The consultation period for CP24/2 closed on Tuesday, marking the end of (at least the first phase of) what has been widely perceived to be one of the FCA’s most contentious policy proposals of recent years.
The consultation process
For those who have not been following this consultation closely, key related events so far may be summarised as follows:
- On 27 February 2024, the FCA announced a consultation on proposed amendments to its existing enforcement policy:
- The announcements included – among the cheerful references to children’s sport, shoulder pads and Suits – somewhat harder-edged proposals, intended “to increase transparency about [the FCA’s] enforcement work and its deterrent effect and to disseminate best practice”. These included, in particular, proposals to publish announcements when opening enforcement investigations, naming the relevant investigation subject, when the FCA considers that it is in the public interest to do so.
- While no one would disagree with the FCA’s aims to increase transparency and strengthen deterrence, our initial blog identified immediate concerns as to: (1) whether the proposals would meet their aims; (2) whether the FCA had any corresponding plan to change or clarify its (very low) investigation opening thresholds; (3) the FCA’s plans to give a named subject “normally” – but not necessarily – advance notice of such an announcement or update of “no more than 1 business day”; and (4) the FCA’s express intention not to consider the potential impact of disclosure on investigation subjects, when determining whether an announcement should be made.
- The consultation period was extended from 16 April 2024 to 30 April 2024, and the FCA, having made clear that it was happy to take the time to listen and engage, held numerous discussions with concerned industry and wider market participants about the proposals.
- On 22 April 2024, the Financial Services Regulation Committee wrote to the FCA:
- The Committee noted that: (1) the “consultation paper explicitly rules out taking account of the impact of disclosure on the subject of an investigation”; (2) the FCA had not carried out a cost-benefit analysis; and (3) in the Committee’s view, the proposal risks: (a) “having a disproportionate effect on firms named in investigations, where those firms are subsequently cleared of any wrongdoing, particularly given the length of many investigations”; (b) the overall integrity of the market, and (c) the position of individuals.
- In those circumstances, the Committee asked a number of questions, including: (1) what had led the FCA to make its proposals; (2) what consideration it had given to other (thematic) disclosure and guidance to meet its objectives; (3) what consideration and analysis it had given to the impact of a publicised investigation; and (4) how its proposed approach contrasts to the approaches of other regulators, nationally and internationally.
- On Friday, 26 April 2024, the FCA published its response (dated 25 April 2024):
- The FCA did not propose to extend the consultation deadline from Tuesday, 30 April 2024, to give interested parties more than one working day to consider and reflect its contents, despite the response: (1) being 29 pages long; and (2) appearing to represent shifts in the FCA’s position (for example, the response states that the FCA is not proposing an “automatic presumption of disclosure”, although the consultation itself had proposed a “presumption in favour” of transparency and a “guiding principle of a presumption of transparency”, which “approach” would be “followed” by publication of information about investigations).
- Despite the response’s length, it also did not appear fully to address the Financial Services Regulation Committee’s points. For example, the Committee’s letter asked for an explanation of the “approaches taken by other supervisors internationally (other than the Monetary Authority of Singapore)” (emphasis added). In response, the FCA: (1) identified the Monetary Authority of Singapore as a positive comparator; (2) identified the Australian Securities and Investments Commission as a mild comparator (saying that the ASIC makes a statement “when it is the public interest to do so”, but does balance “public interest against the potential for prejudice to individuals […] and other factors”); and (c) otherwise provided a general statement about other authorities (mentioning those in France, Switzerland and the US) taking, contrary to the FCA’s proposals, a “privacy first approach”. In contrast, consultation respondents have provided further detail in this regard, including, for example, UK Finance, whose response surveys 26 comparable regulators, concluding that no comparable regulator “in any leading economy publishes the subjects of an investigation at its commencement in the way that the FCA is proposing” (with even the Monetary Authority of Singapore, one of only two regulators of the 26 surveyed which has a somewhat similar regime to the FCA’s proposals (the other being the Financial Sector Conduct Authority in South Africa) being required to consider whether an announcement will jeopardise the investigation in question).
- On 29 April 2024, the day before the consultation closed, Therese Chambers and Steve Smart published an editorial piece in CityAM, emphasising (including in the heading of the piece, which is “Why the FCA will name firms we are investigating” (emphasis added)) that the FCA “will” be proceeding with its proposals.
- On 30 April 2024, the consultation closed. The Chancellor (who was sent a letter from 16 trade bodies asking for his assistance in intervening with respect to the proposals) provided comments to the FT, including that: (1) the financial services industry is different to those industries where a regulator taking a ‘naming and shaming’ approach might be appropriate (giving the example of where that might be appropriate of “a failing water company which has [an] outrageous amounts of leaks”); (2) the proposals feel inconsistent with the FCA’s secondary growth duty towards a competitive economy; and (3) the Chancellor therefore hopes that the FCA will “re-look at their ‘naming and shaming’ decision”. The FT reported that the FCA had responded, emphasising that “[a]s we have said throughout the process, this is a consultation. We will listen carefully to the extensive feedback we have received, including from Government as we reflect on our next steps”.
Concerns about the process and the proposals
The FCA is obviously in a potentially difficult position. It faces scrutiny from Parliament and the public about what it is doing, and criticism about the length of time that its investigations take. The FCA therefore understandably wishes to balance the ability to provide more, not less, information about its activities to its own stakeholders against the need to take its time, in a confidential process protecting the investigation in question, to: (1) gather and test evidence where it does think that something might have gone wrong; and (2) proceed to support the decision to take any resulting, carefully considered and robust enforcement action, where it becomes apparent that that is necessary and appropriate to do.
It is also obvious that the UK’s markets need and welcome a strong regulator. True regulatory strength is built, however, on fairness and consistency, and the consultation’s proposals have been met (by interested parties across the financial services industry and the wider UK listed company market (over which FCA also brings enforcement actions)) with uniform and deep concern that they are essentially unfair and inconsistent, and that the FCA’s (obviously laudable) aims to increase transparency and strengthen deterrence can be better met in other ways.
These concerns are not trivial, and nor are they resolvable by developing the detail of, for example, the FCA’s public interest test. They include concerns – at least some of which are shared by the Chancellor and the Financial Services Regulation Committee – that: (1) in principle, the announcement of the identity of the investigation subject cannot fairly be used to create the deterrent effect envisaged by the FCA; and (2) in practice, such an unfair and potentially inconsistent policy (as the FCA would only be selectively disclosing investigations) would: (a) damage the UK’s competitiveness and reputation for fair process; (b) impede (rather than assist) the FCA in its statutory objectives; and (c) cause significant harm to investigation subjects, the wider market, and to the public’s confidence in the FCA as a regulator (for example, by risking causing unwarranted media storms as a result of selective announcements which equate conduct under investigation with misconduct, at a stage when the FCA has not yet gathered or scrutinised evidence, thereby misleading and misinforming the market).
Despite the seriousness of these concerns, and the FCA taking the time to meet with the industry and market participants to discuss them, its recent actions – in particular, apparently: (1) to start meeting criticism through the media, which has contributed to ongoing debate being played out via the press (the Chancellor’s well-made, but nonetheless unusual, intervention most recently being met with commentary from Former Treasury committee chairman, Lord Tyrie, all of which does not bode well for how the market and media will react (and how the FCA will manage it), if the policy is brought in and the first subjects are announced); and (2) not to await consultation responses (which respondents will have spent a great deal of time and cost considering and articulating), before announcing that it will in principle be proceeding with the proposals – may raise concerns. The FCA might wish to consider combating these, by reconsidering this apparent approach; properly considering the consultation responses that it has received; and, overall, giving serious thought to reconsidering the proposals themselves. Sometimes, strength is letting go.
Our consultation response
Our views are set out more fully in our response to the consultation. If you would be interested in a copy of our response or discussing the proposals, please let us know.
