FCA proposes fundamental changes to its Enforcement Policy

The FCA has said that announcements will be made if it is in the public interest to do so and having regard to all the relevant facts and circumstances. The FCA proposes to apply a public interest framework test in making decisions whether to announce. Factors incorporated into this test include the interests of potentially affected customers, consumers or investors, encouraging witnesses and whistleblowers to come forward, to mitigate against speculation, provide reassurance the FCA is taking action and act as a deterrent. 

The FCA says it will include in any announcements a statement that opening an investigation does not imply it has reached any conclusion that there has been a breach or misconduct, unless it considers it inappropriate to do so (ie where Supervision has already take action that has been publicly announced). The FCA proposes, as a general rule, to give no more than 1 business day's notice of making an announcement.

The FCA has gone to some lengths to describe the checks and balances that will be in place to guide it in its decisions about making announcements. In particular, the FCA has described situations in which it will positively not do so, such as where other enforcement agencies are involved, specifically criminal authorities. The FCA is also proposing only to make announcements about firms, not individuals. The FCA has taken the view that there are no statutory limits on its proposed approach to firms, whereas for individuals data protection and human rights legislation impose restrictions on its ability to make announcements. 

Whilst the proposals will only relate to publications about firms and not individuals, they are troubling for a number of reasons:

• The FCA has expressly stated in its consultation that the impact of an announcement on the subject firm is not a consideration it will take into account in applying the public interest framework test. This is surprising when, under its longstanding policy to date, the FCA has explicitly stated that the potential prejudice to the subject of an investigation is a factor taken into account when deciding whether exceptionally to announce that an investigation has commenced. Failing to take into account the impact of an announcement on the subject firm seems to ignore the very real prejudicial impact that enforcement investigations have on firms once they are commenced, and the greater impact publication would have. The idea that the public will view this in some form of neutral fashion demonstrates a fundamental disconnect between the FCA and the real world in which firms operate. Public sentiment is very likely to view the FCA opening an investigation as a strong indication that a regulatory breach or some other form of misconduct has occurred. At that point, irreparable damage may be done through customers moving their business to another firm or not choosing to do business with the firm at all. This is especially a risk for smaller firms. Relations with investors and service providers may also be adversely impacted. Given that the majority of FCA investigations are closed with no further action months and – in many cases - years after investigations are opened, this illustrates the very real injustice inherent in the FCA's proposed approach. Contrary to the FCA's statement in its consultation paper it is hard to see how the proposal is "fair and proportionate".

• The potential for irreversible reputational impact on firms must be considered in the context of the very broad range of alleged transgressions that FCA enforcement investigations may relate to, including the prospect of criminal proceedings. The FCA has sought to justify its decision to make early stage announcements because this is what the CMA, OFCOM and OFGEM does. The FCA does not appear to have taken into account its arguably greater inclination to commence criminal investigations (including 'dual-track' criminal/civil investigations) and to ultimately pursue prosecutions for matters ranging from insider dealing and market manipulation to fraud and serious breaches of regulatory provisions (including those relating to money laundering). The potential for reputational impact in these types of cases is huge but can – in many cases – be avoided by non-disclosure or at least controlled through reasonable collaboration. This is something recognised by the Serious Fraud Office which, in its own policy on the publication of cases, expressly recognises the need to avoid such damage, as well as the potential harm to individuals as a starting point. 

• Announcements about the opening of investigations against a firm may well, depending upon the subject matters of the investigation, give rise to speculation about the potential culpability of individuals within the firm and whether the FCA is also investigating them. There is nothing in the FCA's proposals that will protect individuals from this risk. Contrary to principles the FCA say underpin the proposed public interest framework test, announcements will positively feed speculation, not mitigate it, especially in circumstances where nothing at all is said about the position of individuals. There is, therefore, the very real prospect that an announcement about a firm will generate speculation that implicates individuals.

• The very short notice proposed to be given of an intention to make an announcement gives the firm no real opportunity to prepare itself for the impact such an announcement will have or to take steps to object to it, for example, by way of representations to the FCA. In those circumstances, firms with sufficient resources may have no choice but to raise their reasonable objections via applications to the Court, which would have significant costs implications. Smaller firms may not be in a position to do so. This goes against the approach the FCA takes to the announcement of RDC decisions where there is, in principle, a more reasonable period of time to make representation to the FCA and to make an application to the Tribunal (pending which no announcement is made). Granted, the scope to keep RDC decisions private or to achieve anonymity is narrow. However, bearing in mind the potential for adverse impact in circumstances where there has been no finding of fact, the scope to reconsider a decision to announce the opening of an investigation ought to be broader not – as currently anticipated – narrower than that which applies in respect of RDC decisions. There is of course the possibility that the firm will be subject to a regulatory requirement to disclose the fact that there is an investigation, for example, because it is publicly listed, and the information is considered to be market sensitive. The proposals do not adequately deal with this scenario and appear only loosely to require the FCA to consider the particular impact on such firms.

• A firm's ability to make its own public statements about the opening of an enforcement investigation, after the FCA's own announcement, will be limited. Firms will likely need to avoid saying anything that expressly denies allegations of wrongdoing, as the FCA could otherwise accuse the firm of making misleading statements or of failing to cooperate with its investigation. In which case, all a firm can say is that it is cooperating with the FCA in the expectation of a positive outcome. Firms are, therefore, at a disadvantage in being unable to take their own steps to mitigate against the commercial impact of an announcement by the FCA that it has opened an enforcement investigation. 

• Publication of opening enforcement investigations ought to put the FCA under pressure to resolve them quickly and not allow them to drift/stagnate and may lead to challenge if they do. However, firms are going to be under significantly more pressure to agree outcomes to achieve an early disposal of enforcement investigations in order to mitigate against the prejudicial effect of being subject to a lengthy enforcement investigation which will, under the new proposals, be in the public domain and repeatedly brought into the limelight by regular updates issued by the FCA. There is a very real prospect this may lead to a greater risk of prejudice to individuals within those firms, where admissions made by the firm in order to secure a settlement lead the FCA to pursue enforcement against individuals. This has happened in a number of cases, perhaps most notably as a result of the LIBOR investigations and the enormous and irreparable prejudice that a large number of traders suffered as a result. The FCA's proposals risk worse outcomes for individuals.

Much of what the FCA seeks to achieve by way of transparency could be achieved by publishing information about investigations that does not name the firm that is the subject of them. 

Further, an approach that would be considerably more likely to instil confidence in the FCA's enforcement capabilities with regulated firms, practitioners and the public, would be for the FCA to commit to improving and streamlining the enforcement process and ensuring cases reach determination, one way or another, without undue delay. Most practitioners will have dealt with cases where investigations have been opened but have then not progressed materially for a number of years, leaving firms in an state of limbo that can cause stagnation and businesses to fail. The idea that this happens with an upfront public announcement is more likely to lead to more businesses collapsing at a time when FCA concerns may ultimately be unproven or shown to have been misconceived. Additionally, the FCA has come under pressure and received criticism in its handling of complex investigations which involve large scale disclosure exercises. None of the FCA's proposals in its consultation are aimed at addressing these issues. 

In the likelihood that these proposals will be adopted, regardless of the opposition they face, firms need to be ready for a fundamental shift in the FCA's approach to publicity around enforcement investigations. Whilst it may not always be possible to do so, firms that are aware, perhaps through prior FCA Supervision engagement, may need to seek legal advice at an earlier stage to be prepared for the impact of and possible challenge to publication.