Disclosure of investigations: FCA responds to the House of Lords

Disclosure of investigations: FCA responds to the House of Lords

On 18th April 2024 the House of Lords Financial Services Regulation Committee (“FSRC”) wrote to the Financial Conduct Authority (“FCA”) to express the following concerns about the proposals in CP24/2 to disclose details of ongoing investigations:

  • the potential for an adverse impact on firms named in investigations which are later cleared; and
  • similarly, possible negative implications for the reputations of individuals who may or may not be named, particularly if investigations take a long time to conclude.

Accordingly, the FSRC tabled a range of questions about the FCA’s proposals. Of particular concern to the FSRC was the fact that the FCA had not carried out a cost benefit analysis (“CBA”). This is because the FCA had concluded that a CBA was not required under relevant sections of the Financial Services and Markets Act (“FSMA”).  The purpose of this article is to summarise the FCA’s responses to the key questions posed by the FSRC.

Q. How many investigations into a) firms and b) individuals are launched on average per year? How many are currently underway?

To answer this question, the FCA provided the information in the table below:

Source: FCA response to FSRC, 25th April 2024

In addition, the FCA stated that, as of 31st March 2024 500 investigations were underway, of which:

  • 336 concerned individuals;
  • 164 concerned firms;
  • 79 concerned unregulated persons; and
  • 85 concerned regulated or listed persons.

Q.  Of closed investigations, what percentage in each category resulted in an adverse finding leading to the FCA taking enforcement action? How long, on average, does an investigation take from launch to closure?

Again, the FCA provided information in a tabular format to answer these questions:

Source: FCA response to FSRC, 25th April 2024

Q. Do you have plans either to reduce the number of investigations or to speed them up? If so, how? What are your targets for each of these?

The FCA responded by stating that it:

  • would “streamline” its portfolio of investigations to ensure greater alignment with its strategic priorities;
  • improve coordination between its authorisation, supervision and enforcement teams in an effort to reduce the number of investigations required and proceed with those that are initiated more quickly.

Q. What led the FCA to make these proposals? Were they based on any particular representations? If so, from whom?

The FCA cited a “sustained and significant increase in Parliamentary interest in specific cases or groups of cases” as one of the main reasons it has made the proposals to disclose the details of investigations. The regulator claimed that, on average, it received around 650 letters per year from Members of Parliament, usually on behalf of their constituents. Furthermore, the FCA asserted that the confidence of whistleblowers is damaged if they do not see evidence of action after they have come forward.

Q. What consideration have you given to including an appeal mechanism, whereby firms or individuals under investigation can challenge your decision to publicise the investigation before you do so?

The FCA stated that, in common with other agencies, it will not operate an appeal mechanism. Instead, the regulator held firm on its proposal to give subjects advanced notice of an intention to publish. Should a subject take issue with the proposed disclosure, the FCA argued that they could always seek judicial review, or an injunction.

Q. What consideration have you given to thematic, rather than individual, disclosure, in order to meet the public interest benefits of disclosure that you cite?

Whilst the FCA did not rule out the use of thematic disclosure, the regulator stated that it does not view this as an alternative to named disclosure. Moreover, the FCA contended that thematic disclosure could trigger unhelpful speculation concerning who its subjects are.

Q. What is your assessment of the impact of this proposal on the relationship between regulators and the industry more generally?

On its relationship with other regulators the FCA said:

  • it is not proposing an automatic presumption of disclosure, something which it claims is common at other agencies;
  • OFCOM, CMA, FRC, OFGEM, OFWAT and the Serious Fraud Office are amongst the UK authorities that do make disclosures about the commencement of an investigation; and
  • it regulates a greater proportion of small and medium sized firms. The FCA states that it is conscious that these firms are often synonymous with their senior managers and that it “must be mindful when announcing where this could inadvertently identify an individual”.

More generally, the FCA contended that disclosure would not constitute “naming and shaming” and that it would use “factual and measured” language in publication.

In pursuing criminal investigations, the FCA was keen to stress that it is bound by the Code for Crown Prosecutors and accountable to the courts for its actions.

In sum, the FCA held that the public interest tests it proposes to use to determine publication do not contravene the principle of “innocent until proven guilty”.

Q. Have you performed any analysis on the likely impact of a publicised investigation on the reputation, share price and ability to trade of an affected firm? If so, what were the findings?

The FCA said that it did not think the impact on its firms would be great because:

  • it only initiates a small number of investigations in proportion to the number of firms it regulates, limiting the value of a traditional cost-benefit analysis;
  • many firms, especially if they are listed or regulated elsewhere, are either required to disclose the fact of an investigation or choose to disclose it anyway; and
  • larger, multinational, firms are used to dealing with a multitude of enforcement actions in several jurisdictions concurrently.

Further disclosures might currently come through Parliamentary processes in high profile cases or the method of investigation, e.g. in asset search or freeze operations.

Q. How does this proposal compare with the approaches taken by other supervisors internationally (other than the Monetary Authority of Singapore)?

The FCA reasoned that the differing cultural norms and expectations in other countries made meaningful comparisons with the approach taken by their financial regulators difficult.

Need help?

FCA CEO Nikhil Rathi is due to appear before the House of Commons Treasury Select Committee today (video link here) and we await the outcome of CP24/2. The consultation period closed on 30th April 2024. Nevertheless, the FCA’s response to FSRC indicates that it is likely to press on with implementing its proposals to disclose.

Yes, a firm or investigation could apply for an injunction or seek judicial review if the FCA informed it of a intention to publish the details of an investigation. However, in our view “prevention is better than cure”.  The costs and uncertainty of seeking these legal remedies should not be underestimated. It is far better to invest this money into developing robust systems and controls to ensure that a firm and its representatives never end up in this situation in the first place. Please contact us if you would like help with strengthening your firm’s control environment.

References

  1. Work of the Financial Conduct Authority. UK Parliament, available at: https://committees.parliament.uk/work/741/work-of-the-financial-conduct-authority/ (accessed on 8th May 2024).
  2. Response to the Financial Services Regulation Committee. Financial Conduct Authority, available at: https://www.fca.org.uk/publication/correspondence/fca-response-lfsrc-april-24.pdf (accessed on 8th May 2024).
  3. Letter from Financial Services Regulation Committee to FCA. House of Lords, available at: https://committees.parliament.uk/publications/44344/documents/220473/default/ (accessed on 8th May 2024).

Alexander Culley

Alexander Culley

Alexander Culley

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