Enforcement proposals challenges – a recap

The FCA has responded to a variety of criticism from industry and parliament over the last month after consulting on its new approach to enforcement investigations.

The House of Lords Financial Services Regulation Committee made several criticisms of the proposals to publicly name firms under investigation, asserting that in the consultation the FCA explicitly rules out taking account of the impact of disclosure on the investigation subject, and has not carried out a cost-benefit analysis of its proposals on the basis that it is not making any new rules.

The Committee says the proposals risk:

• having a disproportionate effect on firms named in the investigations where firms are then cleared of any wrongdoing;
• the overall integrity of the market – for example because of possible unwarranted impacts on share prices;
• individuals being tarnished by having their names linked with an investigation even if their actual names are not published.

The FCA responded to this with a letter acknowledging the significant changes the proposals would bring and says it plans a further round of discussion and engagement after it has considered the responses to the consultation. The letter also included that:

• while it is proposing to move away from a presumption against disclosure, this does not mean there would be a presumption in favour of disclosure;
• investigations do often become public knowledge at the moment, for a variety of reasons; and
• it has concluded that there have been instances in the past when earlier publication would have enhanced its response and the market’s reaction.

The Committee responded to this by writing to Nikhil Rathi, chief executive of the FCA, expressing disappointment that Mr Rathi himself had not signed the FCA letter, since the Committee had directly written to him. It also expressed concern that the response did not refer to the Committee’s express request that the FCA takes no further steps until the Committee has taken evidence on the proposals and come to a conclusion.

In addition, 16 financial services trade associations, including UK Finance, the ABI, TheCityUK and PIFMA, have written to the Chancellor asking him to intervene over the FCA’s proposals. PIFMA said the impact could lead clients to leave smaller firms “in droves”, while larger listed firms would almost certainly suffer significant market volatility. The letter also notes that the proposals would be likely to have damaging consequences for the competitiveness of the UK’s financial services sector.

Finally, the Treasury Committee has published a further set of correspondence with the FCA, and the Financial Services Regulation Committee formally announced its investigation into the proposals, calling for views by 4 June. The latest correspondence comprises:

• a letter from it to Nikhil Rathi asking:
  • whether the FCA considered publicising investigations anonymously until it made a final decision;
  • what the FCA is doing to speed up the length of investigations – and asking whether it agrees that an average length of nearly 4 years is unacceptable;
  • how the plans to carry out fewer investigations are consistent with the FCA’s operational objectives;
  • how publicising investigations will improve the UK’s international competitiveness, given that other major regulators maintain the privacy of firms under investigation;
  • whether the FCA could carry on with its proposals if it could not rely on its legal immunity under FSMA; and
  • what consideration the FCA has given to whether its proposals could place the ongoing viability of a firm in jeopardy and whether prudential or financial stability concerns would outweigh the desire to publish – and whether this would risk a two-tier or unfair system where some firms were named and some not.

• a letter of response from the FCA explaining:
  • there would be no presumption of disclosure but that at some appropriate point in some investigations the public interest may support naming a firm;
  • listing circumstances when it is likely to be in the public interest to publicise investigations – such as where potential misconduct is already public, and where a high level but anonymous description could in fact apply only to certain firms and so would prompt speculation and firms issuing denials, where there is potential ongoing consumer detriment;
  • statutory immunity was not considered and is not relevant; and
  • that the facts and circumstances the FCA will consider will include any potentially disproportionate impact, including on the viability, of naming a subject.

• a further response from the FCA to the Committee on Financial Services Regulation:
  • addressing the criticism that Nikhil Rathi himself had not responded to the Committee’s original letter by noting the FCA’s general practice of asking colleagues leading on the initiative to respond in advance of Mr Rathi and Ashley Alder answering questions before the Treasury Committee;
  • noting that responses received from trade bodies and law firms generally strongly oppose the proposals;
  • acknowledging that the FCA will take several months now to analyse and respond; and
  • explaining that the consultation came about because the FCA no longer considers a presumption against disclosure to serve its primary statutory objectives or support an appropriate degree of transparency and accountability. The letter ends by saying the FCA remains open-minded on how best to address the issues.