On 27 February 2024, the Financial Conduct Authority ('FCA') published Consultation Paper CP24/2 ('CP') setting out its proposed amendments to its Enforcement Guide ('EG'), including significant changes in relation to its approach to publicising enforcement investigations. The consultation has sparked a notable backlash from various stakeholders, including robust criticism from the House of Lords and politicians who have raised concerns about the potential implications of these changes for individuals and firms.
The Proposed Changes
Under the proposed new approach, the FCA plans to publicly announce when it has opened an enforcement investigation which includes naming the subject of the investigation, a summary of the suspected breach or failing, a statement that an investigation does not equate to wrongdoing and providing updates on the progress of the investigation. This proposal marks a departure from the FCA's standard approach of not announcing investigations, save for in limited circumstances and/or when it issues a warning or sanction. If the FCA's proposals do come into force, the changes will impact both existing and new enforcement investigations. The decision to publish, and the details of what is published, are proposed to be guided by a new public interest framework. The factors that will determine whether publication is in the public interest includes whether it will:
- Enable the interests of potentially affected customers, or consumers or investors more generally, to be protected.
- Help the FCA's investigation, for example by encouraging potential witnesses or whistleblowers to come forward.
- Address public concern or speculation, including by correcting information already in the public domain.
- Provide reassurance that the FCA is taking appropriate action.
- Deter future breaches of the FCA's rules or other requirements or prohibitions that it is responsible for enforcing.
- Otherwise advance one or more of the FCA's statutory objectives, including protecting and enhancing the integrity of the UK financial system.
Having said all of this, the FCA has made it clear that early publication of an investigation (including the names of the firm being investigated) will not be automatic. The decision on whether to publish will be made on a "case-by-case basis" with a careful consideration of whether publication would be in the public interest. It should also be noted that the change in the approach to those under investigation will not apply in the same way to individuals because of the FCA's obligations under UK General Data Protection Regulation.
The deterrent effect that the publication of an investigation will have on those operating in the regulated sector is very much at the forefront of the FCA's reasoning for proposing this change. As Therese Chambers, the joint executive director of enforcement and market oversight at the FCA, recently stated:
"Enforcement is not just about the prison sentences, fines and censures. It is about communicating what our plan is and deterring bad behaviour…We want to be more transparent about what we investigate, so firms will be reassured whether they are on the right track (and can pivot if they are not) and so that the public can be reassured that we are on the case."
This new approach reaffirms the FCA's commitment to becoming a "more innovative, adaptive, assertive, proactive regulator". If it comes into force, it is likely that there will be a significant increase in the FCA publicising details of its investigations as the deterrent effect that such announcements are presumed to have means that it is set to become a key component of the FCA's enforcement strategy moving forward.
The FCA has also stated that it will make it clear that announcing an investigation does not automatically mean it has determined that misconduct or breaches of its requirements has occurred and that it will be transparent when it closes cases with no outcome. However, this will arguably provide little comfort for regulated firms who may feel that the intervening damage that such announcements may cause to their reputations and businesses may not be easily remedied by the FCA announcing that there is no case to answer.
Backlash Against the FCA's Proposed Changes
There has been a significant public backlash against the proposal from various quarters.
For example, the House of Lords Financial Services Regulation Committee, advised the FCA to reconsider its proposal to publicly name firms under investigation, citing potential damage to the integrity of the market and the principle of "innocent until proven guilty." The committee has requested a pause on the proposal's implementation to allow for further scrutiny and evidence gathering, highlighting the lack of a cost-benefit analysis by the FCA.
Further, City firms, supported by trade bodies such as TheCityUK and UK Finance, are rallying against the FCA's proposal, fearing reputational damage and a breach of the "innocent until proven guilty" principle. They argue that the policy could stifle innovation and harm the UK's financial competitiveness.
Indeed, Chancellor of the Exchequer Jeremy Hunt has also warned the FCA against the potential 'naming and shaming' of businesses under investigation, suggesting that such actions could undermine the FCA's duty to support growth and harm the UK's financial competitiveness.
In response to the backlash, the FCA has defended its proposal, stating that transparency can deter misconduct, raise standards, and maintain market integrity, which is essential for the UK's financial competitiveness. They claim that naming firms is not about shaming but about public interest, and that their analysis shows minimal impact on firms' share prices when investigations are announced.
Another potential advantage of this proposal that the FCA claims is that earlier naming of firms under investigation and the reasons for their investigation will enable other regulated firms to get their houses in order so that they do not also become the subject of an investigation.
One thing that is clear is that there has been no let-up in the FCA continuing to signal strongly its commitment to being an increasingly assertive and proactive regulator. However, in light of the significant and sustained backlash, it will be interesting to see whether the FCA heeds the criticisms and backs down on its proposals, or at least waters them down.