UK FCA “naming and shaming” proposals: the House of Lords steps in.

The proposals have to date been the subject of two FCA consultations: 

• Consultation CP24/2: Our Enforcement Guide and publicising enforcement investigations – a new approach, was published on 27 February 2024 and closed on 30 April 2024 (the “Initial Proposals”); and 
• Consultation CP24/2 Part 2: Greater transparency of our enforcement investigations, which revised the Initial Proposals, was published on 28 November 2024 and (at the time of writing) closes on 17 February 2025 (the “Revised Proposals”).  

We have published articles on both the FCA’s Initial and Revised Proposals, links to which can be found under “More on this topic” below. 

Background to the Report 

The FSRC launched a call for evidence on 8 May 2024 to gather representations from stakeholders on the FCA’s Initial Proposals.  It closed on 11 October 2024. (There was a two month pause during this period while Parliament was prorogued). 

The Report, Naming and shaming: how not to regulate, examines issues arising from the FCA’s approach to its intended change, including the extent to which its Revised Proposals address concerns raised by stakeholders about the Initial Proposals. The Report sets out the FSRC’s recommendations and next steps.  

In this article, we set out the issues identified by the Report under various headings and, in italicised text, the Report’s findings and, where made, the FSRC’s recommendations. At the end of this article we set out the FSRC’s conclusions and next steps. 

Ultimately, the FSRC is clear that, any future action by the FCA should be proportionate and clearly evidenced, failing which its proposals should not go ahead.

The Report: Identified issues, findings and recommendations

Initial engagement and communication

The FCA’s Initial Proposals were met by surprise and concern by the financial services industry. Many stakeholders made the point that there had been no prior notification of the FCA’s intention to publish these proposals and that the first consultation had not appeared on the FCA’s Regulatory Initiatives Grid. 

The Report found that the lack of engagement with stakeholders, or of proper notification on the Regulatory Initiatives Grid, “was unacceptable”. Furthermore, the fact that the FCA was then surprised by the strength of reaction to its proposals “suggests a worrying disconnect with industry on the part of senior FCA leadership”. Had the FCA conducted adequate engagement in the development stage of its proposals, it could have avoided a lot of unnecessary controversy and damage to the sector’s confidence in the regulator.

The Report recommends that the FCA should ensure that consultations are properly registered on the Regulatory Initiatives Grid, and it should also review its internal processes to ensure that earlier engagement with the sector is carried out when appropriate.

The move from “exceptional circumstances” to a public interest test

The FCA has attempted to justify this move by explaining that the current “exceptional circumstances” test is not broad enough to allow it to publish certain investigations which it considers should be disclosed in line with its statutory objectives.  By way of example, it has said that it could not use its powers under the current test to announce a case related to investment fraud because “investment fraud  is not exceptional”¹.  

Under the current test, the FCA typically announces one or two investigations per year which, it says, has created an expectation around how it interprets “exceptional”, essentially equating it with circumstances that are particularly unusual or rare -  and that, as well as the “exceptional” factor, its current policy sets out a narrower set of reasons for announcing compared to its proposed public interest test².  Whilst the FCA emphasises that the shift will not involve a significant increase in the number of investigations being announced, it would nevertheless double the amount of announcements it might make.

In the Report the FSRC says it is still unclear why an immediate risk of consumer harm would not be considered an “exceptional circumstance” which would demand disclosure of an investigation.  

It also remains unconvinced as to 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. It says that the FCA must be able to justify that this shift in approach is both proportionate and necessary.

The public interest test 

The Revised Proposals alter the public interest test as set out in the Initial Proposals by including the impact of the announcement of the investigation on (i) the firm which is the subject of the investigation, and (ii) the financial market more widely, as additional factors to be taken into account when assessing public interest.  These factors were not included in the test as set out in the Initial Proposals.

In its Revised Proposals, the FCA has also provided more detail on how it would approach the public interest test, outlining that decisions would be made in stages (i.e. whether an announcement would be in the public interest, when it might make an announcement, and what it might announce). The list of the factors it will consider are set out under “factors in favour” and “factors mitigating against” publication or naming. 

While the Report commends this change as one which reflects “a more balanced approach” and “goes some way to address stakeholders’ concerns”, it says that it remains unclear what specific criteria would guide the FCA’s assessment of “public interest” or how the FCA would evaluate the impact that it now recognises the announcements may have on firms and financial markets.   Further, questions persist around the levels of discretion the public interest test affords the FCA, how consistency in decision-making can be assured and how inconsistent outcomes avoided. 

Before any final decisions are taken to proceed with the change, the FSRC is of the view that the FCA must be able to demonstrate that its proposed new regime is underpinned by robust, fair and proportionate processes for the assessment of “public interest”. It says that further guidance on how the factors contained in the public interest framework will work in practice should be published, before any final decisions are taken.

Impact on individuals

The FCA has said that it will not generally announce an investigation into a named individual.  This has not changed between its Initial and Revised Proposals. 

The FSRC is concerned that the FCA’s Revised Proposals do not address the concern that senior managers and other key individuals connected to firms where investigations are announced could be identified through the Senior Managers Certification Regime or through publicly accessible information on the FCA Register. This potentially exposes those individuals to reputational damage regardless of the outcome of the investigation.  

Notice period

The FCA’s Initial Proposals gave firms 24 hours’ notice of the announcement of an investigation, but the Revised Proposals increase this to 10 business days, in order to give firms sufficient time to make representations – and, in the event that the FCA decides to publish, a further two days’ notice of publication. 

The Report says the increase from 24 hours to 10 days’ notice period is “a sensible change” but it expects the FCA to consider carefully whether two days’ notice of publication of any announcement is sufficient for firms. 

Secondary international competitiveness and growth objective

Following the FCA’s Initial Proposals, concerns were raised that they could risk positioning the UK as an international outlier, and making the UK a less desirable place to invest and conduct business. The FCA’s Revised Proposals responded to these concerns by arguing that, by announcing investigations, it would actually encourage greater competitiveness by allowing firms not subject to investigations to consider their own conduct, thereby compelling them to act to reduce their regulatory and financial risk - and that the educational benefit that these announcements could have to smaller firms may lead to establishing a better competitive environment by creating a more even playing ground.

In its Report, the FSRC says it remains unconvinced by the explanation offered by the FCA on how the proposals align with its secondary international competitiveness and growth objective. It recommends that the FCA should carefully consider the ways in which its proposals might adversely impact its secondary objective before it proceeds with implementing any changes to its enforcement regime.

Comparisons with international and domestic regulators 

The FCA has sought to draw comparisons in its proposed approach with other regulators.   In its Initial Proposals it contended that its proposed new approach was consistent with the approaches taken by other UK and overseas regulators.  In its Revised Proposals it conceded that, in truth, few financial services regulators announce their investigations but that no other regulator around the world has the same breadth of responsibilities it has. 

The FCA’s assertion that its proposals would be consistent with approaches taken by other international regulators is, the FSRC says in its Report, “misplaced and misleading”. It says that it is notable that the FCA has “changed the narrative on this”, from emphasising commonality with other regulators in its Initial Proposals to highlighting the uniqueness of its remit in the Revised Proposals. The FSRC is of the view that concerns that announcing investigations at the outset will impact on the UK’s competitiveness and will risk positioning the UK as an outlier are warranted, and that the FCA must be transparent about the further feedback it receives on these issues.

Consumers 

In its Initial Proposals the FCA advocated the need to publicise investigations in order to improve the information available to consumers, which would also reassure the public that the FCA was taking appropriate action.  However, there are concerns as to extent to which disclosure of an investigation would achieve this – and, actually, there is potential for announcements to cause public confusion (in that the public may not distinguish between the opening of an investigation and a regulatory finding that a breach had in fact occurred) .

The FSRC found that the FCA’s Revised Proposals did not specifically address how the FCA would ensure that the information provided at the point of announcing an investigation would be set out in a way that made it clear to consumers what the likely implications would be.

Whistleblowers 

In its Initial Proposals, the FCA stated that being open about its enforcement activities would encourage witnesses and whistleblowers to come forward, and inform its enforcement and supervisory work. The FCA has since supported its stance by referring to its whistleblower survey which, it said, flagged that whistleblowers had said that the regulator’s non-communication with them would dissuade them from making whistleblowing reports to the FCA in the future.  

In its Report the FSRC notes that the Revised Proposals exclude any reference to the whistleblower survey as a key basis for the FCA's belief that the measures would encourage greater participation from whistleblowers. 

Cost benefit analysis

The FCA has defended its decision not to undertake a formal cost benefit analysis in relation to its proposed changes on the basis that it is not proposing new regulatory rules or guidance. The FSRC is, however, of the strong view that it should undertake one. 

The Report says that the lack of a cost benefit analysis has contributed to industry concern that the full impact of the FCA’s proposals on firms and markets was not suitably considered, and that “the significance of the changes warrants one”.   The FSRC’s “firm view” is that the changes necessitate a robust and detailed analysis of the direct costs to the sector, and that wider factors in the UK’s growth and competitiveness should form part of this analysis. The need for such an assessment will be underscored if, as happened following its Initial Proposals, the feedback the FCA receives on its Revised Proposals reiterates the call for a cost benefit analysis. 

The Report goes as far as to say that the FCA should change its policy of producing a cost benefit analysis only for rules and guidance on rules.

The Report’s conclusion and next steps

The Report concludes that, while the Revised Proposals go some way to addressing “some significant gaps” in the Initial Proposals, they do not resolve the fundamental issue that, by broadening the justification for proactively announcing investigations, the FCA could increase the risk that investigations could be announced, reputational damage to firms could occur, media speculation could arise, but then no regulatory action is ultimately taken. The FSRC says it “remain[s] unconvinced that the proposed public interest framework will allow for proportionate and consistent decision making over whether to announce an enforcement investigation early”.

Following its Revised Proposals, which are (at the time of writing) subject to consultation, the FCA needs to be able to demonstrate that stakeholders’ concerns have been addressed and that the FCA’s motivations for the proposals have been clearly articulated and understood. This should include setting out supporting evidence and, if necessary, making additional amendments to the proposals to address any further concerns raised.  The FSRC asks the FCA to report back to it with its findings before any further changes are implemented.  The FSRC also asks the FCA to respond to it in relation to the various findings and recommendations made in its Report (as set out in italics above).  

Ultimately, the FSRC is of the view that the proposals should only be taken forward if the FCA can demonstrate that it has taken stakeholders’ concerns into consideration.  If the FCA does not find an acceptable balance between realising the potential benefits for consumer protection, and managing the potential risks to firms, individuals, and to market stability, it should not proceed with these proposed changes.

The FSRC observes that the FCA’s efforts to reduce the time taken to complete investigations are clearly working and are welcome, and the FCA should consider whether it should focus its efforts on expediting its investigative processes to increase transparency before making substantial changes to the wider enforcement framework. 

In its Report, the FSRC says it remains unconvinced that the FCA has adequately demonstrated how its Revised Proposals align with its secondary international competitiveness and growth objective. It says that the FCA would have been wise to have consulted with the Government on the initial development of these proposals, and that it should engage with the Treasury over any future developments of the proposals to ensure that they are aligned with the Government’s view of the secondary international competitiveness and growth objective.

Further, the FSRC is of the view that the initial failures in communication and engagement remain a concern and that the FCA should review its internal processes and communication strategies employed throughout this process, including a review of how appropriate its internal processes were for consulting on a change of this scale. It recommends 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. 

Commentary

The establishment of the FSRC was approved by the House of Lords in December 2023.  Its remit is to consider the regulation of UK financial services, including consultations notified to it under the Financial Services and Markets Act 2023.  In this, its first Report, brutally entitled “Naming and shaming, how not to regulate”, it has not held back in highlighting the issues and continued shortcomings in the FCA’s plans to change its approach to announcing enforcement investigations, and will no doubt be a chastening read for FCA senior management.  Many stakeholders’ concerns in relation to the Initial Proposals remain, despite the FCA issuing Revised Proposals.

The way in which the FCA has gone about this whole process has also highlighted serious concerns about the FCA’s own internal processes, and these have not escaped the attention of the FSRC.  It raises the issue of insufficient notice of the proposals to the financial services market, the lack of a cost benefit analysis and the lack of consultation with Government in relation to the FCA’s secondary competitiveness and growth objective. 

The fact that the FSRC has requested that the FCA respond to it in relation to addressing the shortcomings it has identified, and to take on board its recommendations, and has asked it to publish a “lessons learnt” document in relation to its lack of engagement with industry, shows that the Revised Proposals, although an improvement, have done little to dampen the backlash that the FCA is facing on this issue.  The FCA has its work cut out.  

Authored by Daniela Vella and Elaine Penrose.