Publicising Enforcement Investigations

Introduction

1. The FCA is consulting on a new approach to publicising enforcement investigations. Under its current approach, the FCA generally makes no comment about investigations, not even the fact that an investigation has been launched[1], until the announcement of a statutory notice imposing sanctions, such as a fine or prohibition. If the investigation closes without action being taken, then the public will never know. If action is taken, then the announcement may be years after the wrongdoing occurred. The FCA says that this can lead to public concern about whether the FCA are taking appropriate action and reduce the educational and deterrent effect of its enforcement. Therefore, it is consulting on a new approach. If implemented, this could have significant deleterious consequences for regulated firms. Right now, I am defending clients against regulatory investigations where a public announcement of an investigation at the outset without establishing guilt could have had major implications for those firms, in terms of their relationship with clients, their profitability, their standing with other regulatory authorities, their ability to borrow money etc. This article explains the FCA’s new proposed approach, how will it work, and what are the pros and cons. In the conclusion, I encourage all regulated firms to respond to the consultation by the deadline of 16 April 2024. If you would like help with the response, please get in touch.

The New Approach

2. The FCA want to proactively publish more information about its investigations, including their opening and progress. This includes publishing the identity of the subject of the investigation, if the FCA assess that it is in the public interest to do so and if there are no compelling legal or other reasons not to. It will also include publishing updates on investigations and announcing that the FCA has closed cases where the investigations have not led to regulatory or other action.
3. The FCA will decide whether and what to publish on a case-by-case basis, using a new public interest framework and taking all relevant facts and circumstances into account. But the FCA will continue to keep the fact of its investigations confidential in certain situations. These are primarily where it considers publication would be likely to adversely affect those investigations, the interests of consumers or the FCA’s operational objectives. The FCA will make announcements about firms (i.e. corporate entities), but will not generally publish information about investigations of individuals, given the impact that could have on an individual. Announcements will make clear the FCA has not made any decision as to whether misconduct has occurred.
4. The FCA is seeking comments from interested parties on the proposals set out in the consultation paper by 16 April 2024. In the paper, the FCA also propose certain changes to the Enforcement Guide. This article concentrates on the new approach to publicising investigations, not the other changes to the Enforcement Guide.

How it will work

5. The FCA have set out a number of factors which it will consider to determine whether an announcement or update will be in the public interest. This includes the likelihood that it will:
   1. enable the interests of potentially affected customers, or consumers or investors more generally, to be protected;
   2. help the 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 we are taking appropriate action;
   5. deter future breaches of FCA rules;
   6. otherwise advance one or more of the FCA’s statutory objectives, including protecting and enhancing the integrity of the UK financial system.
6. Similarly, the FCA propose a set of factors which it considers indicate that an announcement or update may not be in the public interest, specifically if it is likely to have an adverse impact on:
   1. the conduct of our investigation or an investigation by another regulatory body or law enforcement agency;
   2. the interests of consumers;
   3. the stability of the UK financial system or the FCA’s ability to otherwise carry out its statutory functions.
7. Significantly, the list of factors in the two paragraphs above take no account of the interests of the firms subject to an investigation. The FCA consider that it must focus on its statutory objectives. This is considered further below.
8. An initial announcement will contain matters like: the identity of the subject of the investigation, the industry sector and regulatory / legal provisions the investigation relates to, and a summary of the suspected breach, failing or other misconduct being investigated. The FCA will publish the announcement on its website and may also issue a press release.
9. The FCA will give the subject generally no more than one business days’ notice of the announcement. There will be occasions where no notice is given. If the announcement is market sensitive, it will be published after markets have closed.
10. The FCA have not given a date for when the new approach would take effect. It would presumably be at least a few months after the date the consultation closes (16^th April 2024), to give the FCA time to consider the responses and publish a decision notice. Recently, the FCA have been taking a long time to publish decision notices after consultations.

Advantages

11. The FCA say that being open about its enforcement activities as soon as it is able is important. It reassures the public that the FCA is taking appropriate and prompt action, ensures the faster dissemination of best practices and concerns, increases deterrence and drives positive behavioural change. The FCA acknowledge the significant gap between wrongdoing occurring and enforcement action being announced. Public concern can grow during this gap, and lead to a sense that nefarious conduct is not adequately punished.
12. The FCA also think that the public would benefit from a greater understanding of the types of suspected misconduct that are subject to investigation, even where no enforcement action arises.

Disadvantages

13. The FCA have intentionally not listed the potential harm to the subject of the investigation as a factor which it will consider. The harm of an announcement could in fact be very significant. If the firm is listed, an announcement about a major investigation could have a material impact on the share price. If the firm is a consumer-facing bank or insurance company, it could drive customers away. If the firm is a broker, it may result in clients moving to another broker. The announcement is likely to flag up in KYC checks, and result in significantly more red tape and issues when establishing new business relationships, or reviewing existing ones.
14. The announcement of an investigation may make recruitment of staff more challenging for the firm in question. It may make it more difficult for the firm to borrow money, particularly if the potential impact of a fine or other censure is significant: the lender is likely to take this into account in assessing risk. It is likely to result in many questions from other regulatory authorities. For example, if an announcement is made in respect of an investigation of an FCA-registered broker, trading firm or investment bank, I know that exchanges and clearing houses are likely to ask a raft of questions; we can expect other regulatory authorities to do the same, where the firm is dual- or multiple- regulated. The impact of an announcement for an investment bank, which is regulated in many different jurisdictions, and trades on 100+ different exchanges around the world, could be vast. Furthermore, the firm subject to an investigation will generally get only one business day to prepare for the announcement (or, in some cases, no warning at all). It will also, seemingly, get no opportunity to make representations or comments.
15. The FCA’s explanation of the benefits focusses entirely on its statutory objectives and consumer protection. But what about the presumption of innocence until proven guilty? Given the effects on a firm listed above, it seems remarkable that the FCA do not consider this.
16. As briefly mentioned in the consultation paper, there are statutory restrictions on the disclosure of confidential information by the FCA. These are contained in section 348 FSMA. In short, the FCA must not disclose information relating to a person without their consent, unless an exception applies. The main exception is the public interest test. The public interest test is a complex area of law: it has recently been subject to consideration by the Court of Appeal and that case is due itself to be appealed. There may be grounds to challenge the FCA’s conclusions regarding section 348 FSMA. If this is something which you would like to discuss further, please let me know.

Conclusion

The proposal to publish information about the opening and progress of an enforcement case will have major implications for regulated firms. The FCA opens dozens of new cases every year. Therefore, many firms will be affected by this. The FCA proposes intentionally to disregard the interests of firms themselves. It gives little consideration in the paper to the confidentiality restrictions in section 348 FSMA. I would encourage all regulated firms to respond to this consultation. If you would like to discuss further, or assistance in preparing a consultation response, please get in touch: tom.hine@templebright.com.

[1] There are rare exceptions to this where the FCA concludes it is in the public interest to do so – see for example the FCA announcement in respect of the London Metal Exchange