On 12 March, the Financial Conduct Authority (FCA) announced it would not proceed with its proposal to shift from an exceptional circumstances test to a public interest test for announcing investigations into regulated firms.
This decision effectively ended the controversial ‘name and shame’ proposal, which had faced significant criticism from industry and government. The FCA will, however, continue with other measures to promote transparency and further its statutory objectives.
The Story So Far
The FCA’s existing Enforcement Guide has long imposed a high bar for publicising investigations. The new proposal aimed to publicise investigations, including the identity of the subjects, if it was in the public interest. In its final form, CP24/2 set out a public interest framework with factors for and against publication, indicating that firms would have a tougher time dissuading the FCA from naming and shaming than under the previous regime. Instead of considering “potential prejudice” to subjects, firms would need to demonstrate that publication would likely have “a severe impact” on the firm or third parties.
The proposals met with widespread criticism, with concerns about significant legal, commercial, and reputational risks for firms. With around two-thirds of FCA investigations concluding with no further action, there was a real risk that firms could be named and shamed, causing share prices to drop, commercial deals to fail, and reputations to suffer, only for the action to be discontinued months later.
In this context, it was anticipated that the FCA would reconsider its proposals. However, the decision to completely drop the central plank of the transparency drive was somewhat surprising. The FCA’s 12 March announcement, which included a letter to the Treasury Select Committee outlining its next steps, indicates that the regulator remains committed to improving transparency and consumer outcomes.
Policing the Regulatory Perimeter
The FCA confirmed it would proceed with proposals to publish information about investigations into potentially unlawful activities of unregulated firms and regulated firms operating outside the regulatory perimeter, “where doing so protects consumers or furthers the investigation.“
UK Finance reported in June 2024 that £1.17bn had been lost to fraud in the UK in the preceding year, with £107.8m resulting from investment scams. Many of these involved firms masquerading as respectable FCA-authorised businesses, duping investors into transferring money to other assets, only for the investments to disappear. Despite the FCA’s ScamSmart campaigns, the regulator still has a long way to go in controlling fraud.
Any proposal to increase awareness of illegitimate firms is welcome. However, the publication of enforcement investigations into such firms presupposes such investigations exist. Issuing warnings is one thing; taking action to put criminal enterprises out of business is quite another, and the FCA needs to show its teeth to protect consumers.
Anonymised Publications
The FCA’s commitment to increased transparency in enforcement investigations was never the sticking point for respondents; it was the proposal to name subjects that sparked the furore. Many questioned the FCA’s contention that naming firms would educate other firms and market users on the types of conduct under investigation, helping to drive better compliance with relevant rules. Surely the subject matter and potential impact of investigations could be adequately conveyed through suitably anonymised publications.
In fairness to the FCA, it has acknowledged this and confirmed it will look to publish greater detail of issues under investigation on an anonymous basis, “perhaps via a regular bulletin such as Enforcement Watch.” It remains to be seen precisely what these publications will cover. CP24/2’s case study examples involved high-level announcements with little educational value for consumers or market participants. If the FCA’s objective is to be met, any bulletins will need to provide more detail on FCA priorities and systemic weaknesses while avoiding inadvertent identification of firms or connected individuals. This may be tricky in certain cases, and the FCA will be mindful to avoid similar third-party rights issues as those following the well-publicised ‘London Whale’ case involving JP Morgan and its former CIO, Achilles Macris.
Reactive Confirmations
The FCA’s third proposal focuses on reactively confirming investigations officially announced by others, such as market announcements or other corporate disclosures.
Justifying its position, the FCA noted that even when an investigation is in the public domain, it is currently unable to confirm or deny its existence in many cases. The FCA’s Enforcement Guide provides that where such information is already publicly known, it will only be a factor tending towards an announcement where there is a need to address “public concern or speculation.” CP24/2 removed this qualification, and it is anticipated the FCA will continue with this lower test.
At a superficial level, one might not see the harm in the FCA simply confirming information already in the public domain. However, if a company were to make a general reference to an investigation, would that be sufficient for the FCA to bring the entire matter into public view? Would their notification go into more detail? It is possible that a firm’s carefully worded RNS announcement could be undermined by a subsequent confirmation by the FCA. One hopes relevant firms would have time to make representations as to any announcement’s substance.
The most controversial element of the FCA’s proposals may have gone, but many questions remain as to how they will follow through on their commitment to increasing transparency around enforcement activity.
Written by David Hamilton, Partner at Howard Kennedy LLP
