More transparency? Or naming and shaming? The FCA’s proposed new approach to enforcement

Fatima Jama explores the FCA’s proposed new approach to enforcement and increasing the transparency of investigations.

Introduction

The consultation period for Consultation Paper 24/2: Our Enforcement Guide and publicising enforcement investigations – a new approach (CP24/2) (the “Consultation”) concluded on 30 April 2024. This Consultation proposes a new method for the UK’s financial regulator, the Financial Conduct Authority (the “FCA”), to publicly disclose the initiation and advancement of investigations. Additionally, it suggests simplifications to the FCA’s Enforcement Guide (EG).

Current mechanism in place

At present, where the FCA is investigating any matter, under EG 6.1.3, the FCA is permitted, in exceptional circumstances, to make a public announcement that it is doing so if it considers such an announcement is desirable to:

(1) maintain public confidence in the financial system or the market; or
(2) protect consumers or investors; or
(3) prevent widespread malpractice; or
(4) help the investigation itself, for example by bringing forward witnesses; or
(5) maintain the smooth operation of the market.

The FCA does not normally publish details of the information found or conclusions reached during its investigations. In many cases, statutory restrictions on the disclosure of information obtained by the FCA in the course of exercising its functions are likely to prevent publication (see section 348 of the Financial Services and Markets Act). In exceptional circumstances, and where it is not prevented from doing so, the FCA may publish details.

The proposed changes

The FCA is proposing to actively disclose additional details about its enforcement investigations, including their initiation and ongoing status. This comes as the FCA has long received criticism for the length of its investigations and the number of cases opened despite the high staff turnover.

In a speech published by the FCA and given by Therese Chambers, Joint Executive Director of Enforcement and Market Oversight, she explained “We want to increase transparency around this [enforcement] work, quicken our pace and strengthen our focus”.

The FCA also plans to reveal the identity of the investigated party if deemed in the public interest and not legally restricted. These adjustments will have a retrospective effect, applying to ongoing investigations.

The proposals by the FCA involve publicly announcing and updating enforcement investigations, with specific details outlined in the revised EG 4.1. It is crucial to recognise that this is not a proposed change to existing regulations but rather a shift in the FCA’s approach, as it already possesses the authority to make such announcements (subject to other legal considerations). The FCA anticipates this increased transparency will bolster public trust and confidence, communicate clear messages to the market, act as a deterrent, and reinforce the FCA’s accountability. Among these outcomes, accountability is particularly noteworthy, given the heightened scrutiny the UK’s financial regulator faces from Parliament and consumer groups.

The revised EG states that it will usually be in the public interest when the announcement will:

(1) facilitate the protection of the interests of potentially affected customers, or consumers or investors more generally;
(2) assist the FCA’s investigation, for example by encouraging potential witnesses or whistleblowers to come forward;
(3) address public concern or speculation, including by correcting information already in the public domain;
(4) provide reassurance that the FCA is taking appropriate action;
(5) deter future non-compliance with the FCA’s rules or other requirements or prohibitions that the FCA is responsible for enforcing; or
(6) otherwise advance one or more of the FCA’s statutory objectives, including protecting and enhancing the integrity of the UK financial system.

The proposal by the FCA will be relevant to firms under the regulatory purview of the FCA, which could potentially face enforcement investigation. This includes both authorised and registered firms engaging in designated activities overseen by the FCA, along with the individuals employed within these firms.

The revised EG specifies that typically, the FCA will not publicly disclose investigations involving named individuals, in compliance with data protection laws and other relevant legal limitations. However, if the FCA deems it beneficial to the public interest, considering the aforementioned factors and guidance, it reserves the right to announce such investigations or provide updates, provided it can do so without violating any legal constraints.

Why is the FCA proposing these changes?

In the Consultation, the FCA acknowledged that by the time an investigation leads to tangible outcomes like censures or penalties, the usefulness of that information for consumers and the industry is often diminished. Additionally, it arrives too late to incentivise witnesses and whistleblowers to contribute to relevant enforcement and supervisory efforts.

Alongside this, according to the FCA, the effectiveness of enforcement as a deterrent and educational tool diminishes when it is necessary to wait until the conclusion of a typically lengthy investigation to disclose its findings. Consequently, the FCA aims to enhance transparency regarding its enforcement activities, with the intention of fostering educational benefits and deterrent effects at an earlier stage in the process.

In the Consultation, the FCA pointedly excluded mention of potential harm to the firm as one of the factors that might discourage disclosure. Instead, the Consultation emphasises that while all pertinent facts and circumstances will be evaluated in weighing the public interest, the FCA prioritises other factors that align with advancing its statutory objectives.

Dissenting voices

The House of Lords Financial Services Regulation Committee (the “Committee”) issued a  letter to Nikhil Rathi, the Chief Executive of the FCA on 22 April 2024, concerning the Consultation about its strategy for disclosing enforcement decisions.

In its letter, amongst other things, the Committee raised specific concerns that the FCA’s proposals risk having a disproportionate effect on firms named in investigations, where those firms are subsequently cleared of any wrongdoing, particularly given the length of many investigations. This new proposal also risks the overall integrity of the market, including through possible unwarranted impacts on share prices. Individuals, whether named or not, may have their reputations unfairly tarnished through association with a publicised investigation. The Committee also notes that the severity of these impacts will depend on the length of time before a firm or individual is exonerated, where that is the outcome.

The FCA’s response

In its reply to the Committee on 25 April 2024, the FCA highlighted a variety of UK authorities that routinely disclose the commencement of investigations. These include the Office of Communications, the Competition and Markets Authority, the Financial Reporting Council, the Office of Gas and Electricity Markets, the Water Services Regulation Authority, and the Serious Fraud Office. The FCA shares concurrent or adjacent responsibilities with a considerable portion of the UK agencies mentioned. These agencies oversee enforcement in vital sectors crucial to UK consumers and the competitiveness of the UK economy. And the FCA asserts that there is no indication that its disclosure practices compromise the competitiveness of its regulated sectors.

Considering the extensive array of publicised investigations, the FCA maintains that implementing a public interest test for disclosure does not compromise the foundational legal principle of “innocent until proven guilty.” Furthermore, the FCA emphasised that when announcing investigations, it employs factual and balanced language. Consequently, it does not view this approach as constituting “naming and shaming.”

Market sensitive information

In the Consultation, the FCA acknowledged the possibility of instances where its announcements may entail the disclosure of market sensitive information. Such information could pertain to the subject of the investigation or other parties associated with it.

“If an announcement or update is potentially market sensitive, we will generally inform the subject of the announcement or update after markets have closed, publishing on our website at 7.00am and via an FCA-approved primary information provider. If the subject is a listed company in another jurisdiction, and the announcement or update is potentially market sensitive, we will, where possible, try to avoid publication during stock exchange hours in that jurisdiction.”

The FCA notes in its reply to the Committee that these proposed changes would not impact a large number of firms. In 2023/2024, the FCA initiated investigations into four listed firms. Among them, the FCA observed that three firms publicly disclosed the existence of the investigation. It is worth noting that companies listed in the UK, along with other issuers of shares publicly traded in the UK (for example on AIM) or on an EU regulated market or trading venue, are generally obligated to disclose FCA investigations promptly if the public knowledge of such investigations could significantly impact their share prices. Additionally, the FCA commenced 11 other investigations into regulated firms. Amongst these, one investigation was publicly disclosed by the firm itself, and another was made public by the FCA. See London Metal Exchange plc.

Between 2021 and 2024, the FCA recognised seven occasions when a firm made a disclosure related to FCA investigation(s), either directly or indirectly, to the UK market. The FCA excluded two of these instances because the relevant shares were suspended when the announcement was made. Among the remaining five instances, on all but one occasion, the relevant firm’s share price did not experience a negative movement of more than 1% on the day of the announcement. See Nationwide Building Society; Revolution Beauty Group PLC; Lloyds Banking Group PLC and Barclays.

The sole exception was Vanquis Banking Group (formerly known as Provident Financial). On 15 March 2021, its share price experienced a significant decline of 27.7%. However, the FCA attributed this drop to the company’s announcement regarding redress payments impacting the solvency of its consumer credit division and media commentary, rather than any announcements related to FCA activity.

It remains uncertain how the FCA will justify the disclosure of market sensitive information. According to the FCA’s Best Practice Note – Identifying, controlling and disclosing inside information: “You can only disclose inside information where it is necessary to do so in the normal exercise of employment, a profession or duties”. This is in accordance with the Market Abuse Regulations Article 10 and Article 14 and Grøngaard and Bang (Case C-384/02) [2005] ECR I-9939. Any disclosure outside of these circumstances is considered an offence under MAR, as outlined in Primary Market Bulletin 25. 

Conclusion

While some firms may perceive the increased transparency positively, many have expressed concerns about potential reputational repercussions from such announcements. Additionally, there is ambiguity regarding the timing of updates from the FCA on investigations, which could lead to a conflict between the public interest test and the firms’ need for timely market information, especially if the investigation’s scope narrows significantly after initial inquiries. Some have suggested the FCA should provide regular updates to overcome this hurdle, as cases often extend for years rather than months. This commitment would not only enhance transparency but also reinforce the FCA’s accountability. Publicly announcing investigations may also place further pressure on firms to resolve cases expeditiously.

The FCA has been under significant pressure for some time to accelerate its actions and response across various financial sectors. Criticism has been levelled at the FCA for the prolonged duration of enforcement cases. On average, of FCA investigations that concluded in 2023/2024, those resulting in enforcement action took approximately 41 months to settle, initiate civil or criminal proceedings, or issue a Warning Notice. Contested investigations took even longer, averaging 56 months to reach resolution. Furthermore, delays within the justice system can contribute to the length of FCA cases. One example involves the FCA issuing a Decision Notice in May 2023, for a regulatory matter, yet the case will not be heard in the Upper Tribunal until March 2025. Similarly, in a criminal case where a charging decision was made in May 2023, the trial will not commence until January 2026.

These delays have diminished public trust and confidence in the UK’s financial regulator. This new approach proposed in the revised EG may shift public perception slightly, but it does not address the root cause of the prolonged duration of enforcement cases in the FCA.

With the consultation period closed, firms and the financial services sector will undoubtedly await the FCA’s feedback and policy statement with anticipation. While the FCA has not specified a timeline for releasing final guidance, firms should be aware that the FCA will start to apply its new approach to investigation publicity to all FCA enforcement investigations from the date the new policy comes into force. This will include new enforcement investigations and ongoing investigations, where the FCA will assess that publishing an announcement or update is in the public interest.

Fatima joined Mountford Chambers in October 2023. As a second six pupil, she now accepts instructions in all criminal matters and looks forward to developing her practice. 

Prior to commencing pupillage, Fatima worked at the Financial Conduct Authority for over 5 years primarily in the Enforcement and Market Oversight Division. During her time in Enforcement, Fatima worked in the Wholesale 2 department where she assisted on investigations and bringing disciplinary action, civil cases and criminal prosecutions on behalf of the FCA with a focus on market misconduct. 

Following her time in Enforcement, Fatima was promoted to a position in the Primary Market Oversight department, Market Integrity Unit where she was responsible for identifying, triaging and developing cases involving potential breaches of the UK listing regime. Fatima was also seconded to the Critical Guidance and Primary Market Monitoring team for a brief period where she handled external and internal queries regarding highly sensitive information and inside information matters. She was also responsible for surveillance of the primary markets and identifying and responding to “real-time” issues affecting listed companies with respect to a range of disclosure obligations, including those under the Market Abuse Regulations. 

Fatima is a member of the Financial Services Lawyers Association.