Can pushback stop the FCA from naming firms under investigation?

Published last week (February 27), the regulator proposed announcing that it has opened an investigation, including the identity of its subject.

But the consultation promptly drew concerns about the potential reputational harm from publishing a subject’s identity, especially if the investigation concluded without regulatory, civil or criminal action.

“The proposed new approach has the potential to do enormous reputational damage to firms that may have done nothing wrong,” says James Alleyne, legal director in the financial services regulatory team at Kingsley Napley. “Once ‘named and shamed’ many firms will never recover.”

The FCA says it will state clearly that announcing an investigation does not automatically mean it has decided there has been a breach or misconduct. But Alexandra Roberts, head of regulatory policy and compliance at trade body Pimfa, says the FCA’s caveat will not register with the market and wider public.

A new public interest framework

The FCA publishes information about enforcement investigations when they lead to outcomes such as a fine, but it generally does not publicise earlier that it is investigating.

FCA data show the regulator successfully imposed eight fines in 2023. “It looks pathetic when you think that the UK is one of the largest financial markets in the world,” says Simon Morris, a partner in the financial markets team at CMS.

“Now this isn't to say the FCA isn't doing a good job...but when it comes to enforcement action, unsurprisingly it is difficult to commence and it can be difficult to execute.

“And so the FCA wants to get more names out into the market to show us how hard it is working. So I think it’ll be a big temptation for it to announce big and recognisable names.”

The regulator plans to start publishing more information about open investigations, using a “flexible public interest framework” to decide whether and what to announce on a case-by-case basis.

There is a clear risk of inconsistency and unfairness regarding whether or not a firm will be identified.Richard Ellis, Charles Russell Speechlys

“Some of the factors the FCA says it will consider, such as making an announcement to protect the interest of consumers, are not dissimilar to an exception in the current regime, and are less likely to be controversial,” says David Pygott, a partner in the global investigations team at Addleshaw Goddard.

“However others are new, and much broader and subjective. For example, the FCA ‘providing reassurance that it is taking appropriate action’. In practice, this seems likely to create differences in the FCA's approach to different firms.

“To some degree, its decisions would necessarily be influenced by the wider political and media environment affecting a particular firm, regardless of whether the firm has good defence arguments in the investigation itself.”

Richard Ellis, partner at Charles Russell Speechlys, likewise highlights the FCA’s existing power to identify subjects of investigations in exceptional circumstances.

“As such, this weapon is already in the FCA’s arsenal. Any deterrence angle is already covered. Given this, it seems likely that the FCA is asking for greater scope because it wants to use it.

“The FCA’s thinking seems to be that identifying a firm as being under investigation would encourage witnesses and whistleblowers to come forward. That aim could only be achieved if the power were actually used.”

According to the framework, an announcement or update on an enforcement investigation will usually be in the public interest when, among other things, it is likely to:

• assist the FCA’s 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; and
• provide reassurance that the FCA is taking appropriate action.

“The FCA will need to establish clear and objective metrics for decision-making, with sufficient senior management oversight to ensure a consistent and fair approach is applied,” says Alleyne at Kingsley Napley. “One particular issue that will need addressing is the question of firms with listed shares.

“Those firms, and their share price, are likely to be affected much more than private companies by being named, which may create a presumption against naming them. This in itself will create an unlevel playing field and could give rise to potential widespread unfairness.”

There are inherent risks of inconsistency in any policy being applied case-by-case, says Imogen Makin, a counsel at Wilmer Hale specialising in financial services investigations.

“However, if this new policy has to be introduced, it is by far a better outcome for regulated firms that it is applied on a case-by-case basis, preferably taking into account representations from the investigation subject, than early publication being applied across the board, which would be far more unpalatable.”

The FCA could end up damaging its own reputation.Richard Ellis, Charles Russell Speechlys

Ellis agrees that in practice whether or not to identify a firm would always need to be decided case-by-case, unless identification were to take place in every case, which seems unlikely.

“Consequently, there is a clear risk of inconsistency and unfairness regarding whether or not a firm will be identified. There is also a danger that this process could lead, even subconsciously, to an element of bias during the investigation.

“If an investigator has decided, using their own discretion, that it is appropriate to identify a firm, then it may be likely that they may later be reluctant to acknowledge that the firm has not been guilty of the suspected misconduct.

“It may be assumed that such bias would not lead to investigations reaching the wrong conclusion in the end but it is possible that such bias may lead to investigations being extended for longer than necessary.”

Statutory immunity from damages

Despite concerns about reputational damage to firms, the FCA is immune from liability in damages, unless it is found to have acted in bad faith or breached human rights.

But acting in bad faith effectively means acting maliciously, says Morris at CMS, and it would be very difficult to show this.

“It's a very, very high standard to show. What is more likely is that if the FCA threatened to publish and the firm was sufficiently aggrieved, it could seek to injunct the FCA.

“But that would be a very strident step for a firm to take, and I think very few firms would be willing to do that.”

The FCA’s statutory immunity in respect of paying damages will be a significant obstacle for firms seeking to take action after they have been publicly named, agrees Adam Jamieson, partner at Ashurst.

“Firms are more likely to focus on successfully challenging the FCA at the pre-publication stage, before any reputational damage or financial loss has been suffered.”

If the FCA decides to announce, or publish an update on, an investigation that names the subject, the regulator will give the subject “appropriate advance notice”.

“The FCA will usually give no more than one business day’s notice but may give no notice if it considers that the circumstances require urgency,” the consultation paper reads.

If the FCA goes ahead with these proposals, it should include a specific mechanism for challenge prior to publication, says Makin at Wilmer Hale. “This is especially important given that the proposed public interest test for early publication does not include any consideration of the potential damage or harm to the investigation subject.”

Although the FCA is exempt from liability to pay damages under legislation, there is a scheme for handling complaints against the regulators.

A policy statement says the scheme acts as a counterbalance to its statutory immunity, but is not intended to undermine it.

“That may arguably be an acceptable state of affairs at present,” says Ellis. “But it may need to be reviewed if the FCA acquires greater ability to inflict damage on firms.”

While there has been much comment on reputational damage to firms, Ellis adds that there could also be damage to the FCA in the long run.

“The proposal will come with a risk that the FCA will identify firms as being subject to investigation and will then, in some cases, have to publish a follow-up statement saying that the relevant investigation was to be closed with no action taken.

“If this were to happen even on a semi-regular basis, the FCA could end up damaging its own reputation.”

Is a U-turn possible?

The proposal to disclose the identities of subjects of investigations is open to consultation until April.

Alleyne says “it remains essential for those in the regulated sector to clearly and objectively set out to the FCA the potential damage that could be caused by these proposals, and to engage with the regulator sensibly to communicate the likely harm to market participants”.

The FCA recognises that a more transparent approach may raise concerns about the potential impact on investigation subjects, but it has not included such impact as a specified factor in its proposed framework.

If the FCA’s aim is to improve transparency about enforcement investigations, this could still be achieved without naming those it is investigating, says Jamieson.

“Simply publishing details of the types of compliance issues and potential rule breaches being investigated on an anonymised basis would likely achieve the same outcome.

“It would show the market that the FCA is particularly focused on an issue, trigger firms to review their own controls in that area, and create a powerful deterrent.”

The FCA will be under a duty to consider feedback on its proposals, says Pygott at Addleshaw Goddard. “If widespread concern in the market is communicated back to the authority in response to the consultation, it might change course.”

But experience suggests a complete change of position is unlikely, he adds. “Modification of the proposals, for example by introducing more guard rails into the text of the proposed new enforcement guide, seems a more realistic objective for those concerned by them.”

Indeed, Morris says that as the FCA has trumpeted the policy, it would be an “enormous retreat and loss of face” for the regulator not to proceed.

“I think the FCA is likely to go ahead with this. Otherwise it will basically be saying, ‘We make a proposal and if firms make enough noise, we drop the proposal’. And that's not a message that they would be very happy getting out.”

Chloe Cheung is a senior features writer at FT Adviser