Innocent Until Named Guilty? Exploring the FCA's New Proposal to Approaching Enforcement Investigations
Introduction
The Financial Conduct Authority (‘FCA’) has outlined a new proposal in a recent Consultation Paper as to how it will approach future enforcement investigations into regulated firms. The proposal gives the FCA the power to publicly name firms under an enforcement investigation when it is in the 'public interest', even if the investigation has just commenced or is ongoing. This marks a significant departure from current practice, where the FCA only announces the firm’s name once the investigation has concluded or in exceptional circumstances mid-investigation. The FCA has lauded the proposal for improving transparency and deterring breaches of FCA rules. The market has criticised the proposal for damaging the principle of 'innocent until proven guilty' for firms under investigation and launched numerous attacks against the proposal in practice.
Why is the proposal being introduced?
The FCA believes the new proposal will improve transparency surrounding the enforcement investigation process. Therese Chambers, the joint executive director of enforcement and market oversight at the FCA, highlighted the need for the FCA to be 'more transparent’ when they open and close cases. She further highlighted that under a more transparent regime it 'becomes clearer to those regulated about what behaviour is tolerated and what behaviour breaches the FCA rules'. This follows from the fact that if an enforcement investigation is announced along with the name of the firm under investigation, the reason for the FCA's enforcement investigation will also be provided. As the FCA's current approach does not publicly announce investigations until an outcome has been reached, it is arguably not always clear for firms as to what type of behaviour the FCA will or will not tolerate. The proposal for a more transparent regime may further seek to address a criticism launched against the FCA regarding the average time it takes regulatory and civil investigation cases to reach a conclusion, which currently sits at 33 months.
The new regime is also introduced to deter those regulated by the FCA from breaching the FCA rules. Steve Smart, the other joint executive director of enforcement and market oversight at the FCA, argues that the proposal will lead to more 'targeted and transparent enforcement, we [FCA] will reduce harm and deter others'. As explored below, the announcement of an enforcement investigation alone can lead to various negative consequences for a firm. The thought of facing these consequences may deter firms from breaching the FCA rules and encourage a more cautious and stricter approach. Furthermore, the proposal may contribute towards the FCA gaining a more proactive image in the regulatory space, which in turn can create an additional deterrent for firms not to break the FCA rules. It has been argued that these deterrents are not embedded in the current practice, as investigations are only announced to the market once the investigation has been concluded.
When will the FCA name firms under the new proposal?
Under the new proposal, the FCA will not automatically publish the name of a firm under investigation. Instead, it will look to whether publishing the name of the firm is in the public interest. When considering if naming a firm would be in the public interest, a non-exhaustive list of factors will be considered. The FCA will look into whether the announcement would:
1. enable the protection of customer, consumer or investor interests;
2. help its investigation, such as inviting witnesses or whistle-blowers to come forward;
3. addresses issue of public concern or speculation;
4. provide reassurance that the FCA is taking appropriate action;
5. deter future breaches of FCA rules;
6. advance one or more of the statutory objectives of the FCA.
The FCA will also look at a list of factors which indicate that publishing the name of a firm is not in the public interest. Under the proposal, it will not be in the public interest if it has a negative impact on:
1. the conduct of the investigation or any other ongoing investigation by a regulator;
2. the interests of consumers;
3. the stability of the UK financial system or the FCA's ability to carry out statutory functions.
It is clear from the framework laid out above that the public interest test presents a broad range of factors which can encourage the FCA to publicly name a firm it is investigating. Whilst this framework is arguably necessary to achieve the FCA's aims of increasing transparency and creating a deterrent, this broad approach must be considered against the background of the proposal's wider impact on the market.
How has the market reacted to the proposal?
The market has been quick to either reject the proposal in its entirety or call for the FCA to amend the proposal to provide greater protection for firms. Miles Celic, chief executive of TheCityUK, observed that 'the industry is opposed to the FCA’s proposal to name and shame financial services firms before the conclusion of enforcement investigations'. There are three leading criticisms of the FCA's proposal, which are examined below.
(i) Negative Impact on the Firms named under Investigation
The first criticism focuses on the potential consequences that will follow for a firm that is publicly named as under investigation under the FCA. This is seen as particularly problematic if the FCA decides not to take regulatory, criminal or civil action against the firm under investigation. Currently, approximately 65 per cent of the FCA investigations close without action.
Following an announcement, a firm's reputation could be damaged. James Alleyne, a legal director in financial services regulatory team at Kingsley Napley, voices this concern, noting that "the proposed new approach has the potential to do enormous reputational damage to firms that may have done nothing wrong". This reputational damage could lead to financial loss, halt future growth and alarm a firm's consumers as well as current and potential investors. For firms which have shares listed on an exchange, a public announcement could have a drastic impact on share price and result in a loss of firm value. Furthermore, a firm that is publicly announced to be under investigation may have to divert more resources into protecting its image and position in the market. This would then drive-up costs for a firm during the investigation when compared to the current regime, even when that firm is not ultimately sanctioned by the FCA.
Despite these potential adverse consequences for a firm, under the proposal firms will receive no more than one business days notice before an announcement. Bradley Rice, a financial services partner at Ashurst, highlights that "firms will therefore have very little opportunity to dispute any publication decision, assess the impact that publication will have on its business, engage with its stakeholders or prepare its own PR response".
If an enforcement investigation is announced and concludes without a sanction, a firm will have no form of proper redress against the FCA for any negative commercial consequences suffered from the announcement. This is because in the UK the FCA is immune from liability in damages, unless found to have acted in bad faith or breached human rights. Thus, those arguing that that the proposal could lead to innocent firms suffering unfair financial loss emphasise the lack of a recovery mechanism for such firms seeking redress.
The FCA has recognised these concerns and noted that the announcement of an investigation into a firm does not automatically mean that the firm has engaged in wrongdoing. Yet, the market may not be so forgiving. Alexandra Roberts, head of regulatory policy and compliance at Pimfa, says that 'the announcement of an investigation will lead many to believe that there is no smoke without fire and so guilt on the part of the firm will be assumed immediately'.
(ii) Decreasing the Competitiveness of the UK's Financial Services Industry
The second criticism focuses on the proposal's effect on the overall competitiveness of the UK's financial services industry. It finds that the proposal may discourage firms from conducting business in the UK, as firms may be wary of the potential implications of being 'named and shamed'. These firms may then choose to conduct their services away from London and instead choose other jurisdictions that do not adopt such approach, such as Germany, France or the US.
The UK's Chancellor, Jeremy Hunt, has voiced concern that the proposal could damage the international competitiveness of the UK's finance industry and hoped that the FCA will 're-look at their decision'. This concern is also shared by Alexandra Roberts, who 'cannot understand how these proposals support the FCA’s role of promoting UK competitiveness and economic growth'.
(iii) The Application of the Public Interest in Practice
The third criticism looks to how the public interest test will be applied in practice. As the FCA will apply the public interest test on a case-by-case basis, it has been argued that under the proposed public interest framework the FCA may apply the policy in an inconsistent or unfair manner. An inconsistent or unfair application of the public interest test could lead to some firms being more vulnerable to being publicly announced as under investigation when compared to other firms. For example, when looking to whether naming a firm would 'address issue of public concern or speculation', it has been argued that this factor could result in predominantly larger firms falling in the FCA's cross hairs. Furthermore, 'providing reassurance that it is taking appropriate action' may encourage the FCA to focus on more high-profile firms when deciding whether to publicly name a firm under investigation. This is noted by Simon Morris, a partner in financial markets at CMS, who finds that under the proposal there may be 'a big temptation for it to announce big and recognisable names'.
Conclusion: Pushing on with the Proposal?
The FCA has consulted with the market on the proposal and recently closed its consultation at the end of April. In the upcoming months the FCA will publicise its final decision on the approach it will take when publicly naming firms in enforcement investigations. Whatever form the proposal takes, it is clear that the FCA's push towards achieving greater transparency and deterring breaches of its rule are both legitimate aims for a regulator to take. Further, it addresses ongoing criticisms of the current regime. However, the market's criticisms surrounding the proposal should not be dismissed and the potential implications of publicly naming an innocent firm should be considered by the FCA. It remains to be seen how a public interest framework will be applied in practice. Yet, the FCA should seek to strike a balance of protecting consumers and investors through active regulation with the need to protect the firms it regulates from facing disproportionate consequences.
By
Edward Berry