly tarnished via association with a publicised investigation. These impacts may be all the more severe should a lengthy period elapse between the adverse publicity and any eventual exoneration.
In the absence of a cost-benefit analysis, the Committee asked eleven specific questions, to help the FCA assess the likely impact of its proposals. It stated that the Committee intended to take evidence on these, and requested that the FCA take no further steps to implement the changes until the Committee had had the opportunity to review this evidence and form a conclusion.
The FCA responded by 29-page letter dated 25 April 2024, signed not by the CEO but by Therese Chambers and Steve Smart, Joint Executive Directors of Enforcement and Market Oversight.
Highlights include the FCA’s reaffirming its intention to move away from a presumption against public disclosure of an investigation to a public interest framework for deciding whether the facts of an investigation should be announced. The letter also notes the FCA considers that:
- The current approach no longer adequately serves its primary statutory objectives or supports an appropriate degree of transparency and accountability in the context of regulatory enforcement;
- A public interest framework would not undermine either the competitiveness of the financial sector, particularly given the approach taken by other regulators in the UK (e.g., OFCOM and the CMA), or the fundamental legal principle of “innocent until proven guilty”; and
- Publicly naming firms is not likely to impact their share price or client confidence – whilst simultaneously confirming that it will take into account the impact of disclosure on the firm subject to an investigation, when assessing whether to publicise that investigation.
On 1 May, Lord Forsyth wrote again to the FCA’s Chief Executive, acknowledging receipt of the letter but noting: “The Committee Members and I were, understandably, expecting the response to come from you.” He reiterated the Committee’s intention to take evidence on the proposal and its request that the FCA take no steps to implement the change until the Committee had had opportunity to review. The Committee issued a Call for Evidence and currently seeks views on the proposals contained in the FCA’s consultation, inviting written submissions by 4 June 2024.
Further reinforcing the weight of industry opinion, and also on 1 May 2024, Dame Harriett Baldwin, Chair of the Treasury Sub-Committee, wrote to Nikhil Rathi on behalf of the Treasury Sub-Committee on Financial Services Regulations, with seven other questions:
- Has the FCA considered a method of publicising enforcement investigations anonymously until a decision has been made, avoiding firms having their reputation unjustly tarnished should the investigation lead to no further action?
- Given that investigations closed in 2023/2024 took an average of 43 months from start to finish, how much focus and resource is the FCA devoting to speed up investigations and enforcement “to fix the root cause of this harm”?
a) Do you agree that not concluding an investigation until almost four years later creates “an unacceptably long period of uncertainty for companies which are being investigated”?
b) How is reducing the number of operations you carry out consistent with the ambition to “strongly support our operational objectives…”?
- Since the Securities and Exchange Commission and the Swiss Financial Market Supervisory Authority maintain privacy over all their investigations – why do you believe publicising enforcement investigations at the outset will improve the international competitiveness of the UK and make the UK a more desirable place to do business?
- What is the FCA doing to improve the metrics and the communication of any relevant metrics it uses to measure enforcement action?
- How much preparatory work will be done on an investigation before a company is named?
- Would these proposals be possible if the FCA were not able to rely on legal immunity under the Financial Services and Markets Act 2000?
- Has the FCA considered whether these proposals could jeopardise the ongoing viability of a (particularly non-listed) firm, and whether prudential or financial stability concerns might outweigh a desire to publish an investigation? Is there a risk of a two-tier system, where some firms are named and others allowed to remain anonymous?
Ms Baldwin sought a response by 15 May 2024 and received one by 7 May. The FCA said that whilst the consultation proposed to move away from a presumption against disclosure, “there would be no presumption in favour of disclosure”. It attempted to reassure the Chair of the Treasury Sub-Committee with a detailed 14-page response to her seven points but, we fear, with limited success.
On 9 May 2024, the Financial Services Regulation Committee announced that it had launched an inquiry into the FCA’s proposals and as aforementioned, invites written submissions by 4 June.
The FCA is clearly in a difficult position – facing scrutiny from Parliament and the public about its proposals. The FCA has said it remains “open minded on ideas as to how to address the issues identified” and will take several months to consider feedback and further engage with stakeholders. Likewise, when the Financial Services Regulation Committee reports back on the industry response to its Call for Evidence, we will aim to update you further.
