On 8th May 2024 Ashley Alder (Chair of the FCA) and Nikhil Rathi (Chief Executive of the FCA) appeared before the Treasury Committee to answer questions about, amongst other things, the regulator’s proposals to revise its approach to publicising investigations. Prior to attending the meeting, representatives from the FCA provided a series of written responses to the Treasury Committee’s questions. The form and content of the letters was similar to that tabled in response to questions the FCA received from the Financial Services Regulation Committee of the House of Lords on 18th April 2024. Nevertheless, in making its own request, the Treasury Committee did manage to elicit some additional information from the FCA which may interest our readers.
Image: justifications for named publication advanced by the FCA
FCA to take time before deciding next move
Noting the “generally strong opposition to what we are proposing” from industry, CEO Rathi stated that the FCA would “take several months” to reflect on the feedback received from a wide variety of stakeholders. Rathi says that the FCA is “open minded” about how to address the concerns raised so far, with the ultimate goal of achieving a “broad consensus” to take the proposals forward. Even so, noting that the topic of disclosure is “sensitive” and can provoke “emotive” reactions, Rathi was keen to stress that consumer groups had been “significantly more positive” about the proposals. According to Rathi, some within this constituency have lobbied the FCA to go even further than it is currently proposing! Are the battle lines being drawn for the next stage of this process?
Early intervention preferred to enforcement
In tandem with the CEO’s letter, the heads of the FCA’s Enforcement function also penned a letter to the FCA. This contained more detail about the regulator’s use of early intervention tools, ideally to avoid the commencement of an investigation in the first place. Particularly noteworthy is that the use of skilled person (section 166) visits increased by 77% in 2023/24 when compared to 2022/23:
Source: Letter from Executive Directors, Enforcement, FCA, 7th May 2024
In addition, there was a marked increase in the number of cancellations and final notices issued in response to breaches of the Threshold Conditions during the same period:
Source: Letter from Executive Directors, Enforcement, FCA, 7th May 2024
Consistent with this, the Directors of Enforcement said that one out of every four applications for authorisation are refused compared to one in fourteen in 2020/21. They posited that this should result in fewer investigations in the long term. Similarly, the FCA stressed that an investigation is typically only launched as a last resort. Most firms subject to investigation have failed to respond, or respond satisfactorily, to a plethora of supervisory interventions. This includes some, or possibly all of: visits, skilled person reviews, and accession to voluntary requirements – also a popular tool in the FCA’s supervisory kit:
Source: Letter from Executive Directors, Enforcement, FCA, 7th May 2024
On rare occasions, the FCA might need to act immediately to impose restrictions on its own initiative and/or open an investigation. By contrast to the other tools mentioned in this piece, the FCA reported that its use of its own initiative powers remained fairly static in 2023/24 when compared to the previous year:
Source: Letter from Executive Directors, Enforcement, FCA, 7th May 2024
Image: FCA pivots towards early interventions in 2023/24 (comparisons to 2022/23)
The usually lengthy build up to the opening of an investigation is cited by the FCA as being a reason why, in the vast majority of cases, a firm would likely be aware far in advance of what is potentially in the offing.
“No shortcuts”
Should an investigation be opened, the FCA agreed with its critics that, at present, cases are taking too long to conclude. Still, it emphasised that there are “no shortcuts to a thorough and fair investigation”, especially given that some cases are “extremely complex”. This complexity stems from the time it takes to collect evidence and enforce court orders (particularly overseas). Much also depends on whether a respondent chooses to contest or settle a matter.
Weighing up the alternatives to named publication
When pressed by the Treasury Committee as to whether the FCA had considered alternatives to named publication to reduce reputational risk, the regulator responded that this remains an option. Some respondents to the consultation suggested that this could take the form of an “Enforcement Watch” publication which is similar to the Market Watch newsletter issued by the FCA today.
Summary
Whatever the outcome, the FCA’s Enforcement Division declared:
“We will always, unless inappropriate to do so, make clear that we have as yet found no misconduct or other failing.”
Moreover, there would not be a presumption in favour of publication. The cost / benefits of publishing would be evaluated in each case. Either way, if the FCA proceeds to change its policy broadly in line with current proposals then our opinion is that this would create a large degree of uncertainty for firms and their representatives. Investing in an effective compliance programme would go some way to reducing this uncertainty. Please contact us if you would like help to put your firm in shape.
References
- Letter from the Chief Executive, Financial Conduct Authority, relating to proposals about publicising enforcement investigations. Financial Conduct Authority, available at: https://committees.parliament.uk/committee/158/treasury-committee/publications/3/correspondence/
- Letter from the Executive Directors, Enforcement, Financial Conduct Authority, relating to proposals about publicising enforcement investigations. Financial Conduct Authority, available at: https://committees.parliament.uk/committee/158/treasury-committee/publications/3/correspondence/
- Letter from the Chair, Financial Conduct Authority, relating to proposals about publicising enforcement investigations. Financial Conduct Authority, available at: https://committees.parliament.uk/committee/158/treasury-committee/publications/3/correspondence/
