Legal development

Naming and shaming – the FCA announces controversial new enforcement plans

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    Financial Services Enforcement

    "The first rule of enforcement club is that you do in fact talk about enforcement club"

    The FCA has announced plans to change its enforcement strategy. The announcement was made by Therese Chambers (the joint executive director of enforcement) during her speech at The Market Abuse and Manipulation Summit and amongst the card game references and movie quotes, there were some controversial proposals which include naming (and shaming) the firms that it places under investigation.
    The proposals are set out in full in the accompanying Consultation Paper.
    The FCA believes that the changes will increase the deterrence effect that an enforcement investigation can have on the market. It plans to use a flexible public interest framework to inform its case-by-case decision-making on whether and what to announce. It is proposed that the policy will apply to both new enforcement investigations and ongoing investigations, where the FCA assesses that publishing an announcement or update is in the public interest.
    Why are the FCA proposing this?
    From the FCA's perspective, the proposals align with the image it is seeking to promote of itself as a proactive and assertive regulator. 
    The Consultation Paper sets out what the FCA describes as three significant benefits for publicising investigations:

    1. It builds trust in the system and the public will know the FCA are on the case.
    2. Firms and the market will benefit. By being clearer about the types of misconduct the FCA think warrant a formal investigation, it allows other firms to learn lessons, raise their standards and "think twice about doing the same at a much earlier stage than currently".
    3. It will support FCA accountability by shining a light on the efficiency and pace of its investigations.

    Although the FCA may be criticised where investigations it has announced are subsequently dropped or take a long time to investigate, increased visibility of the fact of an investigation being launched is likely to be welcomed by the Treasury Select Committee (who are responsible for scrutinising the FCA) and activist consumer/investor groups (who may feel aggrieved by the actions of authorised firms). 
    What this will mean for firms and our concerns 
    Currently it is rare for the FCA to release any details of live investigations until the point at which a fine or other disciplinary action is published. It follows that in the event that the FCA drops its investigation without making any adverse findings (which it does in about 65% of cases), the matter can remain entirely private. It is also important to recognise that the statutory threshold for the FCA opening investigations is extremely low – broadly, there need only be circumstances suggesting that a firm may have breached one or more of the FCA's rules or may be guilty of certain offences. The FCA can also open more general enforcement investigations where there is no suggestion of a specific breach or contravention, but the FCA have good reason to be concerned about a firm. 
    The reality is that whilst it may, arguably, make life easier for the FCA, public announcements at the outset of enforcement investigations will have a huge reputational impact for the firms named. In some cases, particularly for smaller firms or for those with large retail operations, the detrimental impact of such an announcement could be irreversible. The adverse press attention will inevitably lead to a fall-out with customers, other counterparties and regulatory authorities (including overseas regulators). The impact of publication on investigation subjects is not a specified factor that the FCA will consider when applying its public interest framework. 
    The FCA is proposing that firms will be given no more than one business day's notice before any announcement is made. The FCA reserves the right to give no notice at all if it considers that it needs to announce, or give an update on, an investigation urgently. Firms will therefore have very little opportunity to dispute any publication decision, assess the impact that publication will have on its business, engage with stakeholders or prepare its own PR response. Thankfully, for privacy reasons, the FCA has stopped short of applying the proposals to investigations where the subject is an individual - such cases will remain confidential (other than in exceptional cases). 
    Given the serious repercussions that this policy will have on affected firms if it is implemented, "You wanna make an omelette, you gotta break some eggs" would probably have been a more apt Fight Club reference for the FCA to have used.
    The new approach is the subject of formal consultation, with responses due by 16 April 2024.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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