“Transparency as a regulatory tool”: The UK FCA’s proposed new enforcement approach

The FCA’s proposed new approach

In CP24/2, the FCA is proposing publicly announcing that it has opened an enforcement investigation including publishing the identity of the subject of the investigation, and publishing updates on the investigation, if it considers that it is in the public interest to do so.

The change will apply to all regulated firms but, due to specific legal considerations regarding information about individuals, the FCA will not “usually” announce that it is investigating a named individual, although it notes that there will be circumstances when it can lawfully make such an announcement, in the public interest.

The FCA will start to apply its new approach to all enforcement investigations, both new and ongoing, from the date the new policy comes into force.

The public interest framework

In order to decide whether an announcement or update is in the public interest, the FCA proposes a new public interest framework, which it will apply, on a case-by-case basis, to the fact, content and timing of each announcement or update. 

The FCA proposes a number of factors which it considers indicate that an announcement or update will be in the public interest – specifically the likelihood it will:

• enable the interests of potentially affected customers, or consumers or investors more generally, to be protected.
• help its investigation, for example by encouraging potential witnesses or whistleblowers to come forward.
• address public concern or speculation, including by correcting information already in the public domain.
• provide reassurance that it is taking appropriate action.
• deter future breaches of its rules or other requirements or prohibitions that it is responsible for enforcing, or
• otherwise advance one or more of its statutory objectives, including protecting and enhancing the integrity of the UK financial system.

The FCA also proposes a set of factors which it considers indicate that an announcement or update may not be in the public interest - specifically if it is likely to have an adverse impact on:

• the conduct of its investigation or an investigation by another regulatory body or law enforcement agency.
• the interests of consumers, or
• the stability of the UK financial system or its ability to otherwise carry out its statutory functions.

Note that the FCA does not include, as a factor for consideration within the framework, the potential impact on investigation subjects. This is because, the FCA says, it considers the assessment of whether publication of an announcement or update is in the public interest should be primarily focused on its statutory objectives.

The factors set out above are non-exhaustive.

Content of announcements

The announcement will contain sufficient information for the public interest purposes as identified in the relevant case, in particular to enable consumers, firms and other relevant market participants to understand the nature of the FCA’s concerns.

More specifically, each announcement may contain:

• the identity of the subject of the investigation (although not, in general, when the subject is an individual – see our comments above).
• the industry sector and regulatory or legal provisions the investigation relates to, and
• a summary of the suspected breach, failing or other misconduct being investigated.

The announcement will make clear that the opening of an investigation does not imply that the FCA has reached a conclusion that there has been a breach, failing, or other misconduct unless it is inappropriate to do so.

Where the FCA publishes an announcement of an investigation and subsequently closes it without taking enforcement or other action, it will make a public announcement stating this and/or amend the original announcement.

Announcements and updates will be published on the FCA’s website, and the FCA may issue a press release with a link to the relevant page.

Notice of announcements

The FCA proposes to give the subject of an investigation no more than one business day’s notice of an announcement or update unless, due to the particular facts and complexities of the investigation and the surrounding circumstances, the FCA needs to announce, or give an update on, an investigation urgently – in which case no notice will be given.

If an announcement or update is potentially market sensitive, the FCA will generally inform the subject of the announcement or update after markets have closed, and will publish on its website at 7.00am and via an FCA-approved primary information provider.  If the subject is a listed company in another jurisdiction, and the announcement or update is potentially market sensitive, the FCA will, where possible, try to avoid publication during stock exchange hours in that jurisdiction.

“Transparency as a regulatory tool”

Currently, unless there are exceptional circumstances to justify publicising that an investigation is underway, the FCA will only publish information about its enforcement investigations when it leads to outcomes, for example, when the FCA issues or proposes to issue statutory notices imposing sanctions, prohibitions and requirements, such as to pay redress.  By this time, the FCA says, the reassurance, educational value, and effectiveness of that information, which benefits consumers and industry, is often significantly reduced.  Further, publication is too late to encourage witnesses and whistleblowers to inform the FCA’s relevant enforcement and supervisory work.

The FCA contends that the case for transparency strongly supports its operational objectives, specifically those of consumer protection and enhancing the integrity of the UK financial system. The FCA believes that the educational and deterrent effect of early publicity will decrease the likelihood that harm to consumers and markets will occur in the first place by enabling the FCA to more effectively address risks.  Further, it says the proposals will increase public confidence in the financial system, thereby enhancing its stability and integrity, by demonstrating that the FCA is “on the case” in addressing risks to consumers and investors.

The FCA considers too that the proposals are compatible with its secondary objective of advancing the international competitiveness of the UK economy and its growth in the medium to long-term, by promoting trust in the UK’s financial markets, by demonstrating how the FCA is striving to ensure compliance with relevant requirements, and reducing non-compliance through education and deterrence.

The proposals will also, the FCA says, increase the regulator’s accountability by making its enforcement work more visible to consumers, the firms and individuals it regulates, and Parliament.  In the press release accompanying CP24/2 the FCA says that it has “committed to carrying out cases more quickly as [it] seeks to increase the deterrent impact of its enforcement actions” but there does not appear to be any explanation in CP24/2 of how the proposals will lead to quicker investigations.  It would follow that by publishing the fact of an investigation the FCA is holding itself up to public scrutiny, thereby prompting it to work more efficiently; in fact, in  her speech Therese Chambers said “We want to drive our own accountability by shining a light on the efficiency and pace of our investigations”. 

The FCA makes clear that, while it set out to be open and transparent, it remains subject to certain legal requirements, including the obligation to protect confidential information received that relates to individuals or firms under section 348 of the Financial Services and Markets Act 2000 (FSMA).

The FCA points out that its proposed approach is consistent with that taken by a number of other UK regulators, such as, amongst others, the Competition and Markets Authority. The FCA also states that the PRA has raised no current objections or concerns regarding these proposals.

Commentary on the FCA’s proposed new approach

The point at which the FCA may publicise enforcement action has been creeping forward over the years.  Originally, the regulator could only publish the final notice at the end of an enforcement action.  In 2010, FSMA was amended to allow the (then) FSA to also publish decision notices (which are issued at the end of the enforcement process, but before the subject of the investigation is able to refer the matter to the Upper Tribunal).  And, in 2012, FSMA was amended again to allow the regulator to publish, in relation to warning notices, “such information about the matter to which the notice relates” if it considers it appropriate to do so and provided, in its opinion, it would not be unfair to the person concerned, prejudicial to the interests of consumers, or detrimental to the stability of the UK financial system.

By contrast, the public interest framework proposed for these latest proposals does not take the impact on the investigation subject into account (instead the FCA’s statutory objectives are given priority).

The decision on whether to exercise the power to publish information about a warning notice, and what information to publish, is taken by the Regulatory Decisions Committee (RDC) after it has consulted with persons about whom the warning notice has been given, including normally providing 14 days for the person to respond in writing to the RDC. An application can be made to extend that time.

The FCA’s current proposals do not provide for the checks and balances which accompany the involvement of the RDC, nor allow for any period of consultation.

The FCA links increased transparency with the furtherance of its statutory objectives – but it might be wondered if the FCA’s proposals have another, more self-serving, element: the proposals may have the (intended) effect of countering scrutiny of the FCA’s performance in investigations and enforcement outcomes by enabling the FCA to demonstrate its proactivity. As Therese Chambers herself says “the public can be reassured that we are on the case”.  

By going public with investigations at such an early stage, there could also be a risk that the FCA is putting itself under unreasonable pressure to finish what it starts – and this could potentially lead to rushed investigations, or, potentially, to a reluctance to close cases with no findings.  Perhaps in recognition of this, Therese Chambers says that the FCA “will focus on a streamlined portfolio of cases through [which] we can deliver the greatest deterrent impact, acting at pace and with greater transparency”. This focused approach, however, seems somewhat at odds with the FCA’s insistence that the opening of an investigation does not imply that the FCA has reached a conclusion that there has been a breach, failing, or other misconduct: if a case is identified as one through which the FCA can deliver the greatest deterrent impact, the public may assume that the opening of an investigation into that case is indeed indicative that the FCA has reached a conclusion that there has been a breach (etc).

Therese Chambers talks of the proposals in terms of “impactful deterrence”. Whether they measurably deter misconduct will, if they come into force, remain to be seen. If the information which the FCA might wish to announce derives from information which it has received under section 348 FSMA, the applicable confidentiality requirements may make it difficult for the FCA to be as transparent as CP24/2 suggests. In any event, such announcements are highly likely to impact firms in ways which the FCA seems to have failed to properly consider.  The potential reputational impact to a business could be significant, particularly if the impact of an announcement is exacerbated by press speculation. The FCA’s proposed disclaimer that the announcement does not imply that the FCA has reached a conclusion that there has been a breach, failing, or other misconduct may well be overlooked or, as explained above, disregarded.

Reputational damage may lead to loss of investor and/or consumer confidence, which may in turn lead to detrimental financial impact, felt more acutely by smaller firms.  If the investigation drags on, the firm has to deal with being in the shadow of a regulatory probe over a long period of time. (The average duration of an FCA investigation was 41 months for cases closed in 2022/23).  The FCA cites the statutory objective of public confidence as a reason for transparency. That may be true in terms of confidence in the regulator but, in reality, consumers, thinking “no smoke without fire”, may (for example) decide to change provider if they know theirs is being investigated.

Further, the announcement may precipitate a flurry of complaints, claims management company activity, data subject access requests, freedom of information requests, and litigation.  The firm’s legal and PR departments are likely to be kept busy.

Considering all the ways the proposals have the potential to negatively impact a firm, announcing the opening of an investigation seems unnecessarily premature and, ultimately, unjustified, given there is no proof of wrongdoing at that stage (perhaps at any stage). The proposals do not include any avenue for consultation with, or challenge by, the firm - merely allowing for one business day’s notice at most, which is simply insufficient to provide a meaningful opportunity for engagement.  Given that, reportedly, around 65% of the FCA’s investigations currently close without action, it is unclear what the benefit of announcing those investigations would have been, other than to enable the FCA to evidence that it is doing its job.   

Proposals for a revised Enforcement Guide (EG)

As part of CP24/2, the FCA also announced proposals to revise its EG.  These include streamlining the EG to remove any duplication where it currently repeats provisions of FSMA, other legislation or information available in the FCA Handbook, and moving information about its broader strategic approach to the Enforcement pages of its website.

The FCA also proposes the following policy changes:

• The FCA may refuse the attendance of a particular legal adviser at an FCA interview of a subject under investigation where it may reasonably be assessed as potentially prejudicing the investigation or any other ongoing investigation – for example, where that legal adviser has a conflict of interest or owes a duty of disclosure to another person (including the interviewee’s employer).

• The FCA says that it will accept reports over which legal privilege is asserted without agreeing the fact or extent to which it is legally privileged.  It recognises that a firm may choose to provide an investigation report on a limited waiver basis to the FCA (i.e. on the basis that the firm may assert legal privilege as grounds for non-disclosure to a party other than the FCA), but it cannot accept any condition or stipulation which would purport to restrict its ability to use the information in the exercise of its statutory functions, and that it cannot “close its eyes” to information received or accept that that information should, for example, be used only for the purposes of supervision not enforcement. 
• The FCA encourages firms to carry out their own investigations in anticipation of enforcement action. It recognises that firms are not under any obligation to share the content of a legally privileged report or advice they receive, and that it is solely their decision, but adds that a firm’s willingness to volunteer the results of its own investigation, whether protected by legal privilege or otherwise, is welcomed by the FCA and is something the FCA may take into account when deciding what action to take, if any.
• The FCA is removing any reference to private warnings from the EG as it says that it should not use them as an enforcement tool in circumstances where it cannot be more publicly transparent about the issues that concerned it.  It clarifies that, instead, it will give useful feedback about its expectations through correspondence or wider industry engagement.
• It is also removing references to preliminary findings letters and preliminary investigation reports because they are no longer used in that form.
• Decisions to apply to the court to commence civil proceedings will be made by an Executive Director or a Director in Enforcement, which is also mirrored in similar provisions in the EG relating to commencing criminal proceedings. The FCA believes that extending the power to make these decisions to Directors in Enforcement would align better with how it operates and still reserves the decision to an appropriately senior level of decision-maker.

The FCA includes a full draft of its revised EG at Appendix 1 of CP24/2, although it does not highlight where changes have been made.

Commentary on the proposed changes to the EG

Most changes to the EG seek to make it a more user-friendly document.  Some of the more substantive policy changes are likely to reflect what already happens in practice. Some, such as the first one above, may cause some practical issues for firms and their employees. 

That the FCA will take into account a firm’s willingness to volunteer the results of its own investigation, whether privileged or not, when deciding what action (if any) to take against the firm, is very much in line with previous pronouncements by the new Enforcement leadership at the FCA.  In her inaugural speech, Therese Chambers praised a firm under investigation for its co-operation and said it was “a model of how to behave”.  That firm had provided its investigation report, prepared by external legal advisers, and waived privilege over the report.

The FCA’s removal of the use of private warnings from the EG is a move which, again, is driven by the desire for increased transparency. A private warning is a non-statutory tool used to put a firm on notice that a breach may have occurred but that formal action will not, for whatever reason, be taken in the particular case.  It offers a quick and clear resolution in cases where a full investigation is not proportionate or appropriate and, arguably, has a place in the FCA’s enforcement toolkit.  A potential risk of this change is that, without this tool at its disposal, there could be less scope for formal, private engagement with a firm where that would previously have been justified and/or lead to enforcement investigations being commenced in circumstances where this would not previously have been regarded as a proportionate response.

Next steps

The FCA has asked for feedback on the proposals outlined in CP24/2 by 16 April 2024.  If you would like to discuss the proposals or any aspect of this article, please get in touch with one of the contacts listed.  We would be happy to help.

Authored by Daniela Vella, Arwen Handley and Michael O’Donoghue.