UK FCA proposals to publicly announce investigations could be detrimental to firms placed into enforcement


With every new director of enforcement and market oversight at the Financial Conduct Authority (FCA), there is a step change in the way the regulator approaches enforcement cases.

Under the FCA's former incumbent in the role, the threshold for opening enforcement cases was lowered, leading to an increase in its enforcement caseload and an increase in the length of time for an investigation to be concluded.

Improving 'efficiency and pace'

Under the purview of the joint directors of enforcement and market oversight, the FCA, in acknowledging the importance of deterrence, said it needs to speed up its investigation processes. It is proposing to drive its accountability by publicly announcing when it has opened an enforcement investigation and by providing updates during the investigation.

The FCA said that by "shining a light on the efficiency and pace of [its] investigations", it will enhance public confidence by showing that the FCA is "on the case" and will resolve enforcement cases more quickly and maximise their deterrent effect.

The proposed changes are contained within the consultation paper CP24/2: Our Enforcement Guide and publicising enforcement investigations — a new approach. The key changes are:

  • When an enforcement investigation is opened, the FCA will publicly announce this (if it is in the public interest to do so) and publish updates on the investigation.
  • The subject of the investigation will be given "appropriate notice" of the announcement, which normally means no more than one business day's notice and, in certain circumstances, no notice at all.
  • Several revisions will be made to the Enforcement Guide (EG) of the FCA Handbook, including deleting material no longer reflective of the FCA's approach.

The FCA claims the purpose of the changes is: (a) to let the public know that the FCA is working on the matter; (b) to educate firms and the market regarding the types of misconduct that the FCA will investigate and therefore help them learn lessons from this and raise standards; and (c) to ensure more accountability on the efficiency and pace of the FCA's investigations. It is also hoped that by publishing details of enforcement investigations, witnesses and whistleblowers will be encouraged to come forward.

Further detriment for firms under investigation?

It is to be welcomed that the FCA appears to recognise that its existing enforcement process of taking many years to conclude an investigation is ineffective, not to mention unfair to the subjects under investigation. The proposals to address this are, however, likely to cause further detriment to firms placed into enforcement.

The FCA publishes very little information about enforcement investigations and the subjects under investigation are usually expected to keep this confidential. This can be different for listed firms which may be required to announce to the market in accordance with obligations under UK MAR, the Listing Rules and AIM Rules for Companies.

The FCA is now proposing that, when an enforcement investigation is opened, it will automatically announce the existence of the investigation and include in its announcement: (a) the name of the firm under investigation (although it will not generally do so for individuals due to other legal considerations); (b) the industry sector and relevant regulatory or legal provisions; and (c) a summary of the suspected breach, failing or other misconduct under investigation.

The FCA proposes to include a statement that opening an investigation does not imply that there has been any misconduct. A disclaimer of this kind, however, is all but lost in the context of a statement of investigation and will not stop the negative reputational impact that follows once an enforcement investigation is made public as can be seen in the listed sector.

In addition, this statement might not be included if the FCA considers it inappropriate. For example, if supervisory intervention has already been taken publicly. The FCA has stated that it will announce the closure of investigations which do not lead to further action. Such transparency will not mitigate the reputational damage caused by the initial disclosure of the investigation.

The FCA also proposes to provide updates on its investigations to increase its effectiveness and accountability. There is little guidance on the level of detail that might be contained in an update and unclear how this will provide the necessary accountability or advance the
FCA's objectives.

As part of CP24/2, the FCA has also proposed revisions to EG as it is outdated and does not reflect the FCA's approach to enforcement cases. In general, there are revisions to:

  • More accurately reflects the FCA's approach. For example:
    • References to preliminary findings letters and preliminary investigation reports are removed and replaced with a preliminary without prejudice meeting with the FCA, which reflects what we have seen in practice and the FCA focuses on trying to reach a settlement with the firm under investigation.
    • Remove private warnings. The FCA does not consider private warnings should be used as an enforcement tool and, therefore, EG 7.6 will be deleted.
  • Reflect on the changes referred to above. There is a new chapter 4 of EG which outlines the publicity changes proposed.
  • Remove content that would be better elsewhere. For example, remove the restitution and redress powers section as these are not powers exclusively used on enforcement matters.

Impact on regulator's goals and objectives unclear

Announcing investigations and providing updates are unlikely to achieve the FCA's stated objectives and goals. First, there is no need for the FCA to announce new investigations to enable the market to understand its requirements. There are thousands of items on the FCA website — speeches, guidance, and hundreds of determined disciplinary cases that make this clear.

Further, announcing an investigation before the FCA has had the chance to assemble and consider the necessary information is disproportionate because it can be extremely damaging to a firm, its staff, and its customers. In short, the FCA is proposing to publicise its investigations to support its public profile, rather than for the proper discharge of its functions.

It is unclear how publicly announcing the name of the firm under investigation advances the FCA's stated objectives more than by publishing the same details about enforcement investigations on an anonymised basis and by reference to the firm's sector and type of business.

The FCA says that it will not publish details of investigations against individuals. The public will likely be able to draw inferences from the opening of an investigation against a firm, given the FCA's focus on senior managers.

In many instances, the FCA opens parallel investigations against both a firm and a senior manager in respect of alleged regulatory breaches or misconduct. The public may therefore assume there to be investigations against individuals who hold or previously held senior management functions at the firm under investigation.

The consultation on CP24/2 closes on April 30 and the FCA intends to apply its new approach once the new policy statement comes into force. In addition, under the new proposed EG 4.1.1(2) provision, the FCA could publicly announce investigations that were opened before the new guidance came into force.

It is not only firms that might be under investigation in the future that need to watch out — those under investigation may be affected. Given the FCA typically takes several years to investigate an enforcement case, subjects of investigations will be displeased that the FCA's delay may lead to an announcement of their investigation.

Next steps

The FCA's proposals to speed up its enforcement work and drive accountability should be strongly supported. These measures should not be to the detriment of firms under investigation, particularly given how many investigations are ultimately discontinued with no action. Firms and market participants should respond to this consultation so that the FCA can reconsider how it could more effectively speed up its enforcement work and drive accountability.

This article was first published by Thomson Reuters Regulatory Intelligence.