What are the FCA’s updated ‘name and shame’ proposals?

The FCA has issued a further consultation paper on publishing its regulatory investigations (CP 24/2 part 2).

Its original proposals led to widespread concern and negative comment both from the industry and central Government. Read more here.

The FCA now accepts that it should have introduced these proposals in a better way, and states that it does not intend a fundamental change in approach.

How have the proposals changed?

The FCA has changed its proposals and now suggests that:

1. Decisions on publication will depend on a public interest test, but central to its consideration will be the impact on the firm.
2. It would give a firm a copy of any draft announcements with 10 days’ notice (not the one day originally proposed) so that the firm can make representations, with a further two days’ notice if it is decided to publish.
3. The public interest test will include the potential to seriously disrupt public confidence in the financial system or the market.
4. The FCA no longer intends to make announcements of ongoing investigations, i.e. those which are underway at the time the changes are introduced.

The FCA gives a detailed analysis of recent cases where it would have considered publication, i.e. the British Steel Pension transfer cases, the ‘flash crash’ at Citigroup Global Markets, PWC as auditor of London and Capital Finance (the failed minibond issuer), and Coinbase (concerning accepting high-risk clients for crypto business). It also gives examples of wording for its announcements.

Concerns with the proposals

While the FCA has softened its approach, there are still concerns including:

1. Existing guidance in the FCA Enforcement Guide already allows publication in ‘exceptional circumstances’ and sets out factors that are taken into account in deciding whether to publish, such as the protection of consumers or bringing forward witnesses. These overlap to a large extent with the factors on which the FCA relies in support of its proposed new policy. The FCA relies on a somewhat strained interpretation of ‘exceptional circumstances’ to argue that the present test is too restrictive. The natural interpretation, however, of the current guidance is that publication should not be routine or the default option – but that publication can be permitted in non-standard cases where a very strong public-benefit overriding case can be made for publication, and this seems to be a reasonable test.
2. The FCA states that few firms are subject to investigation and this number will decrease. Nevertheless, 65% of FCA investigations do not result in regulatory action – and currently not all regulatory actions are upheld by the Upper Tribunal. So, firms may be perhaps irreparably harmed by publication of an announcement that they are subject to investigation even though regulatory action proves not to be justified. Interestingly, also it was previously the stated policy of an FCA Head of Enforcement to increase the number of regulatory investigations, though this has now been reversed.
3. While under the FCA’s new proposals there will be 10 days to make representations and the impact on the firm will be considered, it remains unclear what weight will be given to the relevant factors and what would sway the FCA against publication in any particular case. It does seem that the perceived necessity to announce that the FCA is ‘on the case’ will be a major factor in the FCA’s thinking, potentially outweighing any impact on the firm.
4. The FCA emphasises that in many cases, an investigation will follow intense supervisory action by the FCA of the firm, including the firm accepting voluntary restriction on permission (‘VREQ’) – and a VREQ will always be publicised by including it on the financial services register. The FCA’s proposed changes may, however, have unintended consequences. Accepting a VREQ is not currently seen as being necessarily a gateway to enforcement action. Firms may at the moment reluctantly agree to a VREQ in the hope that it will allow them time to address any issues. If supervisory action, such as accepting a VREQ, is seen a preliminary to a regulatory investigation, then more firms may decline to accept such a restriction – leaving the FCA to try to compulsorily restrict a firm’s permissions, which might be contested by the firm to the Upper Tribunal.
5. The FCA stresses the value of publication of investigations as an educational tool for other firms. However, it is not clear why specific firms’ names need to be published in order to have this effect. It could be equally effective if generic non-specific information about existing investigations were published.
6. The FCA cites in some cases the fact that matters are substantially in the public domain because of (for example) actions of other regulators or disclosures to the market. It is easier to understand that the FCA may be more likely to publish in these circumstances, though it is again not certain – and publication is less likely to be controversial (so the firm may agree to it or make its own announcement).
7. The FCA does not intend to publish investigations of individuals. Where there is an investigation into a firm, there will almost always be concurrent investigations of individuals and (particularly with small firms) this is likely to lead to the identity of individuals becoming widely known. It is not clear how far this will be considered in the FCA’s public interest test.

The FCA believes that these changes will put it in a similar position to other domestic regulators. The jurisdiction of these regulators is not necessarily similar. The FCA accepts that publicising investigations will make it an outlier compared to other international financial services regulators, but state that no other regulator in the world has the same breadth of responsibilities as the FCA. Other international financial services regulators have, however, very wide (and similar) remits and exercise similar enforcement powers.

The consultation closes on 17 February. It is likely that some aspects of the new FCA proposals will be welcomed, but in general it will still raise significant questions.

If you have questions about the FCA’s proposals, please contact Tony Watts.