05/02/2024 | News release | Distributed by Public on 05/02/2024 09:27
The UK Financial Conduct Authority (FCA) published a consultation paper (CP24/2) at the end of February on a new approach to publicising its enforcement investigations and changes to its Enforcement Guide (EG). The announcement marks a further step in the FCA's increasing assertion of power as a regulator. The consultation has provoked a significant debate within the financial services sector about the impact these proposals will have. With the consultation now closed, we have pulled together the key themes that have come up over the last few months.
In addition to the general debate around the impact of these proposals, there are two interesting features of the debate which are linked to reforms implemented in the Financial Services and Markets Act 2023:
The proposals put forward by the FCA include disclosing the names of firms (and/or individuals) that are subject to an enforcement investigation, their sector and the details of the suspected breach, failing or other misconduct under investigation, where doing so is in the public interest. From the FCA's perspective, this move aims to enhance transparency, educate and serve as a deterrent to potential misconduct. However, the commentaries from industry groups (including UK Finance, and TheCityUK), whilst accepting the importance of effective enforcement, have questioned whether the proposals are the best way to achieve these aims; further, these commentaries have highlighted possible adverse impacts, including the effect that it might have on the UK's competitiveness and how it might affect economic growth and even whether it might undermine market integrity. There have also been a number of questions from senior politicians including Kami Badenoch, Bim Afolami and most recently the Chancellor of the Exchequer, Jeremy Hunt. In addition, the FSRC has suggested that the proposal "risks having a disproportionate effect on firms named in investigations, where those firms are subsequently cleared of any wrongdoing, particularly given the length of many investigations. This also risks the overall integrity of the market, including through possible unwarranted impacts on share prices." The FSRC also noted that the absence of a cost benefit analysis made it difficult to appreciate the effect of the new policy.
Previously, enforcement investigations conducted by the FCA were usually kept confidential until a breach or wrongdoing was confirmed and subsequent enforcement actions were taken, with a Final Notice published on the FCA's website. The FCA only departed from this practice in exceptional circumstances to make a public announcement (see EG 6.1.3) and in practice very rarely made use of this ability. Under the new approach proposed by the FCA, transparency will be prioritised from the outset and a new precedent will be established - it will become more customary for the public to be informed about ongoing investigations, irrespective of the substantive outcome or findings.
The change in approach is designed to achieve a number of policy outcomes, including:
The FCA will adopt a case-by-case decision-making process on announcing investigations which will consider whether it is in the public interest to announce and any legal implications that could follow from any announcement. When considering the public interest, the FCA has proposed a framework of factors that it will take into account, including: the interests of consumers, encouraging witnesses and whistleblowers to come forward, addressing public concern or speculation, deterring future breaches, and advancing the FCA's statutory objectives. While these factors are very similar to the factors listed in EG 6.1.3 that the FCA will consider under its current approach, one of the main points of departure to the current approach by the FCA appears to be announcing "in exceptional circumstances".
The FCA has also listed matters that may not be "in the public interest", if:
Notably, the potential impact on the subject of an investigation is not specifically listed here (although could still be taken into account given the non-exhaustive nature of the framework). This is in contrast with the current approach in EG 6.1.3 where potential prejudice on the subject of an investigation is expressly considered. The FCA addresses this in its consultation paper, noting that it believes the decision to publish should be primarily focused on its statutory objectives.
Despite this framework, public interest is a broad concept and appears to give the FCA a great deal of discretion (particularly given firms (and potentially individuals) will only be given a day's notice of an intention to publish information, where they are to be named in an announcement). While the FCA has stated it will not go into any investigation with a presumption for or against publishing information, no examples have been given to identify where the line will be drawn in practice.
The FCA has noted that investigations into individuals require additional legal considerations when it comes to the publication of information. Therefore, the approach to publishing investigations about individuals will differ and the FCA will not usually announce these types of investigations. However, there is still a risk that investigations into some individuals could be announced publicly.
As mentioned above, firms will be given no more than one business day's notice before an announcement is made or, alternatively, no notice in cases where the FCA considers that to be necessary. Firms will therefore have very little opportunity to dispute publication decisions, assess the impact that it will have on its business, engage with stakeholders, or prepare its response other than potentially to point out factual inaccuracies.
This lack of notice draws out a particular concern about the proposals, around the effect on publicly listed firms which are subject to disclosure requirements under the Market Abuse Regulations. The consultation paper acknowledges the implications that any FCA announcement may have on these firms, but it is unclear how any potential impacts will play out in practice. While most listed firms will announce to the market that an investigation has been opened, the detail announced may be different to what the FCA intends to publish and create additional issues around needing to update the market, with a risk of additional reputational damage impacting share prices.
The FCA has very wide statutory immunity, meaning that firms which suffer losses as a result of information published by the FCA are unable to recover damages unless they can demonstrate that the FCA acted in bad faith (or that they have a claim for damages under the Human Rights Act 1998). This is a very high bar to satisfy and leaves firms with judicial review as the only effective remedy. That would come with its own issues and would likely not be sufficiently speedy to prevent a firm from suffering any losses caused by public announcements (especially if it transpires that any aspect of the announcement was not accurate).
The FSRC's questions to the FCA and the FCA's response are interesting as the FCA has publicly produced information which was not previously set out, in particular on the effect that naming might have on listed companies and the FCA has committed to consider "as part of our consultation response how we can explain more of our thinking about anticipated impact and what commitments we could make to assessing the impact of any changes one year after they are brought it; or, in the event that this is not practical, we will write to [the FSRC] and the Treasury Select Committee to set out why we can't …".
In response to the FSRC's questions about the approach taken by other regulators and other jurisdictions, the FCA recognises that there are a range of approaches, which are driven by "varying cultural norms and expectations about transparency and differing accountability frameworks", but does not engage in a full comparative analysis of all, or at least all major, financial services hubs. The FCA does also indicate that many, but not all, publicly listed companies do make regulatory disclosures when subject to an investigation.
Finally, in response to questions about why a cost benefit analysis is not provided, the FCA indicates that as there is no rule-change proposed, the proposal does not require a cost-benefit- analysis. This response demonstrates the limitations of the CBA requirements in FSMA 2000, and highlights that major changes can be implemented outside a rule-change.
Having the details of an enforcement investigation published clearly poses a significant reputational risk to the firm in question. Despite the FCA's claims that it will make it clear that an investigation does not imply a breach, shareholders, consumers and investors may interpret otherwise. While larger firms may have the ability and resources to mitigate press attention and accountability resulting from the publication of investigations, there is potential for the new approach to disproportionately affect and damage smaller firms. As TheCityUK suggests in its published response to the consultation, this could make the UK a less attractive place to invest and conduct financial services business, which could act as barrier to entry for new market entrants and risks stifling innovation and competition in this regard.
The FCA may point to other regulators, such as the Competition and Markets Authority, which publish information on their investigations at an early stage to justify its change in approach. As the FCA notes in its response to the FSRC, there is limited evidence on whether the process of naming firms subject to investigation has any effect on the competitiveness of these sectors. However, as industry groups, and the Chancellor have noted, there are significant structural differences between sectors where those subject to investigation are named, and the impact that this process might have on encouraging inward investment. The FCA acknowledged this point (although it notes that it does not apply equally across all financial services firms), and has suggested that its approach of not having a presumption in favour of naming is sufficient distinction from some of the other regulators who name those subject to investigation.
Firms should be aware that the FCA is shifting towards greater assertiveness in exercising its powers. For example, we are seeing an increased use by the FCA of its voluntary requirement powers (which are usually voluntary in the sense that firms can sign up or receive a requirement at the FCA's own initiative). A more assertive regulator may see a more aggressive response from the subjects of investigations - with information on an investigation already in the public domain, an incentive to settle early could be removed and firms may be more willing to consider challenges to the Upper Tribunal in order to set the record straight. Firms may take a more circumspect approach to the sharing of documents with the regulator or proactively reporting matters under Principle 11.
Overall, firms should consider the FCA's proposed changes as a signal, if one was needed, to review their compliance frameworks, ensure they meet FCA standards, and be prepared to respond effectively to any FCA inquiries or investigations. Any firms with particular concerns about the new approach should monitor the FCA's policy developments and take the opportunity to provide feedback during the consultation period to help shape the final enforcement policies.
The final text of the FCA's policy will be published after it has considered the responses to the consultation paper. It will be interesting to see if the FCA maintains its position in light of the many, and vehement, objections not only from market participants, but also from politicians and parliamentary committees with oversight responsibilities.
With thanks to Tawana Robertson for her assistance in drafting this article.