Proposed FCA Enforcement Changes – is too much information a bad thing?

On 27 February 2024 Therese Chambers, joint Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority (“FCA”) delivered a speech at the Market Abuse and Market Manipulation Summit; during the speech Ms Chambers said: “We want our enforcement work to deter harm. It aligns with our objective to protect consumers and markets. Our enforcement action also directly reflects our strategic aims - to reduce and prevent serious harm and test and set higher standards.”

The financial services watch dog is about to refresh its enforcement strategy and says the latest re-fresh is designed to:

• deliver deterrence through enforcement activity; 
• increase transparency of the enforcement process;
• quicken the pace of investigations and strengthen focus.

As part of the process, the FCA has just unveiled its proposals for a new approach to publishing information about its enforcement investigations (Consultation Paper 24/2) which sits on their website.

So, what are the headlines? 

In the consultation paper, the FCA says that it: 

• is committed to conducting enforcement cases more quickly so as to increase deterrence and impact of those cases (the FCA has been strongly criticised for the sometimes painfully slow progress with some of its investigations, Woodford Equity and British Steel been a recent and high profile examples); 
• will focus on streamlining its portfolio of enforcement cases to improve the market impact of the process; and 
• close enforcement cases more quickly where no outcome is achievable.

This all sounds very good and, it could be argued, is largely welcome.
 
But more controversial are the FCA’s proposals, as part of the new strategy, to publicly announce the opening of an enforcement investigation, identifying the subject of the investigation and publishing updates “as appropriate” on its investigations into alleged misconduct by a firm. 

Publicity decisions will be taken and informed according to what the FCA calls a new “public interest framework”. The regulator says that this is to increase transparency about its enforcement activity, shining a light on the efficiency and pace of its investigations and to deter wrongdoing. 

Investigations into individuals will be different and the FCA say that it will not usually announce these types of investigations.  

Presently, the opening of an FCA investigation is only announced in very limited circumstances and generally made public at the conclusion of the disciplinary process, for example only when a firm has been fined for misconduct will it be named and shamed. 

So, what about the “public interest framework” which the FCA says that it will use to reach a decision on publicity? 

The FCA has proposed a number of (non-exclusive) factors which it considers will indicate that an announcement or update about enforcement would be in the public interest. These include:

• enabling the interests of potentially affected customers, consumers or investors more generally, to be protected; 
• addressing public concern or speculation, including by correcting information that may already be in the public domain; 
• deterring future breaches of FCA rules or other requirements or prohibitions that they are responsible for enforcing. 

Similarly, the FCA has proposed a set of factors which it considers indicate that an announcement or update may not be in the public interest, specifically if it is likely to have an adverse impact on:

• the conduct of its investigation or an investigation by another regulatory body 
• the interests of consumers, or 
• the stability of the UK financial system or the FCA’s ability to otherwise carry out its statutory functions

The FCA’s publicity proposals are controversial and have drawn a mixed response from regulated firms and their professional advisers. Is this fair or is it disciplinary action by the back door on the cheap before the firm has had an opportunity to have its say and rebut the regulator’s allegations?   

The FCA is quick to stress that announcing an investigation will not mean that the FCA has decided whether there has been misconduct by a firm and that it will say this in any announcement. But the fact remains that inferences may inevitably be drawn by the market, by customers or consumers and by counterparties, especially depending on how much information about the alleged misconduct is in the FCA announcement. Announcing a case could conceivably cause share prices to fall and commercial reputation to be damaged before there has been any findings by the FCA of any actual wrongdoing or a compliance failure in a firm. 

The FCA has tried to counterbalance this by saying that it will, where it has published an announcement and subsequently closed an investigation without taking action, publish a further announcement to that effect and/or amend the original announcement on its website. But that may be too late, and very real long-term damage may already have been suffered by the firm.

It should be noted that many enforcement cases start with firms finding something wrong in their business and, in line with their regulatory obligations, self -reporting to the regulator. The FCA will need to be careful to give firms sufficient confidence that the information that they supply to the regulator will remain confidential should the publicity proposals come into force. 

The FCA may need to provide greater clarity about the nature of, and how much information it might publish, in its announcements, for example will they refer to the nature of the alleged misconduct and the harm it may have caused? Will a firm be allowed to respond to an FCA announcement, and if so, how much can it say in such a response? 

The consultation paper is out for consideration and feedback from the industry until 16 April 2024. Following the consultation, the FCA will publish a policy statement and feedback statement. 

So, watch this space for more news on the regulator’s proposals.