Does the FCA consultation on enforcement signal a more aggressive approach?

On 27 February 2024, the FCA published Consultation "CP24/2: Our Enforcement Guide and publicising enforcement investigations – a new approach". This is a significant and unexpected consultation on what the FCA will publish about firms that are under investigation which might, in the past, have been characterised as “shoot first, ask questions later”. Apart from the likely pushback from legal and industry observers, we believe the new approach may have unintended consequences...

The key proposal: firms not individuals

The key proposal in this Consultation is that the FCA publish more information about enforcement investigations against regulated firms while they are still in progress. This will rely on a public interest framework to inform case-by-case decision-making on whether and what information the FCA will disclose. This may include publishing the identity of the firm(s) who are the subject of the investigation, as well as publishing updates on investigations which have been closed and/or not led to regulatory or other action.

In the case of individuals subject to investigation, the FCA recognise that there are specific legal considerations to be taken into account and so they will not usually reveal they are investigating a named individual.

Why are the FCA doing this?

The FCA justifies this new approach by citing the need for enhanced transparency, greater FCA accountability around the efficiency and pace of its investigations and boosting confidence in financial services markets by reducing the delay between the misconduct and the imposition of a penalty.

These rather bland arguments were expanded on by Therese Chambers, Joint-Executive Director of Enforcement and Market Oversight at the FCA, in a speech made on the same day that the Consultation was published. Two significant themes emerge: “impactful deterrence” and “our own accountability”:

1. “Enforcement is not just about the prison sentences, fines and censures. It is about communicating what our plan is and deterring bad behaviour.”; and
2. “We want to be more transparent about what we investigate…so that the public can be reassured that we are on the case.”

What information will be provided on each investigation?

According to the Consultation, each announcement on a current investigation is likely to contain the following:

• the identity of the subject of the investigation;
• the industry sector and regulatory or legal provisions the investigation relates to; and
• a summary of the suspected breach, failing or other misconduct being investigated.

Where the FCA has gone public on an investigation, it will publish the outcome of the case regardless of how it concluded.

How much warning will the FCA give affected firms?

Normally, the FCA will give no more than one business days’ notice of an announcement or update about a subject firm. If the announcement is potentially market sensitive, subjects will generally be informed after markets have closed, then publishing the information on its website at 7.00am and via an FCA-approved primary information provider.

What are some of the criticisms likely to be levelled at the new approach?

In our view, many of the FCA’s arguments in favour of publicity are questionable. Public disclosure may mean that the FCA is less willing to take on marginal investigations without reasonable certainty of success, so reducing the probability of being subject to enforcement action and thus the deterrence effect that the FCA is seeking. Therese Chambers appears to admit to this when she refers to “a streamlined portfolio of cases”. Fear of public opprobrium when cases are abandoned could also prolong investigations that might otherwise have been quietly dropped.

Secondly, we have been asking ourselves whether the appearance of being “on the case” is a strong enough argument for the FCA reversing the presumption of innocence. This seems particularly pertinent in the wake of the Post Office/Horizon scandal where there are uncomfortable parallels in terms of quasi-judicial authority. The reputational and collateral damage to firms from an early announcement could be severe – loss of confidence from clients, consumers and suppliers in some situations, or encouraging further complainants in others. Also, even though individuals will not be named, senior managers and staff can easily be identified through the Financial Services Register and may be likewise affected.

What else is new in the revised Enforcement Guidance?

The FCA has also taken the opportunity to carry out a comprehensive review of its Enforcement Guide (“EG”). Proposals include streamlining the EG to remove any duplication of the provisions of the Financial Services and Markets Act (“FSMA”), other legislation or information available in the FCA Handbook, and moving information about its broader strategic approach to the Enforcement pages of its website.

Some of the more interesting proposals are as follows:

• The FCA can refuse the attendance of a legal adviser at an FCA interview of a subject being investigated where it may reasonably be assessed as potentially prejudicing the investigation or any other ongoing investigation;
• The FCA will accept reports over which legal privilege has been asserted without agreeing to this fact. Thus, it will not accept any condition or stipulation over information thus received;
• Firms are encouraged to carry out their own investigations in anticipation of enforcement action. Although such investigations may be subject to legal privilege, the FCA is entitled to take into account a firm’s willingness to share findings when deciding what action to take; and
• References to private warnings are being removed from the EG as these should not be considered enforcement tools. However, the FCA still expects to give feedback about its expectations either in private correspondence or wider industry engagement.

Final word: There is plenty of material in the Consultation for industry observers and participants to chew over, but ultimately does it signal a more aggressive approach? Time will tell, however in our opinion the issuing of sanctions sends a more important message to the industry than the FCA’s current work in progress. In any case, past examples such as the Duty of Responsibility (of Senior Managers) that was much debated during the run-up to SMCR, suggests that the FCA may not get everything it is asking for.

Comments on the Consultation are invited by 16 April 2024.