Concerns raised over FCA’s new approach to enforcement

On 8 March 2024, we published an article highlighting key issues coming out of the FCA’s proposed new approach to enforcement (as set out in the FCA’s consultation paper CP24/2).

Perhaps unsurprisingly, given a marked change in approach - which would see the FCA publicising enforcement investigations at the outset, including the identity of the firm, the industry sector and regulatory or legal provisions to which the investigation relates, and a summary of the suspected breach, failing or other misconduct being investigated - the consultation has prompted a high level of engagement from industry stakeholders and beyond.

In particular, the House of Lords Financial Services Regulation Committee (FSRC), UK Finance, the International Swaps and Derivatives Association (ISDA), the Association for Financial Markets in Europe (AFME), and the Chancellor, Jeremy Hunt have each criticised certain aspects of the proposals (with most attention on the public announcement at the outset of an investigation, which would of course mean firms are named (and potentially implicated in the public’s mind), even where a decision to take no further action is made following the investigation. One of the key concerns appears to be, put simply, that public perception will not distinguish between alleged misconduct (subject to investigation) and actual misconduct.

In this article, we review the feedback to the FCA’s proposals and the FCA’s response.

Responses

Whilst consultation responses generally acknowledged that the FCA’s proposals aim to increase transparency, public trust in the regulatory system and the regulator’s accountability accordingly, they also expressed serious concerns about the proposed change in approach. For example:

The FSRC posed 11 questions to the FCA regarding their proposed approach, including what the FCA will disclose about the number of investigations it launches each year, the average length of its investigations and the proportion of investigations resulting in enforcement action being taken. The FSRC also asked whether there will be a process through which firms can appeal the FCA’s decision to publicise the details of an investigation and how the proposed approach compares with other regulators internationally (we note the FCA’s proposed approach would in fact put it out of step with many comparable regulators in other jurisdictions).Perhaps most notably, the FSRC opened an inquiry on 8 May 2024 seeking views upon the FCA’s proposals within CP 24/2 and has asked the FCA not to take further steps to implement its proposed changes until the FSRC has reached a final conclusion.
UK Finance “emphatically rejected” the proposal to announce the launch of investigations and to name the firm involved.UK Finance also notes that CP24/2 was not included in the Regulatory Initiatives Grid which could have enabled industry engagement on the issues arising, prior to the launch of the consultation.

In summary, the key criticisms raised in response to the FCA’s proposals are:

The risks associated with the impact of announcing an investigation before a conclusion is reached. In particular:

On 18 April 2024, the FSRC wrote to the FCA expressing concern that the proposal “risks having a disproportionate effect on firms named in investigations” particularly where an enforcement investigation ultimately concludes with a conclusion of no wrongdoing.
The FSRC considered the publication of the name of the firm being investigated posed a potential risk to market integrity by potentially causing reputational damage, impacting investor confidence and ultimately share prices.
The impact of being named as a firm under investigation is likely to have a disproportionate effect on smaller firms as they may be less able to absorb and react to the impact of the announcement, or to weather the uncertainty for the period of the investigation.

UK Finance also highlighted that the proposed approach "may create unnecessary conflict between the FCA and firms, slowing down the investigation" which is inconsistent with the regulator’s objectives...

The ISDA and AFME said that “the proposals appear to significantly underestimate the adverse impact that publication will have on firms and the wider market, and the potential for confusion and misunderstanding as a result of early publicity”. They are also concerned about the, presently vague, public interest test that the FCA proposes to apply when considering whether to publicly announce enforcement investigations.

A number of other themes emerged in the feedback:

Concern that regulators in other jurisdictions are not taking the same approach.
The FSRC asked the FCA to provide details of other jurisdictions adopting a similar approach to enforcement. UK Finance notes that “no other G7 country currently takes the FCA’s proposed approach” and that only South Africa and Singapore have a regime similar to the proposal in CP 24/2, but these jurisdictions have very different financial markets to the UK. If the FCA adopts an approach that is inconsistent with other jurisdictions, this could make the firms it regulates less attractive to investors.

terms and conditions

FCA impact assessments not being built into the proposed approach
Specifically, the FSRC criticises the apparent lack of consideration that would be given to reputational harm, impact on markets and share prices and in some cases, ability to trade, before the FCA makes the decision to publicly name a firm. It was also concerned with the potential adverse impact upon the relationship between the regulators and the industry more generally. The FSRC notes that while a cost-benefit analysis of the proposal is not required FSMA “it seems unhelpful to have proposed these changes without an accompanying assessment of their likely impact”.

Right to appeal

The FSRC asks whether the FCA has considered including an appeal mechanism to allow for challenge to a decision to publicise.

Existing powers

Some of the responses point out that, within the existing framework, the FCA is already able to announce the start of investigations and provide updates “in exceptional circumstances” if it considers it is desirable to maintain public confidence in the financial system, protect consumers or investors, prevent widespread malpractice, would help the investigation or otherwise maintain the smooth operation of the market (see EG6.1 FCA Handbook). . When deciding whether to make such an announcement, the FCA must consider the potential prejudice that could be caused to persons who are, or likely to be, the subject of the investigation. UK Finance suggests that the FCA could use these powers to publish anonymised summary enforcement activity which would have some similar effects to its current proposals while avoiding some of the potential adverse effects. ISDA and AFME gave similar feedback.

The FCA has responded to the FSRC letter as follows:

The proposed approach does not necessarily mean that all enforcements investigations will be published, only that there will be a public interest framework for deciding whether an investigation is announced at its outset and if so whether the firm itself is named as part of that.The FCA also argues that, even under its current approach, some enforcement investigations are announced, for a number of reasons, sometimes by those under investigation, or become public through disclosures by firms as part of annual reports, prospectuses when raising capital.Investigations may also become public through the method of investigation, for example if the FCA conducts a search or freezes assets.The FCA clarifies that under the proposed approach, there will be case-by-case assessment of whether an investigation is announced which will take into account the potential impacts of publication, the interests of consumers and the FCA’s operational objectives.,
The FCA reiterates that its proposals are part of its move to increase its accountability and the pace and focus of the its investigations in a way that will “amplify the deterrent impact” of the FCA’s work and encourage whistleblowers to come forward.
Other authorities in the UK publicly announce their investigations at the outset, including OFCOM, CMA, FRC, OFGEM, OFWAT and the Serious Fraud Office. The FCA does not consider that the proposed public interest framework undermines the basic principle of “innocent until proven guilty”.The FCA analyses various regulators’ approaches in other jurisdictions but comments that the UK regulatory framework is significantly different in the UK to elsewhere.
Other authorities (such as those named above) do not provide an appeal process against the decision to disclose details of an investigation.The FCA consultation paper proposed to provide advanced notice of the announcement (1 business day) such that any firm or individual affected could challenge the decision through a judicial review or injunction, although the FCA is seeking feedback on this point (In its response, UK Finance expressed concern (no doubt shared with many other firms) that 1 business day would not be sufficient for firms to consider the decision to announce and decide whether to challenge it, or to take alternative action to minimise the impact of the announcement).

Comment

It is perhaps telling that, following the initial consultation feedback, the FCA extended the consultation closing date by 2 weeks to 30 April 2024. Despite the FCA’s original stated intention to publish a policy statement and feedback statement ‘in due course’ following the consultation, in its response to the FSRC, the FCA has said that it will consider all responses “very carefully” and would plan a further round of discussion and engagement with stakeholders, including to consider the process for (and format of) public announcements at the outset of enforcement investigations. The FCA has also said that it is important to have ‘opened the debate’ on how it uses its enforcement powers. In saying this the FCA is likely mindful that the intense scrutiny of its proposal to publicly announce the identity of firms under enforcement investigation has taken focus away from the FCA’s broader proposals and their public policy rationale

While we do not yet know the final shape of the FCA’s revised approach to enforcement, the force of certain of the consultation responses has already resulted in the FCA altering its course to some extent and it remains to be seen what further stakeholder engagement and consultation will bring. It seems likely there may be some fundamental qualifications and/or clarifications to the FCA’s original proposals before the process concludes.

Written by James Matthews and Amy Earlam