Over the past couple of weeks, it’s highly likely that you will have been made aware of Financial Conduct Authority proposals to publicise enforcement investigations of financial services firms.
So much so that 16 financial services trade associations, including Pimfa, wrote to the chancellor of the exchequer, Jeremy Hunt, to intervene.
As is often the case with such highly contentious issues, there is a compromise to be found between what the regulator and industry wants.
Let’s address the industry’s primary concern regarding the proposals, which is the regulator's ability to announce when it has opened enforcement investigations into a firm, based on a new public interest framework, before any finding of wrongdoing.
This is a significant departure from the current practice, and the industry is understandably concerned about the potential implications.
From a Pimfa perspective, it is hard to see the benefit of broadcasting when a firm is being investigated for a breach of regulations. We know, for example, that around 65 per cent of enforcement investigations result in no enforcement action.
Pimfa has already made the point that, for smaller firms especially, the impact of simply publicising an enforcement investigation could be devastating and potentially ruinous, despite there being no immediate evidence of actual wrongdoing on the part of the firm.
Meanwhile, larger listed firms would almost certainly be subject to market volatility because of shareholder action, impacting their valuation or outflows of assets.
In both instances, the damage is done, even if no action is taken after the investigation.
On the other side of the debate, the FCA suggests that publicising enforcement investigations will provide greater transparency to the public about the work it is doing and act as a deterrent, leading to less misconduct in the sector and better outcomes for consumers.
Moreover, the FCA and the proposals state that the power to publicise enforcement investigations would be used sparingly, and there would be a public interest requirement in doing so, meaning that not every investigation would be made public.
However, it is important to also consider that in the current FCA handbook it states: “Where it is investigating any matter, the FCA will, in exceptional circumstances, make a public announcement that it is doing so if it considers such an announcement is desirable to:
- maintain public confidence in the financial system or the market;
- protect consumers or investors;
- prevent widespread malpractice;
- help the investigation itself, for example by bringing forward witnesses; or
- maintain the smooth operation of the market.”
Under the existing handbook, the FCA considers the potential prejudice to any persons who are, or who are likely to be, a subject of the investigation in deciding whether to make an announcement.
The factors listed here are similar to the proposed public interest framework in these new proposals. However, the main point of departure is the removal of "exceptional circumstances" and no longer explicitly considering the potential impact on the subject of the investigation.
The FCA addressed this point in its consultation, indicating that the decision to publish should primarily be focused on its statutory objectives.
