FCA consultation proposes changes to enforcement investigations

The FCA has recently released a consultation paper proposing changes to how it carries out enforcement investigations. We consider the key proposals and how they may impact upon both firms and individuals under the FCA's regulation.

What has the FCA announced?

In a consultation paper released on 27 February (CP 24/2** - the Paper), the FCA set out plans to publicly announce details of enforcement investigations at an earlier stage of the investigation, if it is considered to be in the public interest to do so. Reducing and preventing serious harm is one of the pillars of the FCA's three-year strategy, and it's hoped that the proposals will have a deterrent effect.

The proposals will no doubt be of concern to many FCA regulated firms and individuals alike – particularly given the risks of reputational damage, which in many cases may be unnecessarily suffered given that a significant number of FCA investigations are closed without further action being taken.

The proposals seemingly stem from a drive for greater transparency. The FCA also considers that, through the provision of further information regarding ongoing investigations, consumers will have greater confidence in how the FCA operates.

However, the Paper acknowledges that there are restrictions on the information the FCA can release. When it comes to FCA regulated individuals, the Paper states that the "proposal is to not usually announce that an individual is being investigated", whereas when it comes to firms, it seems likely that the default position will be to publish the details of an investigation.

The FCA states that a decision to publish information is subject to whether it considers it to be within the public interest to do so. This then of course begs the question – in what circumstances will the FCA consider it to be within the public interest to publish the details of an investigation?

The public interest framework

The Paper states that details of an investigation will likely be released if the publication of those details will:

• Enable the interests of potentially affected customers, or consumers or investors more generally, to be protected.
• Help an FCA 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 the FCA is taking appropriate action.
• Deter future breaches of the FCA's rules or other requirements or prohibitions that the FCA is responsible for enforcing; or
• Otherwise advance one or more of the FCA's statutory objectives, including protecting and enhancing the integrity of the UK financial system.

What is clear from these criteria is that the FCA has designed a framework where intentionally the interests of those subject to an investigation are unlikely to be accounted for.

The FCA's rationale is that it is focussing on its statutory objectives. The statutory objectives provide for an approach which focusses on the benefit to consumers, but the question which follows is whether the right balance is being struck between (1) the extent to which consumers' interests are being advanced and (2) the potential detriment to firms caused by the announcement of an FCA investigation.

Potential impact

Following a Freedom of Information request, the FCA revealed that, for the period between 2016 and 31 December 2021, there were 602 enforcement investigations and of those investigations, 269 were recorded as 'closed with no action taken' (44.68%). During a recent summit, Theresa Chambers, joint executive director of enforcement and market oversight, announced that around 65% of FCA investigations currently close without further action being taken.

Notably the Paper sets out that in some instances, the FCA will proceed to publish details of an investigation before providing notice to the respondent firm or individual. The implications of this may be significant – whether that's reputational damage for a smaller firm that they are unable to recover from or for a larger firm damage to their share price.

If the FCA is to proceed with these proposals, a perhaps fairer approach may be to provide firms/individuals that are the subject of an investigation with the opportunity to respond to any concerns raised by the FCA, and to publish that response alongside the information released by the FCA. 

As we discuss below, it is not only those firms subject to an investigation which may be impacted by these changes.

Past Business Reviews

Should the FCA proceed with its proposals, there will be instances where firms outside of an investigation become aware the details of an investigation, and subsequently become concerned that they may also have acted contrary to the FCA's expectations. This may lead those firms to question whether a voluntary past business review should be undertaken to identify whether there is evidence of any mis-selling or foreseeable harm.

PRIN2A.2.5R provides that:

"If a firm identifies through complaints, its internal monitoring or from any other source, that retail customers have suffered foreseeable harm as a result of acts or omissions by the firm, it must act in good faith and take appropriate action to rectify the situation, including providing redress where appropriate." (our emphasis)

Published details of a live investigation may trigger firms outside of an investigation to consider their regulatory responsibilities including any redress exercise.  This is going to be a particularly difficult decision for firms where, in the end, the FCA's investigation is closed with no action taken.

Summary

There seems to be a significant risk firms will face at least reputational damage in cases where the FCA ultimately concludes that no further action is required.

Whilst the FCA's objective of increasing transparency to better its own accountability is understood, this must be balanced with the position of FCA regulated firms and individuals and it seems likely that questions will be raised within responses to the Paper as to whether that balance has been fairly addressed.

For those who wish to respond to the FCA's proposals, responses must be provided by 16 April 2024.

A copy of the FCA's proposals can be found here.