Deep dive into FCA enforcement proposals

At the end of February 2024, the FCA published a consultation paper proposing significant changes to its approach to publicising enforcement investigations. Up to now, publicly available information on ongoing investigations is minimal. Usually, the public would know about an investigation only when the FCA publishes the Final Notice relating to it, or sometimes, where appropriate, a Warning or Decision Notice. Now, in the interests of transparency, the FCA proposes proactively to publish more information about its enforcement investigations including their opening and progress as well as the identity of the subject of the investigation. Crucially, this means the public will know that some firms are under investigation well before the FCA decides whether the firm in question has in fact breached any rules. Would this transparency come at too much of a cost to regulated firms? 

In this article, written for Compliance Monitor, Michael Lewis and Emma Radmore look at the drivers, the proposals, the safeguards and the possible consequences.

What does the FCA propose?

The FCA states that it wishes to be more transparent about its activities. It considers that openness about enforcement activities at an early stage brings many benefits such as:

• Reassuring the public that the FCA is taking action
• Quickly publicising best practice and concerns
• Increasing deterrence
• Driving positive behavioural change
• Encouraging witnesses and whistleblowers to come forwards.

The FCA thinks many of these benefits are lost when the information is published only when the investigation is complete.

The FCA proposes what it describes as a "flexible public interest framework" which it will use to decide whether to announce investigations and, if so, what information to release. Before it publishes the name of the firm under investigation, the FCA will need to have assessed that it is in the public interest to do so and that there are no compelling legal or other reasons not to do so. The FCA intends to disclose both new investigations and those ongoing when the change in policy takes effect. This may seem surprising and arguably unfair to those currently under investigation who could reasonably have expected that their investigation would remain confidential.

The FCA proposes that the new policy will apply to all enforcement investigations, including those it pursues against listed firms in relation to potential breaches of the Listing Rules, Principles and MAR, although it appears to concede that there may be cases in which its announcements will involve disclosure of market sensitive information.

The FCA has stated that it will not normally announce the name of an individual it is investigating – not least because the UK GDPR would prohibit it in most circumstances. It appears that the FCA intends in some cases to announce investigations into individuals without naming them. One difficulty with this is that even without naming individuals, others, including the press, may be able to work out who is under investigation.

What does "in the public interest" mean?

The consultation sets out several factors that the FCA will consider in deciding whether an announcement or update is in the public interest. The paper lists certain factors which would be indicative either that publication is or is not in the public interest, but also states that the factors are not exhaustive.

In the public interest

The FCA thinks an announcement will be in the public interest if it is likely to:

• Enable the interests either of specific potentially affected customers, or of consumers or investors more generally, to be protected
• Help the investigation – maybe by encouraging witnesses or whistleblowers to get in touch
• Address public concern or speculation
• Give reassurance that the FCA is taking appropriate action
• Deter future breaches of FCA rules or requirements
• Otherwise advance any of the FCA's statutory objectives.

Not in the public interest

The public interest factors are widely drawn. By contrast, the factors that suggest an announcement may not be in the public interest are a lot narrower. They are that the announcement would be likely to have a significant impact on:

• The conduct of the FCA's (or any other regulator's) investigation
• The interests of consumers
• The stability of the UK financial system or the FCA's ability to carry out its functions.

What about the effects on the firm?

The FCA has intentionally omitted reference to potential harm to the firm itself from the list of factors that it says may weigh against making a disclosure. The consultation states that, while in balancing the public interest all relevant facts and circumstances will be considered, the FCA considers other factors which support the promotion of its statutory objectives to be more important. 

The only concession is that the announcements will state that the opening of an investigation should not be taken to imply that the FCA has reached any conclusion that there has been a breach or decided whether, and if so what, enforcement action will follow. And if the FCA then closes the investigation without further action, it will announce that too. In the FCA's view, this means the framework will be flexible, fair and proportionate, while also having the impacts the FCA wants.

The FCA does not propose to give firms the opportunity to object or appeal a decision to publicise. The firm will usually get notice of the decision to announce the investigation, but this notice will be no more than one business day, and may sometimes be less if the FCA decides it is not appropriate to give any notice at all. This is, of course, a separate requirement to the requirement on the FCA to notify the firm that it is appointing investigators as part of the enforcement process.

What will EG look like in future?

The consultation also takes the opportunity to streamline its Enforcement Guide (EG). While the changes appear significant, they mainly remove information that is elsewhere (usually in the Decision Procedure and Penalties Manul - DEPP). The FCA says EG is supposed to provide information that is not provided elsewhere. So it has removed a lot of material that duplicates DEPP and also plans to move some of the more high level information to the enforcement pages on its website. As a result, the consultation just annexes the new look, much shorter, EG, in which the FCA has also taken the opportunity to clarify and update elements of guidance on its approach. And the new EG will also include guidance on publicity, to be finalised pending the results of the consultation.

One further change to EG is to remove the previous guidance on private warnings. The FCA considers that it should not use private warnings as an enforcement tool in situations where it cannot be publicly transparent – rather, if it wants to give wider useful feedback to the industry in cases where it has decided not to impose a disciplinary sanction, it will do so by other means.

Critical concerns

The consultation makes clear that the FCA is viewing the reasons for these proposals through the lens of its statutory objectives and its desire to drive transparency with little regard to the firms which are the subject of an announcement. This raises a number of concerns:

• The FCA has taken a very literal approach to its statutory objectives. While consumer protection is rightly a focus, this should not come at the cost of unfair treatment of firms
• Regardless of the announcement making it clear that the FCA has not already decided there is a breach, customers, suppliers, counterparties and funders alike may understandably take a "no smoke without fire" approach and decide to stop doing business with the firm rather than await the outcome of the investigation. This will cause not just a huge reputational issue for the firm but could threaten its viability as an ongoing business if significant sources of income disappear. Where funders withdraw, this could lead to a disorderly (as well as unnecessary) collapse of the firm with the attendant loss of jobs and disruption for customers. Even if the firm survives, and the FCA decides there is no cause for further action, the damage will have been done, and it will be hard to get back lost business and repair the reputation
• The consultation does not consider the potential effects on the ongoing availability of professional indemnity insurance cover – in a market where many firms are finding it hard to get cover anyway. While in principle the proposals should perhaps make little difference, given that firms would have had to disclose investigations to their insurers anyway, the increased public awareness of how many investigations are underway and in relation to which types of business or conduct may nevertheless create greater concerns for underwriters – leading to more firms paying higher premiums when they can even find cover at all
• How will the proposed policy affect freedom of information requests the FCA receives? Will it result in it having to disclose further information which would otherwise have been confidential?
• Will firms want publicly to disagree with the inferences that might be drawn from an FCA announcement? Firms, especially listed firms, may be keen to launch their own investigations to prove their "innocence", which could lead to a public disagreement between the firm and the regulator?

There are a couple of fixes that could at least reduce some of these concerns:

• Requiring the FCA to consider the impact on the firm of making an announcement alongside the other factors – and potentially requiring it to assess whether naming the firm would add any impact to the announcement or merely potentially harm the firm
• Giving the firm a proper opportunity to dispute publication of the announcement on set grounds – the one day proposed would allow the firm to make only factual corrections – and allow a proper appeals process. That is, effectively, a process similar to many others in the enforcement process, but the timeline for responses from the firm, appeal to the Regulatory Decisions Committee and the RDC's decision could be required to be made more quickly than in other scenarios so as not to lose the FCA's aim to make the announcement as soon as possible.

When will the changes take effect?

The FCA has invited responses to the consultation by 16 April which has now been extended by two weeks to 30 April 2024. The consultation does not say when the FCA plans to publish the final text of its new policy or when it plans to start using the policy. But the FCA clearly wants to move fast, because even with the extra two weeks, the consultation period is still quite short.