UK: Part two in the FCA’s quest for transparency

The FCA’s original proposals in CP24/2 significantly unsettled the UK financial services industry, primarily due to the potential reputational damage which the announcement of an investigation could cause to a firm, particularly given that, at that point in the process, no findings of misconduct by the firm would have been established by the FCA (and may not be established), and also due to the lack of opportunity provided to a firm in advance of an announcement to challenge it.  You can read our previous article on the original proposals here.

The House of Lords Financial Services Regulation Committee (FSRC) and the House of Commons Treasury Committee called on the FCA to justify the proposals.  At an inquiry session on 13 November 2024, the FCA’s Chief Executive, Nikhil Rathi, and the FCA’s Chair, Ashley Alder, were examined by members of the FSRC, who said, amongst other things, that there was a “smack of unfairness” about the proposed process.

The FCA says that it has listened carefully to all the feedback it received in response to its original proposals (including submissions from this firm) and that, through the changes set out in CP24/2 Part 2, it is trying to address the concerns raised.  It adds that this further consultation also aims to assist the ongoing parliamentary scrutiny, including by the Commons’ Treasury and the FSRC.

CP24/2 Part 2: The FCA’s proposed changes

1. The public interest test 

The FCA now proposes expressly including the impact on firms under investigation as a factor it would always take into account in deciding whether the announcement of an investigation is in the public interest, including whether to name the firm concerned in any announcement.  Indeed, it says that this factor will be “central”  to its consideration of whether to announce an investigation and name a firm.  These revised proposals contrast sharply with the FCA’s original proposals under which the FCA expressly said that it would not include the impact of an announcement on a firm as a factor in its public interest test.  

Specifically, under its revised proposals, the FCA will consider whether an announcement, including whether to name the firm, would be likely to have a “severe impact” on a firm or third parties, in particular the firm’s current or former directors and/or employees.  In assessing the likely impact on the firm the FCA will take into account factors such as the likely impact on the firm’s share price, the potential for loss of clients and potential damage to contractual relationships. The FCA recognises that firm size may be particularly relevant, with the impact on smaller firms potentially greater – and that the age and/or stage of development of a firm may also be relevant, as impact might be greater on a more newly established firm.  

The impact on a firm will be assessed on a case-by-case basis, and the FCA appreciates that there will be “many instances” where publishing an announcement and naming the firm will not be in the public interest, for example where the potential impact on a firm outweighs the potential benefit, and harm can be reduced, or educational benefit achieved, without doing so.   

In terms of considerations relevant to the timing of an announcement, the FCA says that it might take into account if the information is already public, and it would consider at what point any harm reduction, reassurance to the market or educational benefit would be greatest. The FCA gives the example of an investigation which has followed an extensive period of supervisory engagement and, hence, where the FCA is likely to have a good understanding of the issues, in which case an announcement would likely be in the public interest early on in the investigation – as opposed to other cases, where the FCA would need to undertake more initial investigative work to learn more about the facts, in which case it would be unlikely to be in the public interest to announce until the investigation is more advanced.  The FCA adds that, under its current processes, it undertakes a thorough review at the three-month point, which would be the earliest point at which it would consider the question of an announcement.

The FCA also proposes that the potential for an announcement to seriously disrupt public confidence in the financial system or the market would be a new factor in the public interest test.

At paragraph 4.10 of CP 24/2 Part 2 the FCA sets out a grid of factors both in favour of, or mitigating against, the publication of an announcement and naming the firm. And at Chapter 5 it sets out case studies based on four previous cases which help illustrate how the proposed public interest considerations might apply in practice.

2. Giving firms time to respond

The FCA proposes that it would share a copy of the proposed announcement and provide firms with at least ten business days to make any representations to the FCA, which will also give firms time to consider whether they want, or may be required, to make an announcement themselves.  (The FCA adds that “…there will be extreme cases where this will not be appropriate, such as where serious fraud appears to be happening.” – but does not say whether, in such a situation, lesser notice, or no notice, will be given). 

If, after considering the firm’s representations, the FCA still decides to announce the investigation, it would share its reasons with the firm, and give the firm a copy of the final text at least two business days before it is published.  

This is a notable shift from its original proposals, under which the FCA proposed to give the firm under investigation no more than one business day’s notice of an announcement (unless the circumstances meant that the FCA needed to announce urgently, in which case no notice would be given).

The FCA explains that it will only take decisions on whether to announce after it has considered the firm’s representations, along with any legal issues (for example, to ensure any announcement complies with relevant personal data and human rights legislation). It will also consider any market sensitivity issues and discuss these with the firm.  The FCA recognises that where the announcement of an investigation is market sensitive, it is likely that the firm would also be issuing its own announcement in line with separate disclosure and reporting obligations and that, in these circumstances, it would generally be content for the firm to announce first, with a reactive confirmation from the FCA.  

The FCA confirms that decisions to announce will always be made at Executive Director level.

3. Existing investigations

Contrary to its original proposals, the FCA says that it will not make proactive announcements of investigations that are on-going when the proposals come into effect. On-going investigations will continue to be subject to the FCA’s existing policy of announcing in “exceptional circumstances”.  The FCA may, however, reactively confirm on-going investigations that are already in the public domain, where this confirmation is in the public interest.

“Enforcement Watch” publication?

The FCA recognises that there may also be circumstances where there may be benefits to announcing that it has opened an investigation but that there is no public interest in naming the firm involved.  It is receptive to a suggestion made in response to its original consultation of an “Enforcement Watch” publication, which would provide more detail on the themes, topics and trends in its enforcement work, and says that it will explore this idea further.  Such a publication, it says, could help firms identify areas of potential vulnerability in their own businesses and to underpin better compliance with FCA requirements, and there would not be any need to name the firm under investigation in order to achieve this aim. The FCA gives examples of investigations into firms’ systems and controls for financial crime, cyber security and market abuse as being potentially appropriate for anonymised announcements.

The FCA’s new enforcement approach 

The FCA says that the language used in its original consultation “unhelpfully gave an impression of a fundamental change in approach” whereas it views its proposals as an “incremental shift in current practice rather than wholesale change”.

It is keen to stress that its proposals must been viewed in the context of its wider reform to enforcement, whereby it is aiming to increase the pace and focus of its investigations.  It explains that it has raised the bar for opening an investigation and strengthened the pre-investigation triage process by considering (i) whether an investigation is most likely to drive impactful deterrence across the industry, and (ii) whether it can use its other tools to stop and reduce harm, rather than opening a formal investigation.

As a result, the FCA is opening fewer investigations. It says that it typically opens 10-12 investigations into regulated firms a year.  The FCA anticipates that its proposals would affect “only a subset” of these regulated firms it investigates.

This may lead one to wonder why the FCA cannot achieve the aims of its proposed new policy under its existing policy of announcing only in “exceptional circumstances”.  The FCA addresses this in CP24/2 Part 2.  In its view, the current test is narrower than its proposed new public interest test.   Under the current test it announces where circumstances are particularly unusual or rare, and the current test does not provide for when another enforcement agency has announced an investigation, nor does it provide for the FCA to reactively confirm the existence of an investigation where it has been announced by the firm.  While the FCA anticipates that the proposed change would only increase the number of proactive announcements by a small amount, it believes that it could potentially double the small number of proactive announcements currently made. (The FCA says that, currently, it has announced 14% of its open cases as at 28 November 2024 and that, typically, it announces around 1-2 cases per year).

Next steps 

Feedback to the proposals set out in CP24/2 Part 2 are to be submitted to the FCA via an online questionnaire on its website by 17 February 2025.  The FCA plans to decide on the proposals in the first quarter of 2025.

Commentary

Given the deeply unfavourable reaction from the UK financial services industry and parliament to the FCA’s original proposals, it is unsurprising that that the FCA has made these concessions, which lead to a far more rounded approach.

Although the FCA attempts to explain the benefit of its new proposals as compared to its current “exceptional circumstances” test by saying that they would enable it to apply a wider set of considerations to the decision of whether to announce an investigation and, ultimately, to enable it to potentially announce more investigations, one wonders what this will actually mean in practice, especially given the FCA is opening less investigations overall.

The fact that the FCA also recognises that the impact of an announcement on smaller or more newly established firms could be greater may lead to a situation whereby the odds are unfairly stacked against larger firms, given any impact may be more easily mitigated by them.

Ultimately, firms must prepare for these changes, and be ready for the prospect of an investigation being announced.  This will mean mobilising legal teams to prepare representations against publication, including gathering evidence on any potential negative impact on the firm, and readying PR teams to deal with any media scrutiny in the event of an announcement.  

If you would like to discuss this article, or any of the issues raised, please get in touch with one of the contacts listed.  

Authored by Daniela Vella and Philip Parish.