FCA publicity consultation: ‘How not to regulate’

The House of Lord’s Financial Services Regulation Committee has today published its report on the FCA’s publicity consultation, Naming and shaming: how not to regulate.

The Committee’s conclusions

The report:

• Summarises the process of the consultation, and the Committee’s own interventions in it (including: (1) writing to the FCA in April 2024, asking the FCA to pause the consultation while it investigated – which request was ignored; (2) the Committee’s own call for evidence, launched in May 2024, respondents to which “highlighted significant failings in the development and communication of these proposals, and suggested that there could be serious potential problems inherent in the FCA’s proposed approach”; and (3) the Committee’s taking of evidence from the FCA in November 2024).
• Explains why the Committee remains “deeply concerned” about the process of the consultation, noting that: (1) there was insufficient pre-publication discussion of the proposals (which were not, for example, discussed with HM Treasury, prior to publication); (2) the proposals were not included in the FCA’s Regulatory Initiatives Grid, in the usual course; and (3) the FCA’s resulting surprise at the “strength of reaction to its proposals suggest[ed] a worrying disconnect with industry on the part of senior FCA leadership”. The report concludes in this regard by suggesting that the FCA “should publish a ‘lessons learnt’ document from this process, setting out where it went wrong and how it will prevent similar mistakes from occurring in the future”.
• Concludes, on the substance of the revised proposals, that in the Committee’s view “the FCA has not yet made a convincing case for why a change to its existing powers, which allow it to announce an enforcement investigation early in exceptional circumstances, is required. Furthermore, we are not yet convinced that the FCA’s proposed new public interest framework strikes an acceptable balance between realising the potential benefits to consumer protection and transparency, and managing the potential risks to firms, individuals, and market stability”. The report:
  • Invites the FCA to report back to the Committee, before any changes are implemented, but notes ultimately that, “[i]f the FCA is unable to find an acceptable balance in these proposals between increasing transparency to help prevent consumer harm, and managing the potential risks to firms, individuals, and market stability, it should not proceed with these proposed changes”. 
  • Suggests that the FCA might well consider whether it should, in any event, now “focus its efforts on expediting its investigative processes to increase transparency before making substantial changes to the wider enforcement framework”. 

The Committee’s views on the FCA’s proposals

On the substance of the revised proposals, the report addresses the continuing key issues in some detail, including:

• The overall justification for the proposals in circumstances where, as the Committee puts it “[w]e are still unclear why—if there is an immediate risk of consumer harm—it would not be considered an ‘exceptional circumstance’ which would demand disclosure of an investigation” in any event, under the existing regime. “In the context of its existing powers, the FCA’s explanation for how these proposals will further its objectives is unconvincing. It remains unclear why a broader interpretation of ‘exceptional circumstances’ could not be considered in place of the proposed public interest test, particularly where there is an immediate risk to consumers”.
• The justification for how the proposals align with the FCA’s secondary international competitiveness and growth objective - on which the FCA failed to engage sufficiently with the government - and particularly the justification for the FCA taking a different approach to other regulators. In this regard, the Committee concludes that the “FCA’s assertion in its first consultation that its proposals would be consistent with approaches taken by other international regulators was misplaced and misleading. It is notable that it has changed the narrative on this, from emphasising commonality with other regulators in its first consultation, to highlighting the uniqueness of their remit in the second. Concerns that announcing investigations at the outset will impact on the UK’s competitiveness and risk positioning the UK as an outlier are warranted”.
• The remaining risk that senior managers and other key individuals could be readily identified in connection with investigation announcements.
• While some significant issues in the original consultation (for example, on notice periods before announcement) have been reconsidered, the remaining lack of clarity around the proposed public interest test for disclosure, in particular in relation to: (1) how much discretion the test affords the FCA; and (2) how consistency in decision making and outcomes will be assured.
• The lack of information provided by the FCA in relation to the impact of the proposals on whistleblowers, and for cost benefit analysis, which was first requested by the Committee in April 2024. The Committee believes that the FCA must now change its policy only to produce cost benefit analyses only in relation to rules and guidance on rules.

Our view 

It will come as no surprise to readers of our previous blogs and responses on the publicity consultation that we agree with the Committee in each of these respects. This consultation has occasioned a huge amount of industry concern, time and cost, but is, in our view, no closer in February 2025 than it was in February 2024 to articulating properly its basis or intended benefit. 

While we certainly understand and support the FCA’s drive for greater transparency to support education on potential harms and its work (and sympathise with the scrutiny and pressure that the FCA is under, in this regard), we continue to consider that such benefits could be provided by other means, through, for example, the publication of earlier, further and/or more detailed Dear CEO letters, thematic reviews, market watch newsletters, or good and bad practice examples such as those found in the financial crime guide or publications by other regulators. 

In the meantime, if the FCA cannot in these proposals find an acceptable balance between its objectives and harm, and managing the potential risks to firms, individuals, and market stability – which we do not believe is possible simply with further tweaks to the proposed framework, as the basis for the proposals itself appears to us to remain fundamentally misconceived – then they should not proceed. 

Next steps

We have previously blogged on the proposals here, here, here and here. A questionnaire on the revised proposals remains open for comments until 17 February 2025.