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23 January 2025
Last year, financial services firms were left reeling by the Financial Conduct Authority (FCA)'s transparency proposals (aka "naming and shaming" firms that are under investigation). Since then, the proposals have been amended by way of a second consultation. In today’s episode, we explain what’s changed, what’s been clarified, and what all this could mean for regulated firms and individuals.
In the latest episode of our continuing mini-series on financial services regulation, we explain the latest developments on the FCA’s controversial proposals on transparency and public announcements during investigations.
Host Nathan Willmott is joined by Ashurst colleagues Eleanor Robinson and Adam Jamieson to summarise what has changed in the draft transparency proposals; the most important being the change to the public interest test (which now states that the FCA must consider the impact on the firm of any announcement as part of the public interest test); and the increased period of notice that firms can expect of publication (from 1 business day to 10) . They also probe some of the case study examples provided by the FCA.
While the FCA anticipates there will be very few cases each year, Adam points out that this policy “might be enforced for decades and [FCA] strategy will change, cases will change, personnel at the FCA will change – all factors that could influence the number of investigations and therefore the impact of this type of policy”. And irrespective of how many firms are affected, Adam adds that “if you are one of the firms who does get named … it’s going to be your business [and reputation] that gets harmed”.
As well as discussing the implications for firms under investigation and what the new case studies do (and don’t) clarify, our expert panel reflects on the political heat this policy has generated and whether that could yet scupper the proposals before they comes into being. Following the current consultation period, the FCA intends to make a decision by the end of March 2025.
To hear this (and to subscribe to future episodes in season two of our enforcement mini-series) search for “Ashurst Legal Outlook” on Apple Podcasts, Spotify, or your preferred podcast player. And to find out more about the full range of Ashurst podcasts, visit ashurst.com/podcasts.
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. Listeners should take legal advice before applying it to specific issues or transactions.
Nathan:
Hello and welcome to the Ashurst Regulatory Enforcement Podcast. I'm Nathan Willmott and I'm joined here in the Fruit and Wool Exchange in London by two fellow specialists in financial services regulation. My colleagues Adam Jamieson and Eleanor Robinson.
Eleanor:
Hi Nathan.
Adam:
Hi Nathan.
Nathan:
For those of you joining us on screen, this is our first vodcast and for those of you listening via the podcast platform, we hopefully sound just the same. Now thanks very much Adam and Eleanor for joining me today. Our topic is one that has triggered a big reaction from industry over the last 10 months. That is the FCA's amended proposals on transparency, or as they would rather we didn't refer to them, the naming and shaming proposals.
You may recall that we first talked about this topic back in May after Consultation 24/2 was first published and the shockwaves were still rippling around regulated firms. Since then, the discussion has continued. The House of Lords Financial Services Regulation Committee has entered its own inquiry and has taken evidence from the FCA's chief executive and chair and the FCA since then has published its revised proposals. And I'm going to kick off with you, Eleanor. Give us at a high level, what are the new proposals?
Eleanor:
Sure. So first of all, the FCA has changed its public interest test. In the first way it has proposed to add that the impact of the announcement is going to be considered on the relevant firm itself, which is really key and really significant. There is also - they've added in a criteria about the fact that if the announcement seriously might disrupt public confidence, then that would also be considered by the FCA when it's thinking about whether to announce.
Secondly, with that, the FCA is also going to give firms a copy of the draft announcement 10 business days before any announcement will be made, which gives firms an opportunity to consider their response and the firms would also get two business days once the FCA has decided. So there is a little bit more leeway procedurally there. The FCA has also stated that it won't be proactively announcing those firms already under investigation.
And then added to that the consultation has got more colour in the sense of more case studies for us to look at and work out how this would work in practice. The FCA has also talked about how there'd be some timing implications in terms of the announcement, the announcement wouldn't necessarily be made on day one. There could be a bit of a period of thought, maybe three months. And lastly, the FCA has mentioned that it would consider doing anonymous announcements as well as named announcements. So that's it in a nutshell.
Nathan:
Great, thank you. And they've placed quite a lot of reliance on the fact that they do so few cases each year into regulated firms that this is only going to be, they talk about one or two or a few cases a year. Adam, what do you make of that?
Adam:
Well, I mean they obviously want to try and give an impression that the impact of this is going to be quite minimal. And it's quite interesting. I mean there's a couple of issues. One is how reliable are the statistics because they say it's typical for them only to do 10 to 12 investigations a year, but that may have been typical in the last 12 months while they've been trying to balance their portfolio and do fewer cases and speed things up. But historically, I don't think that has been typical. And in the stats they gave to the House of Lords Committee, they noted that they did 33 cases into regulated and enlisted firms in 21-22, so it was only a couple of years ago and a much bigger number.
So how powerful that point is when we are looking at a policy that might be enforced for decades and strategy will change, cases will change, personnel at the FCA will change, all factors that could influence the number of investigations and therefore the impact of this type of policy. I am sceptical as to how much industry are going to look at that and feel reassured. But I guess it's also the point that if you are one of the firms who does get named or announced, even if it's very few that year, it's not going to make you feel a lot better to know that actually out of the full population of regulated firms, there's only a few of you that are being impacted because it's going to be your business that gets harmed by and your reputation.
Eleanor:
Well, that's the irony, isn't it? Is that by making it clear that only a small number of firms will be announced, that does put so much more impact on those firms that are announced. And also because the FCA made it clear that they want to try and change their statistics around discontinuing investigations. They want to continue in about 66% of cases. So that does mean that if you are announced, that's also very impactful knowing that the FCA are more than likely to go ahead with an outcome against you.
Nathan:
It does strike me as a bit of reverse engineering that one of the arguments as to why this was unfair in the first place was that two thirds of cases were discontinued against firms. And as well as shifting around the proposals, they've also said, well, that number's already come down to 56% and they have a target of it reducing to a third of cases, which goes to a lot of what they've talked about in terms of case selection. But in terms of these new proposals, we have more time to consider the proposals in terms of announcements before they go out, chance to make representations. We have the change that it's not going to be the back book of cases that they announced, so they only do them incrementally.
Adam:
I mean that would've been quite extraordinary if they'd have gone forward with it on that basis and how that would've worked in practice as to whether they did a mass publication of all the firms that they considered met that test and were under enforcement. I mean, it would've been-
Nathan:
Absolutely.
Adam:
It would've been crazy in the press, I think.
Nathan:
Yeah, and the original proposals were that they were going to do that, and I think that they spoke as part of their roadshow about the fact that they'd reviewed the existing caseload and they thought that two out of three cases actually met that public interest test for publication. But probably the most important aspect is this introduction into the public interest test of the impact on the firm.
And the wording that they use in paragraph 4.10 of the revised consultation paper is a factor mitigating against publication or naming is that publication would be likely to have a severe impact on the firm or on third parties in particular, the firm's current or former directors and/or employees. The firm's size may be particularly relevant with the impact on smaller firms, potentially greater. I'm interested in your take on the way that they've changed these proposals.
Adam:
Well, I think that this was such a contentious point with the first consultation that if they decided they were going to not drop the proposals and go forward with something new, it was probably the least they could do in terms of giving something to industry to say, well, look, we understand that this could have an impact on you and we'll take it into account. So I'm not surprised that in the new consultation they've included something on it. I think it's quite worrying for larger firms and firms as part of international groups who might actually not be that big in London, that they have made this point about proportionality, the argument that, well, if you're a bigger firm, the impact on you will be less severe because you'll be able to absorb it.
It will almost be expected that there might be enforcement investigations into you from time to time, and therefore the impact on you will be lessened. And in some cases from say a prudential perspective, that might be true, less so for probably the individuals or the directors at those firms who still will be as identifiable as directors of a smaller firm. But I think that's going to be quite troubling for those firms because it's going to be very difficult for them to raise these types of arguments. So unless there's going to be a really obvious significant market disruption or there's another regulator involved or another good reason why it can't be published, I think they've probably got to be looking at these proposals and think, well, there's a very good chance that if we were investigated then our matter would be published.
Eleanor:
Then many large firms might be announcing themselves anyway in their accounts. And I think that's probably what the FCA has got in mind in that. And I can see with the smaller firm argument, there are probably stronger arguments about firm viability if you are that much smaller. I can just see how that would be compelling. The FCA doesn't want to, it's very contrary to its growth and secondary objective to achieve growth and competitiveness to have lots of firms fall over as a result of this policy. But I guess one thing that does stem from that then is an element of cherry-picking, or it may feel that two firms might have both committed the same misconduct, but one of them might end up being announced, the other one doesn't. And so the larger firm might feel unfairly pursued. I understand that.
Nathan:
That's right. And I think if I were reframing that I would change it to publishing considering the level of impact on the firm rather than having a threshold requirement in terms of it being likely to have a severe impact on the firm, which I think is quite a high threshold.
Adam:
Whereas currently they just look at potential prejudice under the sort of exceptional circumstances test.
Nathan:
Exactly.
Eleanor:
Yeah, I can see that severe is very high, particularly for a large firm.
Nathan:
And the document also contains four case studies of cases that have already been through the system and considering the reasons for publishing in those cases, I wonder if you could give me your thoughts on whether they're very persuasive in terms of the reasons behind publication in those cases being a positive step.
Eleanor:
I think those case studies draw out some helpful points on the FCA's thinking or what that thinking would've been. They're obviously done in hindsight though, so it's kind of slightly academic in the sense that once they've come out, it's a slightly different reasoning.
Just looking at say the British Steel Pension Scheme case. Obviously with those cases there are a number of smaller firms so involved. And so I do wonder in reality whether the FCA would've published. That is for the reasons we've just talked about. So that's one thing that does strike me. And I think that say potentially with the outcome against the PWC that might've fallen into the exceptional circumstances bracket. I'm not sure I'm completely convinced that that was one that had to have been through the new proposals.
Adam:
They take a very narrow view of the exceptional circumstances, I think throughout as a theme in the paper, and perhaps it's somewhat sort of defensive in terms of why they felt the need to try and introduce a new policy because they felt handcuffed by the way in which the current test was formulated and applied in practice. But we see this in the case studies as well. I think in the pensions case, they say something along the lines of, well, there's nothing exceptional about us doing an enforcement investigation in relation to pensions advice.
But I mean, that's not my reading of the current exceptional circumstances case because they talk about exceptional circumstances being where there might be press speculation or rumour or public concern. And some of these types of widespread issues I would say do have those types of qualities to them such that they could have thought pretty seriously about using the exceptional circumstances test they've already got.
Eleanor:
And I agree with you on that, Adam. I think that's a really good point. It's just that whole thing about the "exceptional circumstances" test; in the sense that if the FCA published all of these cases that it proposes, you are going to get to so many more numbers. And then all of a sudden if they're publishing half of their caseload, then it doesn't feel "exceptional" anymore. And I think that is what they're trying to target here, that they want to move from publishing rarely to sometimes.
Adam:
Given it was so few, if they're talking about numbers of 10 and 12 and they're thinking we're going to publish, I think one or two at the moment they say, and they're thinking about doubling it, say to two or four. If that had have happened in practice under the exceptional circumstances test if they thought there was good reason, applying the factors, which if you take out the exceptional aspect are pretty similar, the factors to what they've got now and what they're proposing, would there have been widespread criticism of that? I'm not sure. It could have incrementally changed the approach. Maybe they would've been susceptible to a judicial review on those types of decisions or cases, but not necessarily.
Eleanor:
I would also mention on the crypto case that was mentioned, one of the thoughts behind a potential publication was to give some kind of education, particularly about the use of the E-money directive, but actually the proposed announcement given is very high level and doesn't provide that much by way of education. So you do wonder whether that would be an example of one that could have been anonymously announced.
Adam:
I mean, you look at the wording of what they're thinking they're going to announce. I think most people would be surprised by how high level it is. I think people were envisaging there would be more detail given not least, to achieve a benefit, particularly when they're talking about educational benefits to other firms, of publicising, that there would've needed to have been more detail.
Nathan:
I think that's absolutely right. I mean, when I look at the reasons they put forward for these proposals, none of them add up in my mind. The need to give more information to MPs. The level of information they're proposing is not going to satisfy MPs. They're only going to be besieged with more questions from MPs, from the media. The other reasons they put forward, including in relation to the case studies, just they don't really ring true. And beyond the idea that the FCA wants to do this in order to be able to show it's an active regulator, it is for me, the argument isn't there.
Eleanor:
I think particularly where the consumer protection one's concerned, because in this part two, the FCA has put particular emphasis on this idea of telling customers to give them a chance to do something to mitigate or reduce the harm. But this troubles me as well because it seems preemptive because if customers start withdrawing their business from a firm preemptively, that firm could be, its own viability could be in trouble.
So that also seems... And the other one is where the FCA said, if people knew we were investigating, they may not pursue their own claim or may not go to the fore. And I was thinking, well, is that something that you want to push customers to do? Because if the FCA does not continue its investigation, then the person hasn't made a claim. So yeah, I think some of that's quite troubling.
Nathan:
Yeah. I'm interested in your views as to whether you feel the FCA has gone far enough. They've obviously expended a huge amount of political capital on these proposals. They've indicated that they're very keen to push them through and that probably the chance to abandon them has passed now and that they've gone down the route of watering them down in order to try and satisfy the industry.
The city minister Tulip Siddiq has said in early December, she was not sure it satisfied everyone who was very unhappy when it was first announced. She said, I don't think this is the end of the matter. It does feel like there is still a lot of discontent from the sector and that the FCA and other independent regulators really need to be held to account to parliament and to government. I'm interested in your views in terms of what happens next and is this something that will move forward into formal FCA policy?
Eleanor:
Well, I think it will go ahead. I think the FCA has expended so much political capital I think it will. But I think that when the proposals are finalised and they become in practice, I don't reckon it's going to have a massive impact. And what I mean is I think they'll think very carefully about who they announce, and they'll probably use a situation which is more of a proactive announcement or reactive announcement in response. So I think they're going to tread very carefully, but I think that they will go ahead.
Adam:
I think it won't go ahead. I think that they're weak on the UK competitiveness argument. They've accepted really within the paper that they will be an outlier in terms of whether other international regulators do this. Having in the first paper noted that the Singapore regulator does this, and therefore we're not an outlier. I think people know that we would be an outlier. We will potentially therefore be seen as a more aggressive regulatory environment for financial services firms to do business in.
Particularly large firms and international groups, thinking about where they're going to expand operations and all of the dialogue from both industry and politicians around the secondary growth objective has been really strong through this year. And I just don't think the benefits stack up versus anonymous publications that could give a lot more detail, be a lot more educational when you then factor in the potentially damaging impact it could have on both individual firms and general perception of the UK market internationally.
Eleanor:
Just putting the other side though, I think that the FCA's arguments there would be we are trying to make regulation better. We're trying to protect consumers. We're trying to stop there being massive scams. So the better regulated everybody is, the more competitive our markets are.
So I think there are contrary arguments to that. The FCA would say, well, no one else has the same mandate that we do. And you could argue that it brings them more on a par with the FRC. The Financial Reporting Council or the, I think it's Ofcom also publishes, and SFO does publish a certain amount of its caseload. So I would slightly argue, is it going to be such a very aggressive outlier?
Adam:
Casting vote, Nathan?
Nathan:
Well, I'm going to preserve my ability to sit on the fence. In terms of next steps, the House of Lords Financial Services Regulation Committee will publish its report. There's then the period for consultation of these revised proposals ends on the 17th of February. And the FCA has said it will make a decision in relation to these proposals by the end of March in the first quarter of 2025. And so there won't be that much longer for this debate to go on.
And we will find out whether the FCA has that - both political and regulatory - will to push this through and how they'll implement it in practice if they do. And I'm afraid that's all we've got time for in this edition of the Ashurst Regulatory Enforcement Podcast. Thanks very much indeed to you, Adam, and to you Eleanor, for sharing your views on these controversial topics. And thanks very much to you for joining us for this podcast. As always, we're very, very pleased to receive your own views. So do give us a call, email. We'd very much like to know what you have to say on this important topic. Thank you very much.
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