"The first rule of enforcement club is that you do in fact talk about enforcement club"1; so Therese Chambers, the UK Financial Conduct Authority's (FCA) joint executive director of enforcement and market oversight, announced a controversial consultation on amendments to the FCA's enforcement policy. The proposed policy changes involve a little more than "talking", the headlines from the consultation being:
- Public announcements that the FCA has opened an investigation into a firm;
- The publication of updates on an investigation, including closure; and
- Amendments to the Enforcement Guide to remove duplication with other parts of the FCA Handbook and related legislation.
CP 24/2 closes on 16 April 2024 and many consider that feedback from regulated firms (and their advisers) will largely oppose the proposals given the irreparable damage that will be done to firms under investigation by publication of the opening of an enforcement investigation without any proof of wrongdoing.
Public Announcements
The FCA proposes to publish the opening of an investigation into a firm subject to a "flexible public interest framework." The policy will apply to enforcement investigations conducted using the FCA's statutory powers under the Financial Services and Markets Act 2000 and opened after the policy is introduced, as well as those that are already on-going.
Under the proposals, public interest factors in favour of early publication include the likelihood it will:
- Enable the interests of potentially affected customers, or consumers or investors more generally, to be protected;
- Help the FCA's investigation, for example by encouraging potential witnesses or whistleblowers to speak up;
- Address public concern or speculation, including by correcting information already in the public domain;
- Provide reassurance that the FCA are taking appropriate action;
- Deter future breaches of FCA rules or other requirements or prohibitions; or
- Otherwise advance one or more of the FCA's statutory objectives, including protecting and enhancing the integrity of the UK financial system.
There are few proposed public interest factors against early publication. These include if it "is likely to have an adverse impact" on the:
- Conduct of an investigation by another regulatory body or law enforcement agency;
- Interests of consumers; or
- Stability of the UK financial system or the FCA's ability to carry out its statutory functions.
While the FCA states that these are not exhaustive, they explicitly exclude the impact on the investigation subject. The FCA's rationale is purportedly that an assessment of whether publication is in the public interest should "be primarily focused on promoting our statutory objectives. It should support the relevant investigation and increase our accountability by providing public reassurance that we are acting in the interests of consumers and investors."2 Critics may, therefore, see the proposals as more of an attempt by the FCA to publicise its work in response to political pressure and criticism, rather than a genuine attempt to fulfil its statutory objectives and improve the way it regulates.
Given the public interest factors listed, it's likely that early publication will affect firms under investigation which have retail clients, albeit the policy is not limited to such investigations and affords the FCA the discretion to publish announcements in most cases. The FCA has stated that "generally" they do not expect it will be in the public interest to announce an investigation opened on behalf of an overseas regulator.
Content of Public Announcements
The identity of the firm under investigation is likely to be published under the FCA's proposals and announcements are likely to include a high-level summary of the suspected breaches or type of alleged misconduct. This is particularly the case given that part of the FCA's rationale for the proposals is that regulated firms "would benefit from a greater understanding of the types of suspected misconduct and other failings we consider should be investigated"3.
The announcement of an investigation would also normally state that the investigation should not be taken to imply that any conclusions of a breach, or other misconduct or failing have been made, or that a determination has been made that enforcement action is appropriate. However, many firms will consider that reputational damage would be caused by the mere fact of the announcement irrespective of any such statement by the FCA that no findings have been made.
Updates on announced investigations will be published, including where an investigation has been closed without action. These could be by way of additional publication and/or an amendment to the original announcement.
Impact on Individuals
The proposals do not extend to individuals under investigation; those holding senior management functions (SMFs) can breathe half a sigh of relief, although it will not be difficult to determine the identity of SMFs potentially under investigation from the information publicly available on the financial services register linking them to a firm under investigation.
Notice of Publication
Investigation subjects will "normally" be given no more than one business days' notice of an announcement and the proposals do not include a specific mechanism for challenging the FCA's decision to publish. Firms' only recourse will, therefore, be to try and engage with the enforcement team and make representations to them.
The proposals also allow the FCA to publish without notice to the investigation subject if "particular facts and complexities of the investigation and the surrounding circumstances...mean...we need to announce, or give an update on, an investigation urgently"4.
Conclusion
The FCA has focused on its desire to achieve a deterrent effect, be more open and transparent, and to reassure the public that it is taking action when needed. However, there is little evidence that the negative impact of the proposed announcements on investigation subjects and potentially, the financial services industry more broadly, has been adequately considered. Such announcements could have a significant detrimental effect on the business of firms, their parents and other group members (whether based in the UK, US or elsewhere), their value particularly if listed and, potentially, the attractiveness of doing business in the UK when equivalent policies are not in force in competitor jurisdictions.
We encourage firms to respond to the consultation where possible to ensure their views are communicated to the Authority. Whilst we await the outcome of the consultation, firms currently under investigation should consider whether they need to implement specific procedures to deal with enquiries from the media should the proposed policy come into force.
WilmerHale's global investigations team can assist with queries on the FCA's consultation and how best to prepare for the new policy in the event that the proposals are introduced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
