Last week, the FCA released a second phase of consultation relative to its intentions for an increase in transparency around its enforcement investigations. You can read our posts on the previous round of consultation, which dates from earlier this year, here and here. 

Ongoing engagement

Following the strength of feedback to the initial proposals, the FCA engaged extensively with stakeholders including financial services firms, trade associations, law firms, government and other regulatory bodies. The FCA also engaged with the Treasury Select Committee and with the House of Lords Financial Services Regulation Committee. It is now continuing to engage with these industry stakeholders to re-shape the proposals before making a final decision on them. The current phase of the consultation is now open until February and the FCA has indicated that its final decision on the proposals will be made in Q1 of next year.

Positives

Feedback to the original consultation evidences some constructive themes including:

• general support for the FCA's overall enforcement objectives;
• agreement that it would be helpful to have more information distributed into the markets on how the FCA carries out its enforcement work;
• recognition that the distribution of more timely information about issues under investigation could have a positive impact on the markets; and
• acceptance of the benefits of public consumer warnings for example in relation to “fraud-type investigations". 

Concerns

Significant industry concerns have focused on the following elements of the initial version of the proposals:

• the possession by the FCA of existing powers to make enforcement investigation information public;
• a lack of detail about the proposed public interest test;
• very tight and therefore impractical pre-announcement notice periods; and
• the risk of the FCA naming firms that have not committed any wrongdoing.

So, what's new?

The revised version of the proposals contain some key changes:

• the public interest test will now include consideration of the “potential negative impact on a firm” arising from the announcement of an enforcement investigation by the FCA;
• the public interest test will also include consideration of the potential for such an announcement to “seriously disrupt public confidence in the financial system or the market”;
• firms will be given a 10-day (longer than the previously proposed 1-day) notice period of an investigation being announced and within those 10 days firms will have the ability to make representations to the FCA;
• in the event of decision by the FCA that it will make an announcement, an affected firm would have a further 48 hours of notice prior to the publication of that announcement; and
• there will be no retrospectivity and therefore no announcement of investigations that began prior to any change in policy being effected.

Focus and pace

These proposals are part of the FCA's mission to speed the pace of its enforcement investigations and prioritise its focus on those investigations that are most likely to have deterrent effect on the wider market. The clear aim is “fewer and faster investigations”. The FCA expects that the increased level of focus will result in a decline in the number of cases that result in no further action. 

The enforcement approach

The FCA's regulatory model is focused on:

• strengthening the authorisation gateway to prevent those firms that “could cause significant harm from entering the market”;
• more assertive supervision of higher-risk firms with those firms that give rise to regulatory concerns receiving many opportunities to resolve them prior to a referral to enforcement; and
• a very small number of enforcement actions (10-12 per year).

The FCA has “raised the bar for opening an investigation and strengthened pre-investigation triage processes” by considering, prior to the opening of an investigation:

• whether an enforcement investigation will have impactful deterrent effect in the industry; and
• whether it has other regulatory tools to stop and reduce the harm to be addressed.

Public interest

Alongside focus and pace, the FCA intends to introduce this new level of transparency around its enforcement investigations, as a means of serving the public interest. The FCA's reasons include:

• providing information that might enable customers to take actions that prevent or reduce harm;
• building transparency and trust in the financial services system by reassuring the markets that appropriate actions will be taken and taken promptly;
• encouraging industry to address harms sooner;
• improving its own accountability by increasing openness; and
• encouraging witnesses and whistleblowers to come forward.

The consultation makes specific reference to the fact that it will not always be in the interests of consumers to withhold information about the fact of a firm being subject to enforcement investigation. As such, the FCA will be looking to make information about an enforcement investigation available to the public in cases where there is clear consumer benefit to having this information: “we would not announce in all cases, but only when, having weighed all the circumstances, we consider this would further the public interest”. 

Enforcement cases unsuited to public announcements will likely include those that involve covert operations or sensitive information. Some cases might lend themselves to being announced on an anonymous basis. Others may merit announcement on a named basis. There are, of course, other routes for information to reach the public domain, including existing statutory processes (Warning Notice Statements and Decision Notices), announcements made by firms themselves and announcements made in relation to other official processes such as by administrators as part of reporting to creditors, as part of disclosure or reporting obligations (such as for listed firms), or by another enforcement agency in the case of collaborative investigations.

In practice

Building on the previous consultation and drawing on helpful feedback, the FCA provides further detail on how it might consider public interest relative to a decision on whether to announce that an enforcement investigation is underway, and to whether such an announcement might name the firm concerned. Further engagement is expected on how this will work in practice. Key stages of the decision making process are proposed and each stage will include consideration of competing factors relevant to it:

• whether the announcement of an enforcement investigation would be in the public interest;
• when any announcement should be made, including consideration of for example, whether information was already in the public domain and where harm prevention or educational benefit might have optimum effect; and
• what the content of any announcement might be and, in particular, whether the subject firm should be named. 

Factors in favour of publication or naming might include whether information is already in the public domain, whether publication might be in the interests of consumers or investors, whether publication might prevent harm, whether public confidence might be improved, whether there may be educational benefit from publication and whether there might be any operational benefit from making a publication. 

Factors weighing against a publication or naming might include the potential for adverse impact on the market, systemic disruption, a negative impact on public confidence, adverse impact on the firm itself (for example, on its market value or share price) or on its customers, consumers or investors, or adverse impact on the investigation or on a connected investigation. 

Allowing firms to respond

The revised proposals provide more time for firms to respond in relation to the potential announcement of an enforcement investigation including in relation to the content and timing of any announcement. The FCA has clarified that it will only make decisions on whether to announce once the firm has been able to make representations and when legal issues, and any relevant legal advice, have also been considered. 

Real examples

The FCA details a number of real life examples where it considers that it might have been in the public interest to name the firm under investigation, bringing with the announcement benefits such as:

• alerting consumers to the potential for problems with advice that they have received;
• providing reassurance in circumstances of public concern;
• preventing trust in key markets from being damaged;
• providing education in the form of reminders about expected standards of behaviour;
• prompting pro-active reviews by firms of their systems and controls;
• alerting market participants to areas of regulatory focus and scrutiny; and
• deterring wider misconduct.

Conclusions

Some considered revisions to the first round of proposals have been made and the FCA appears receptive to some sound ideas and feedback that it has received from industry. One of note is the potential for “an ‘Enforcement Watch’ publication” to be used as a way of providing useful information on enforcement “themes, topics and trends”, without the need to name firms, into the market. Very much like the examples of good and bad practice that the FCA produces, a publication like this could have positive impact on the market more widely by:

• encouraging firms to review their vulnerabilities;
• emphasising the need for better compliance with regulatory requirements;
• alerting firms to what could happen in the event of non-compliance; and
• providing educational material to firms of all sizes (of “particular benefit to small firms that do not have the resources to obtain the professional compliance advice available to larger firms”) thus levelling the “playing ground” and contributing to a more competitive environment in the markets.

The FCA is of the view that increasing the levels of transparency around its enforcement work will be advantageous for the UK in terms of its reputation for well regulated markets and for “integrity, competence and expertise in financial services”. Further, that the number of firms affected by announcements will be “very small”.

We will be following the outcome of this consultation with interest. The best way to stay connected with updates and insights is to sign up to our regular financial services regulation ‘round-up’ which you can do by clicking here https://buff.ly/4hh166o. You can meet our team of financial services regulation lawyers by clicking here Financial services lawyers | Financial services law.