FCA consults on proposals to start publicising live investigations
At the end of February, FCA published Consultation Paper 24/2 on proposed changes to its Enforcement Guide. It begins with a Foreword which includes the following statement:
“...enforcement action is not simply about individual instances of punishment. Its greatest impact is as deterrence, and in educating the whole market on what we expect, and where others have fallen short.”
Significantly, the FCA are proposing to start publicly announcing that they have opened an enforcement investigation, including the identity of the subject of the investigation, and publishing updates on the investigation, if they consider that it is in the public interest to do so. This would mark a step-change, and perhaps unsurprisingly the proposals have proven controversial amongst the market.
The FCA gives three justifications for this proposed new approach, which we have listed below alongside some commentary:
1. “First, [transparency] builds trust in the system and the public will know we’re on the case.”
More transparency from FCA is laudable and it is understandable that the FCA would be seeking to reassure the public that they do take action against firms where there is a risk of harm. Especially considering various recent scandals that had a widespread effect on the public, such as the Woodford funds debacle which has again been in the headlines over the past couple of months.
However, the FCA will need to be careful that this doesn’t backfire. With Woodford, the FCA faced criticism for failing to identify the problem and prevent the harm in the first place. If the FCA publicise lots of live investigations where it turns out that there wasn’t really an issue, and still miss emerging risks that crystalise and cause harm to the public, it may have the opposite effect to what they are intending and undermine confidence and trust in them.
2. “Firms and the market will benefit too. By being clearer about the types of misconduct we think warrant a formal investigation, it allows other firms to learn lessons, raise their standards and think twice about doing the same at a much earlier stage than currently.”
This may be true. However, while other firms get fair warning, for the firms under investigation which have been publicly named, their ability to continue could be seriously impacted by reputational damage caused by public investigations. That might include the loss of clients and potential clients, or issues with suppliers and other third parties.
In the Paper, the FCA explicitly states that there will be no consideration of the potential impact on a firm's business. Although it would seem they will have to consider the impact on businesses to a degree, in order to balance possible detrimental outcomes for businesses with its objectives to promote competition in the interests of consumers and promote the international competitiveness of the UK financial sector.
FCA set out a public interest standard for determining whether to publicise investigations. Examples of relevant factors given are whether an announcement will:
· address public concern or speculation, including by correcting information already in the public domain
· provide reassurance that we are taking appropriate action
· deter future breaches of our rules or other requirements or prohibitions that we are responsible for enforcing
In our view, the reason for the announcement should determine the level of detail given and particularly whether the firm is named in the announcement. It would make sense in announcements that aim to correct or clarify information in the public domain, such as speculation around a particular case, to name the firm. On the other hand, where an announcement is simply to deter behaviour or flag supervisory focus to other market participants, it would seem unfair and unnecessary to name the firm.
The FCA emphasises that announcements will include a notice that the investigation should not imply that the FCA has concluded that there has been a breach or other misconduct or failing (NB: unless it is “inappropriate to do so”). However, if the public interest standard is considered again; that standard implies that the FCA will only publish an investigation where they assess that it really must be published, which in itself implies that the FCA has real cause for concern in the case. A statement that other market participants and the public should not jump to conclusions is therefore unlikely to curtail the reputational damage caused to a firm named in an announcement.
3. “And it will support our accountability by shining a light on the efficiency and pace of our investigations.”
This one is hard to argue and should be welcomed. But, again, this could be achieved without naming firms under investigation, other than in cases which are aimed at addressing an issue that is already in the public domain.
Another potential issue is the impact on individuals. The FCA states that individuals’ names will generally not be included in announcements for legal and privacy reasons. However, even if these proposals do not formally extend to investigations into individuals, the reputations of individuals will undoubtably be impacted by public investigations into their firms for potential misconduct and serious regulatory breaches. It would not be hard, for smaller to medium sized firms, to identify the individuals concerned in an investigation by virtue of the topic of the investigation and the individuals’ role at the firm.
All this considered, hopefully the bar for concluding that an announcement is in the public interest will be high. The assessment of this should be thorough and sensitive, with the level of detail included in an announcement commensurate to its purpose.
These proposals could have significant ramifications for firms that in future find themselves under investigation. As such, we are encouraging all firms to respond to the Consultation and contribute their views and opinions. The deadline for responses is 30 April 2024, and you can respond via the online form here: CP24/2 response form | FCA