The FCA proposes to name firms under investigation: transparency as a regulatory tool?

June 2024  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2024 Issue

“Last year, I said you would begin to see a different type of FCA. More innovative, more assertive, more adaptive.” These were the opening remarks of Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), when announcing the FCA’s three-year strategy in 2022.

The FCA’s latest proposals – to identify publicly firms when an investigation is opened – appear entirely consistent with the stated desire to be a more “assertive” regulator. The proposals represent a substantial shift from the FCA’s current approach and would, if implemented, result in public disclosure of firms under investigation before any findings of wrongdoing, potentially causing significant damage to such firms (regardless of whether the investigation results in any adverse findings).

FCA current approach

In its announcement ‘FCA to improve pace and transparency around enforcement cases’, dated 27 February 2024, the FCA launched a consultation “on plans to be more transparent when an enforcement investigation is opened”, acknowledging that the proposals would be “a step change from the current process”.

At the same time, the FCA published its consultation paper CP24/2 – ‘Our Enforcement Guide and publicising enforcement investigations: a new approach’ – which sought feedback by 30 April 2024. The proposals are not finalised and we will need to wait until later this year for the FCA to publish its policy statement and feedback statement.

Under the current process, the FCA does not publicly disclose the opening of enforcement investigations save in exceptional circumstances, and the firm under investigation is usually expected to keep the fact of the investigation confidential.

Where exceptional circumstances apply, the FCA has stated that it would “consider the potential prejudice that it believes may be caused to any persons who are, or who are likely to be, a subject of the investigation” when deciding whether to announce that an investigation has been opened. Investigations into firms are usually only made public if the FCA decides to take action upon the conclusion of an investigation (i.e., when it has issued either a decision notice which the recipient has referred to the Upper Tribunal for rehearing, or a final notice).

In some cases, a firm may disclose an investigation, such as where a listed firm is required to announce the fact of an investigation to the market in accordance with obligations under the UK Market Abuse Regulation, the Listing Rules and the Alternative Investment Market Rules for Companies. Accordingly, investigations that the FCA closes with no action taken, which it does in about two-thirds of cases, are generally kept confidential.

Latest FCA proposals

The ‘step change’ in approach under the new proposals is overseen by Therese Chambers and Steve Smart, the FCA’s joint executive directors of enforcement and market oversight, who took on their new roles in April and June 2023, respectively, following Mark Steward’s departure.

Under the purview of Mr Steward, the FCA reportedly reduced its internal evidential threshold for opening enforcement cases, which resulted in an increase in its enforcement caseload and the length of time for investigations to be concluded. For the period 1 April 2022 to 31 March 2023, the average time taken by the FCA to complete the regulatory ‘investigation stage’ was 40 months, and, as of 1 April 2023, the FCA had 591 open enforcement cases relating to 224 investigations.

The FCA has now declared that it “will focus on a streamlined portfolio of cases, aligned to its strategic priorities where it can deliver the greatest impact” and will also “close those cases where no outcome is achievable, more quickly”. Combined with greater transparency, this emphasis on speed and focus will, it is said, act as a greater deterrent and reduce harm to the market.

Under the proposals, the FCA would publicly announce when it opens an enforcement investigation into a firm (but generally not an individual) and publish updates on the investigation, where the FCA considers it to be in the public interest to do so. The FCA would also publicly announce “and/or amend the original announcement on its website accordingly” when it closes an investigation without taking any action or making any adverse findings. The changes would apply to existing investigations, as well as investigations opened after the implementation of the proposals.

While the details contained in an initial announcement would vary on a case by case basis, the proposals state that such announcement may contain: (i) the identity of the subject under investigation; (ii) the relevant regulatory or legal provisions; (iii) a summary of the suspected misconduct; and (iv) a statement that the opening of an investigation “should not be taken to imply that the FCA has reached any conclusion that any regulatory or legal provision has been breached or otherwise made a finding of misconduct or other failing or determined the appropriate resulting enforcement action to be taken”. It is not clear what information may be contained in an update announcement or a closure announcement.

Under the proposals, the FCA would consider a series of non-exhaustive factors before deciding to make an announcement or update. These include the likelihood that publication will: (i) enable the interests of potentially affected customers, consumers or investors to be protected; (ii) help the FCA’s investigation, for example by encouraging potential witnesses or whistleblowers to come forward; (iii) address public concern or speculation; (iv) provide reassurance that the FCA is taking action; (v) deter future breaches of rules; and (vi) advance the FCA’s statutory objectives. Where publication is likely to have an adverse impact on the FCA’s investigation or an investigation by another regulatory body or law enforcement agency, this will indicate that publication is not in the public interest.

Notably absent from the list of factors, however, is any consideration of the potential harm to the firm under investigation. This is particularly surprising in circumstances where, under the existing approach, the potential prejudice to the subject of an investigation is a factor taken into consideration. However, the consultation paper explains that “assessing if publication of an announcement or update is in the public interest should, while taking account of all relevant facts and circumstances, be primarily focused on promoting our statutory objectives”.

This suggests that the FCA may take a holistic approach, including taking into account (where considered appropriate) the potential harm to a firm under investigation. Even so, the proposals make no mention of any mechanism by which the firm in question may make representations or otherwise challenge the FCA’s decision to announce the investigation.

In support of the proposals, the FCA argues that the length of time taken to publish information on its investigatory work often significantly reduces the effectiveness of that information (e.g., in terms of reassuring consumers and promoting market confidence).

For example, in the context of the FCA’s anti-money laundering enforcement actions (including several final notices and fines between 2021 and 2023), the FCA argues that earlier publication of firms’ apparent failings could have led to other regulated firms resolving similar issues more quickly. Furthermore, in the FCA’s view, publication under the current process comes too late to encourage witnesses or whistleblowers to come forward and inform the FCA’s investigatory work.

The FCA also argues that an increase in transparency will promote trust in UK financial markets and encourage it to conduct investigations more efficiently. It further appears that the FCA considers this proposal would meet an increasing demand for transparency by the media and politicians – who frequently request information about the FCA’s supervisory and enforcement work in respect of specific firms.

Implications of proposals

The FCA’s proposals give rise to a number of serious concerns for firms under investigation. Clearly, and regardless of the extent to which the firm in question may have been involved in misconduct (if any), the FCA proposals involve the very real risk of substantial damage to the reputation of a firm under investigation, giving rise to a number of other significant risks, such as a sudden and material negative impact on a firm’s share price.

News speculation, negative publicity and corresponding reputational harm is almost inevitable in such situations, particularly in circumstances where an investigation may take several years before a decision is made by the FCA.

Often, the FCA will open parallel investigations against both a firm and its senior employees in respect of the alleged misconduct. Accordingly, press speculation may also result in reputational damage to senior employees within the firm.

Beyond reputational harm, firms publicly identified as under investigation also potentially face increasing litigation risk from shareholders, customers, counterparties or other stakeholders (including litigation funders) interested in formulating claims arising out of the underlying conduct publicised in the FCA’s announcements.

These concerns have been echoed by the House of Lords Financial Services Regulation Committee in a letter to Mr Rathi of 18 April 2024. The committee noted that the proposals risk: (i) having a disproportionate effect on firms where they are subsequently cleared of wrongdoing; (ii) the overall integrity of the market, including through unwarranted impacts on share prices; and (iii) individuals having their reputations unfairly tarnished through association.

The FCA responded to those concerns on 25 April 2024, robustly defending its rationale for the proposals. In doing so, the FCA also noted that other UK regulatory authorities, such as the regulators for the communications sector (Ofcom), the gas and electricity sector (Ofgem) and the water sector (Ofwat), make disclosures about the opening of their investigations and argued that “it is relevant to consider and learn from the approach of our partners”. Prior to this, in the consultation paper, the FCA had noted that the proposed approach is consistent with that taken by the UK Competition and Markets Authority.

Conclusion

Overall, it is welcome that the FCA acknowledges the present slow pace of investigations and is committed to increasing speed and efficiency. However, there is a considerable risk that the changes proposed in the consultation paper will be detrimental for both firms and employees and that this will outweigh any benefits to consumers, market participants or financial markets in general.

Unintended consequences for the FCA also seem possible – for example, greater transparency around the number of investigations opened and subsequently closed without action being taken, and the length of time taken to investigate, may in fact lead to a greater number of questions regarding the FCA’s approach.

 

William Charles is a partner and Michael Bingham and Thomas Deakin are associates at Milbank LLP. Mr Charles can be contacted on +44 (0)20 7615 3076 or by email: wcharles@milbank.com. Mr Bingham can be contacted on +44 (0)20 7615 3149 or by email: mbingham@milbank.com. Mr Deakin can be contacted on +44 (0)20 7615 3302 or by email: tdeakin@milbank.com.

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BY

William Charles, Michael Bingham and Thomas Deakin

Milbank LLP

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