Industry slams FCA's naming and shaming proposals

Over the past few weeks, many advisers in financial services, as well as Whitehall, have been sharing notes and come to the conclusion that it is a fundamentally bad proposition. 

Nathan Willmott, dispute resolution partner at law firm Ashurst, says: "This is damaging to the competitiveness of the financial system. One of the priorities of the FCA is to promote the financial services system; it will undermine confidence in the financial system more generally."

Yesterday, the House of Lords financial services regulation committee said it "risks the overall integrity of the market and possible unwarranted impact on blameless firms", and asked for the consultation to be paused while it looks into it.

The FCA revealed its proposals late February, and has since extended its consultation by a couple of weeks, while the chief proponent of the plans, Therese Chambers, joint head of enforcement at the FCA, has been discussing the plans with trade associations and other interested parties through various means, including webinars.

The chief complaint many have is that the FCA is planning to name firms once it has opened an investigation, and at present give 24 hours notice of doing so.

In consultation paper CP24/2, the FCA says: "We want to proactively publish more information about our enforcement investigations, including their opening and progress. This includes publishing the identity of the subject of the investigation, if we assess that it is in the public interest to do so and if there are no compelling legal or other reasons not to."

It goes on to say that if there is no case to answer, then it will also make an announcement telling the public that there is nothing wrong after all.

Reputational damage 

It is this first element that the law firms and trade associations have a problem with.

Sona Ganatra, co-head of the financial services department at law firm Fox Williams, says: "Immediately there's a reputational hit – this is before the regulator has had a chance to interview or consider its case, and once it's out in the market it's very difficult to move back."

Under the current rules there are quite clear statements about publishing firms' or individuals' names during the enforcement process.

Currently, the FCA may receive a complaint, it will investigate it and take a view as to whether there has been a rule breach.

Its investigation will involve interviewing people, and consider the evidence, and if it decides something has gone wrong it will issue a warning notice, considered to be the first step in its decision over a firm, where the FCA is planning on taking action.

Under section 6.2, the enforcement guide discusses making it public. It says that the FCA will liaise with firms involved, discussing the potential impact of naming them, and giving them an opportunity to "provide clear and convincing evidence of how that unfairness may arise and how [it] could suffer a disproportionate level of damage".

You're trying to educate the FCA, and the announcement goes out the next day – it's just wrong.Matthew Nunan, Gibson Dunn

Such arguments against naming the firm in a warning notice statement include whether, for example, naming the firm may prejudice other proceedings, or affect the person's health, push them into bankruptcy or deprive them of income.

The firm in question can also decide whether to accept the finding, or dispute it, and the matter will then go to the regulatory decisions committee, to which they can make representations.

Under the new arrangements, in section 4, which replaces this section – additionally, the whole enforcement guide is being replaced – the FCA plans to publish names at the outset, using a "public interest framework". 

The consultation paper says: "We will decide whether and what to publish on a case-by-case basis, using a new public interest framework and taking all relevant facts and circumstances into account."

'Public interest' factors are described as:

• protecting consumers;
• encouraging whistleblowers;
• addressing public concern or speculation;
• providing reassurance that it is taking action; and
• deterring future breaches.

And as mentioned above, it says it will consider "compelling legal or other reasons" when making that decision. If making a public statement would have an impact on the stability of the financial system, for example, then it would not be considered to be in the public interest.

It goes onto say that if there is no case to answer, then it will at a later date make an announcement telling the public that there is nothing wrong after all. 

In a recent webinar hosted by City law firm Simmons & Simmons, Chambers said that if the framework were to be applied today, then two-thirds of their investigations over the past nine months would be made public under this new approach.

Many are extremely worried by this, and particularly about the viability of small and medium-sized financial services businesses under the new regime.

There will be cases where it is in the public interest and in the service of our aim to achieve impactful deterrence to name a firm.Therese Chambers, FCA

Lawyers expect the FCA in its announcements to say that it is investigating a particular firm with a broad focus of what the complaint is, for example money laundering.

This, many would think, would be enough to drive many small firms out of business, and seriously dent the share price of larger, publicly quoted firms, due to the reputational hit for being associated with such dubious activity, even if the FCA later came out and said that there was nothing to substantiate an initial complaint. 

Ashurst's Willmott says: "I think the biggest impact would be for firms where clients have their assets with them and they would get worried about the safety of those assets."

And it may adversely affect the course of the investigation itself. 

Matthew Nunan, partner in the disputes resolution group at law firm Gibson Dunn, says: "Quite a lot of the early part of the investigation is to understand the business model of the company. The investigators may not have come across this type of business."

The possibility, he says, is that the FCA may have got the wrong end of the stick, and has given the firm involved one day to get its ducks in a row.

"You're trying to educate the FCA, and the announcement goes out the next day – it's just wrong. They are giving themselves little time to get it right." 

Some firms may just settle early, to make it all go away rather than turn it into public battle with the regulator.

The regulator's motivation

The FCA, for its part, has been robust in its defence. Chambers in the Simmons & Simmons webinar last month stood her ground under similar questions saying: "What we've sought to do is set out the public interest framework within which we will make these decisions, and we've based that framework on our statutory objectives, because we think it is those objectives that define the public interest for us.

"We will look at all the facts and circumstances of the particular investigation which necessarily means there is some consideration of detriment and impact. The process will be done on a case-by-case basis.

"What we are not saying is that we will automatically announce every single investigation that we open or that we will automatically name every firm that is subject to investigation. This is not a blanket approach.

"But there will be cases where it is in the public interest and in the service of our aim to achieve impactful deterrence to name a firm."

A key element to this she added was to "enhance public confidence" in the regulator.

This is all about the regulator having a bad reputation in terms of the action that they take.Sona Ganatra, Fox Williams

The consultation has raised questions with many as to why the FCA has undertaken such a policy – "enhancing public confidence" in the regulator does seem to be a strong contender.

Many have suggested that the FCA enforcement division is overburdened with cases, and is trying to find a way to repair its reputation, not least for acting too slowly.

Fox Williams' Ganatra says: "This is all about the regulator having a bad reputation in terms of the action that they take. [They want to show] these are all the different things we are doing and moving quickly. It's reputational damage limitation rather than something that's positive for the markets."

Willmott agrees: "When the FCA was looking for a new head of enforcement, one of the key elements they were looking for was someone who would bring down the length of investigations because they were criticised on how long investigations were taking under Mark Steward.

"I think in some respects, if they go through with this, it will enable them to get their public outcome right at the beginning of their investigation, regardless of whether there has been a breach."

Alternative options?

But many believe they should just speed up the existing enforcement process itself, rather than conduct what some think is as much a marketing exercise as much a regulatory one.

Nunan says: "They always need more resources and there's an element of that, [it's] really streamlining their processes."

Emma Sutcliffe, head of disputes and investigations group at Simmons & Simmons, says: "If the FCA’s concern is about improving the speed and impact of the enforcement process, rather than using an announcement at the outset of an investigation without knowing the outcome, surely the better answer is to take steps to speed up the enforcement process itself?"

And there could be better use of 'Dear CEO' letters and thematic reviews to draw attention to issues, which many in the regulation business claim are taken seriously already by those they are intended for. 

An FCA spokesperson said: “We have been making wider changes to the way enforcement operates in order to deliver more impactful deterrence. This includes plans to conduct investigations more quickly and with a more focused number of cases.

“We have been consulting on announcing our investigations, on a case-by-case basis, where it is in the public interest to do so. We believe doing so will give all the firms we regulate and the wider public better insight, earlier, about issues we are concerned about. Announcing more of our investigations would bring us in line with several other UK regulators.

“We have been actively engaging with the industry on this consultation and welcome all feedback.”

The trade associations have not been asleep on this, and are considering ways to tackle these proposals.

A spokesperson at UK Finance says: “The FCA’s proposal to publicly name firms under investigation raises a number of issues. We believe the current proposals are disproportionate in that they could result in firms suffering real damage in terms of their reputation and valuation, given the majority of FCA investigations are closed with no further action.

"We also think the proposals have the potential to harm the UK’s competitiveness and attractiveness as a financial centre."

There will be a lot of attention on the firm, and will there be a lot of attention when it closes?Matthew Nunan, Gibson Dunn

Consumer groups appear as one of the few voices in support.

Mick McAteer, co-director of The Financial Inclusion Centre and a former FCA board member, says: "There is currently too much protection given to commercial interests in legislation and regulation. Commercial confidentiality is wheeled out too often to justify not disclosing information about regulatory activity.

"So, it is welcome that the FCA intends to become more transparent about enforcement activities. Obviously, in the interests of natural justice, care must be taken to ensure this new approach is used fairly and responsibly. But, it should act as a powerful deterrent against potential wrongdoing."

Still, the corporate advisers are concerned that human nature may trump fairness when it comes to making public statements.

Gibson Dunn's Nunan says: "The FCA is under a lot of pressure to take more action faster in different sectors, which means by definition it will be opening a lot of [cases] where there may turn out to be nothing. 

"There will be a lot of attention on the firm, and will there be a lot of attention when it closes? They haven't said what publicity there will be when they close it."

Melanie Tringham is features editor at FT Adviser