The UK Financial Conduct Authority (FCA) published a consultation paper (CP24/2) at the end of February on a new approach to publicising its enforcement investigations and changes to its Enforcement Guide (EG). The announcement marks a further step in the FCA's increasing assertion of power as a regulator. The consultation has provoked a significant debate within the financial services sector about the impact these proposals will have. With the consultation now closed, we have pulled together the key themes that have come up over the last few months.

In addition to the general debate around the impact of these proposals, there are two interesting features of the debate which are linked to reforms implemented in the Financial Services and Markets Act 2023:

• This consultation represents the first time that the process introduced into paragraph 28 of Part 4 of Schedule 1ZA to FSMA (regarding the regulators engagement with Parliamentary Committees) has been applied to the House of Lords Financial Services Regulation Committee (FSRC) with an open dialogue between the FSRC and the FCA; and
• We have seen industry bodies and politicians invoke the FCA's new competitiveness and economic growth objective as an argument against the regulator's suggested approach.  For example, UK Finance has stated that it is unclear how the evidence on which the FCA relies demonstrates that the proposals will further this objective and notes that the FCA's proposed metrics to measure the effect of this proposal against this secondary objective are different from those which HMT has published as the relevant metrics for measurement. Both TheCityUK and UK Finance have suggested that the policy will result in the UK being an outlier against the approach taken in other jurisdictions, which will reduce, rather than enhance, the UK's international competitiveness.

The proposals put forward by the FCA include disclosing the names of firms (and/or individuals) that are subject to an enforcement investigation, their sector and the details of the suspected breach, failing or other misconduct under investigation, where doing so is in the public interest. From the FCA's perspective, this move aims to enhance transparency, educate and serve as a deterrent to potential misconduct. However, the commentaries from industry groups (including UK Finance, and TheCityUK), whilst accepting the importance of effective enforcement, have questioned whether the proposals are the best way to achieve these aims; further, these commentaries have highlighted possible adverse impacts, including the effect that it might have on the UK's competitiveness and how it might affect economic growth and even whether it might undermine market integrity.  There have also been a number of questions from senior politicians including Kemi Badenoch, Bim Afolami and most recently the Chancellor of the Exchequer, Jeremy Hunt.  In addition, the FSRC has suggested that the proposal "risks 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.  This also risks the overall integrity of the market, including through possible unwarranted impacts on share prices."  The FSRC also noted that the absence of a cost benefit analysis made it difficult to appreciate the effect of the new policy.

Previously, enforcement investigations conducted by the FCA were usually kept confidential until a breach or wrongdoing was confirmed and subsequent enforcement actions were taken, with a Final Notice published on the FCA's website. The FCA only departed from this practice in exceptional circumstances to make a public announcement (see EG 6.1.3) and in practice very rarely made use of this ability. Under the new approach proposed by the FCA, transparency will be prioritised from the outset and a new precedent will be established – it will become more customary for the public to be informed about ongoing investigations, irrespective of the substantive outcome or findings.

Why has this been introduced?

The change in approach is designed to achieve a number of policy outcomes, including:

• Increasing the deterrence effect of investigations - in Therese Chambers' own words (from a recent speech announcing the proposals), "[while it is satisfying to see criminals going to jail], it is even more satisfying for the FCA to deter criminals from committing crime in the first place as opposed to disciplining them after the crime is committed. Especially given it is more affordable for firms and taxpayers." 
  Deterring further wrongdoing is clearly a key aim for the new approach, although it remains to be seen whether the publication of examples of suspected misconduct will have a significant impact in this regard.
• Increasing transparency – The FCA has identified that there is a lack of transparency around its enforcement processes and is keen to address this issue. The FCA's view, expressed in its reply to the FSRC, is that the proposals, and the greater transparency around processes, will help to increase the pace and focus of its investigations, and will help to reduce delay between misconduct occurring and penalties being imposed.   The FCA asserts that this change will help to increase trust and confidence in the regulators and markets. The longer firms are not disciplined for their breaches, the more serious misconduct is deemed to be permissible.
• Encouraging whistleblowers - Finally, the FCA also hopes that, by publishing the opening of an investigation, affected customers, potential witnesses or whistleblowers could be encouraged to come forward.

What are the key changes being proposed by the FCA when making an announcement that an investigation has been opened?

• Announcing identity of the subject of investigation: As noted above, the FCA is looking to publish more information about enforcement investigations. This includes publishing the identity of the subject of the investigation, where the FCA considers it in the public interest to do so.¹ The FCA also plans to publish updates on investigations and announce when it has closed cases which have not led to regulatory or other action. It is, however, unclear how frequently these updates will be published and what the content of such updates will be. There is a risk that updates will be published after the FCA has achieved a particular milestone in an investigation and may not reflect developments that a firm under investigation has achieved, for example to close an element of an investigation (noting that the FCA has said it will announce when it closes investigations).
• Announcing the subject's industry sector, regulatory provisions and/or summary of suspected breach: In addition to the subject's identity, each announcement may also set out their industry sector, the regulatory and legal provisions to which the investigation relates, and a summary of the suspected breach, failing or other misconduct being investigated. The underlying aim appears to be to educate the public and industry by publishing this information. However, as UK Finance notes, the Financial Services and Markets Act 2000 (FSMA 2000) imposes legal limitations on the FCA's ability to publish information and it is unclear how this provision will be implemented through the proposed changes. Further, the FCA has not detailed the additional educational benefit is in naming a firm or an individual at the early stages of an investigation when the FCA already educates and signals its regulatory agenda through a host of publications such as policy statements, Dear CEO letters, business plans, speeches and webinars, and other market guidance. It is also unclear why the same impact could not be achieved by anonymising any information that is published.
• Publishing a disclaimer that an investigation does not imply misconduct or a breach: The FCA has indicated that it will state that an investigation does not imply misconduct or breach of requirements or that the FCA has drawn that conclusion when making an announcement.² Firms though will be concerned that the publicity surrounding any investigation announcement is unlikely to be nuanced (or that shareholders, investors and consumers will interpret with this nuance) and that the reputational impact may therefore be largely the same as if a regulatory breach or wrongdoing had been identified. It remains to be seen whether such announcements will be received in any other way than negatively.³ For smaller firms, the reputational impact of an investigation announcement may be disproportionately damaging when considering the potential impacts triggered, which could include the following: financial losses, inability to take on new business, losing key staff members to other firms, and potentially a large volume of information requests and complaints. We are aware of other regulated industries such as in auditing, where firms believe that negative publicity from regulatory investigations, and subsequent press reporting on them, has influenced the way the profession is perceived and has had a direct impact in contributing to the shortage of human capital (and, in turn, posing a barrier to competition within the market).⁴
• No grandfathering regime: An important point to note is that the new approach will apply to ongoing investigations as well as new investigations, and so firms that are currently under investigation by the FCA may be affected. Firms under investigation should prepare for this risk and assess the impact that information being released into the public domain would have on their reputation. We anticipate that the FCA will take a pragmatic approach to its current investigations, such as deciding not to publicise information where it is about to close an investigation even where public interest may suggest that publishing information should go ahead. However, this is untested and the approach adopted is yet to be determined.⁵ See further below in When would the FCA publicise investigations?

When would the FCA publicise investigations?

The FCA will adopt a case-by-case decision-making process on announcing investigations which will consider whether it is in the public interest to announce and any legal implications that could follow from any announcement. When considering the public interest, the FCA has proposed a framework of factors that it will take into account, including: the interests of consumers, encouraging witnesses and whistleblowers to come forward, addressing public concern or speculation, deterring future breaches, and advancing the FCA's statutory objectives. While these factors are very similar to the factors listed in EG 6.1.3 that the FCA will consider under its current approach, one of the main points of departure to the current approach by the FCA appears to be announcing "in exceptional circumstances".

The FCA has also listed matters that may not be "in the public interest", if:

• they are likely to have an adverse impact on the conduct of the investigation, an investigation by another regulatory body or law enforcement agency; or
• they impact the interests of consumers, the stability of the UK financial system or the FCA's ability to otherwise carry out its statutory functions.

Notably, the potential impact on the subject of an investigation is not specifically listed here (although could still be taken into account given the non-exhaustive nature of the framework). This is in contrast with the current approach in EG 6.1.3 where potential prejudice on the subject of an investigation is expressly considered. The FCA addresses this in its consultation paper, noting that it believes the decision to publish should be primarily focused on its statutory objectives.

Despite this framework, public interest is a broad concept and appears to give the FCA a great deal of discretion (particularly given firms (and potentially individuals) will only be given a day's notice of an intention to publish information, where they are to be named in an announcement). While the FCA has stated it will not go into any investigation with a presumption for or against publishing information, no examples have been given to identify where the line will be drawn in practice.

The FCA has noted that investigations into individuals require additional legal considerations when it comes to the publication of information. Therefore, the approach to publishing investigations about individuals will differ and the FCA will not usually announce these types of investigations. However, there is still a risk that investigations into some individuals could be announced publicly.

What if a firm wants to challenge a decision to publicise?

As mentioned above, firms will be given no more than one business day's notice before an announcement is made or, alternatively, no notice in cases where the FCA considers that to be necessary. Firms will therefore have very little opportunity to dispute publication decisions, assess the impact that it will have on its business, engage with stakeholders, or prepare its response other than potentially to point out factual inaccuracies.

This lack of notice draws out a particular concern about the proposals, around the effect on publicly listed firms which are subject to disclosure requirements under the Market Abuse Regulations. The consultation paper acknowledges the implications that any FCA announcement may have on these firms, but it is unclear how any potential impacts will play out in practice. While most listed firms will announce to the market that an investigation has been opened, the detail announced may be different to what the FCA intends to publish and create additional issues around needing to update the market, with a risk of additional reputational damage impacting share prices.

The FCA has very wide statutory immunity, meaning that firms which suffer losses as a result of information published by the FCA are unable to recover damages unless they can demonstrate that the FCA acted in bad faith (or that they have a claim for damages under the Human Rights Act 1998). This is a very high bar to satisfy and leaves firms with judicial review as the only effective remedy. That would come with its own issues and would likely not be sufficiently speedy to prevent a firm from suffering any losses caused by public announcements (especially if it transpires that any aspect of the announcement was not accurate).

Parliamentary concerns

The FSRC's questions to the FCA and the FCA's response are interesting as the FCA has publicly produced information which was not previously set out, in particular on the effect that naming might have on listed companies and the FCA has committed to consider "as part of our consultation response how we can explain more of our thinking about anticipated impact and what commitments we could make to assessing the impact of any changes one year after they are brought it; or, in the event that this is not practical, we will write to [the FSRC] and the Treasury Select Committee to set out why we can't …".

In response to the FSRC's questions about the approach taken by other regulators and other jurisdictions, the FCA recognises that there are a range of approaches, which are driven by "varying cultural norms and expectations about transparency and differing accountability frameworks", but does not engage in a full comparative analysis of all, or at least all major, financial services hubs.  The FCA does also indicate that many, but not all, publicly listed companies do make regulatory disclosures when subject to an investigation.

Finally, in response to questions about why a cost benefit analysis is not provided, the FCA indicates that as there is no rule-change proposed, the proposal does not require a cost-benefit- analysis.  This response demonstrates the limitations of the CBA requirements in FSMA 2000, and highlights that major changes can be implemented outside a rule-change.

Consequences and wider trends

Having the details of an enforcement investigation published clearly poses a significant reputational risk to the firm in question. Despite the FCA's claims that it will make it clear that an investigation does not imply a breach, shareholders, consumers and investors may interpret otherwise. While larger firms may have the ability and resources to mitigate press attention and accountability resulting from the publication of investigations, there is potential for the new approach to disproportionately affect and damage smaller firms. As TheCityUK suggests in its published response to the consultation, this could make the UK a less attractive place to invest and conduct financial services business, which could act as barrier to entry for new market entrants and risks stifling innovation and competition in this regard.

The FCA may point to other regulators, such as the Competition and Markets Authority, which publish information on their investigations at an early stage to justify its change in approach. As the FCA notes in its response to the FSRC, there is limited evidence on whether the process of naming firms subject to investigation has any effect on the competitiveness of these sectors.  However, as industry groups, and the Chancellor have noted, there are significant structural differences between sectors where those subject to investigation are named, and the impact that this process might have on encouraging inward investment.  The FCA acknowledged this point (although it notes that it does not apply equally across all financial services firms), and has suggested that its approach of not having a presumption in favour of naming is sufficient distinction from some of the other regulators who name those subject to investigation.

Firms should be aware that the FCA is shifting towards greater assertiveness in exercising its powers. For example, we are seeing an increased use by the FCA of its voluntary requirement powers (which are usually voluntary in the sense that firms can sign up or receive a requirement at the FCA's own initiative). A more assertive regulator may see a more aggressive response from the subjects of investigations – with information on an investigation already in the public domain, an incentive to settle early could be removed and firms may be more willing to consider challenges to the Upper Tribunal in order to set the record straight. Firms may take a more circumspect approach to the sharing of documents with the regulator or proactively reporting matters under Principle 11.

Overall, firms should consider the FCA's proposed changes as a signal, if one was needed, to review their compliance frameworks, ensure they meet FCA standards, and be prepared to respond effectively to any FCA inquiries or investigations. Any firms with particular concerns about the new approach should monitor the FCA's policy developments and take the opportunity to provide feedback during the consultation period to help shape the final enforcement policies.

Next steps

The final text of the FCA's policy will be published after it has considered the responses to the consultation paper. It will be interesting to see if the FCA maintains its position in light of the many, and vehement, objections not only from market participants, but also from politicians and parliamentary committees with oversight responsibilities.

With thanks to Tawana Robertson for her assistance in drafting this article.

1. This is also where the FCA considers there are no compelling legal or other reasons not to publish. ↩
2. This is unless making such a statement may be inappropriate (for example, if the FCA has already publicly taken supervisory intervention action against the subject of the investigation in which formal findings of breach have been made).↩
3. This is not to say that there are not certain circumstances where a breach or misconduct should be viewed negatively, especially where the breach or misconduct has been proven.↩
4. See Financial Reporting Council (FRC), FRC takes systemic look at barriers to competition in UK audit market: Click here (1 February 2024). We consider that the FRC and its process in respect of announcing open investigations might be a helpful comparison when assessing potential impacts of announcing; it currently issues Press Notices that concern the opening of an investigation right through to publishing Final Settlement Decision Notices.↩
5. We note that the CP is silent on the approach that the FCA intends to take in respect of announcing investigations in respect of those already in progress. ↩