TheCityUK – Written evidence (EGC0027)

Introduction 

Our purpose is to champion and support the success of the UK-based financial and related professional services ecosystem, and thereby our members. The industry we represent is a national asset, contributing 12% of the UK’s total economic output and employing over 2.4 million people, with two thirds of these jobs outside London across the country’s regions and nations. The industry plays an important role in enabling the transition to net zero and driving economic growth across the wider economy through its provision of capital, investment, professional advice and insurance. It also makes a real difference to people in their daily lives, helping them save for the future, buy a home, invest in a business and manage risk. 

TheCityUK is pleased to respond to the Committee’s inquiry on the FCA’s proposals to publicise enforcement investigations and would welcome the opportunity to provide oral evidence to the inquiry. We note the Committee’s correspondence with the FCA and agree with the Committee’s view that the proposal ‘risks having a disproportionate effect on firms’ and ‘risks the overall integrity of the market’. 

Summary of TheCityUK’s position on the FCA’s proposals 

TheCityUK recognises the importance of enforcement to the FCA’s role in protecting consumers from harm and in meeting its other statutory objectives. However, we do not think that the FCA has shown that its proposals as set out in CP24/2 will advance its objectives. We believe the proposals to announce investigations are fundamentally flawed and undermine the UK’s international competitiveness. They would make the UK a less attractive place to do business, hindering the growth of the industry and of the wider economy. 

The proposals outlined in the consultation are not proportionate and do not support the FCA’s primary objectives to protect the integrity of the financial system and to promote effective competition. Crucially, given the globally mobile nature of the financial and related professional services industry, the proposals do not align with the FCA’s new secondary objective on international competitiveness and growth and are not in keeping with the approach taken by the Bank of England (BoE) and Prudential Regulatory Authority (PRA), nor in other major financial centres around the world.

The proposals risk doing substantial harm to businesses under investigation, who may not have committed any wrongdoing and who should benefit from a presumption of innocence, particularly given that the FCA itself states that around 65% of its investigations are closed without further action. The FCA could achieve its aim of creating a stronger deterrent effect in more proportionate ways, for example, by announcing investigations into certain types of wrongdoing, without naming firms or individuals. The FCA could also publish periodic announcements on a no-name basis, summarising the areas of focus of new and existing FCA investigations.   

We set out below more detail on why TheCityUK is strongly opposed to the FCA’s proposals:

Proposal to announce FCA investigations, including the names of the subjects, and publish updates on those investigations, when in the public interest 

• The proposed announcements will have significant negative impacts on investor confidence, the functioning of markets, and particularly on those firms who are investigated but subsequently found not to have committed any wrongdoing. This is especially the case given that these impacts could be long-lasting due to the length of time investigations take. The FCA’s annual enforcement performance data for 2023/24[1] illustrated that 73% of enforcement operations closed in 2023/24 took longer than 24 months to close, with 27% taking longer than 60 months. The negative impact of being named as under suspicion of wrongdoing for so long is unlikely to be remediable even if the FCA goes on to issue a decision clearing the party. 
• For example, the impact for some firms will be magnified and perpetuated by their incorporation by rating agencies in ‘controversy reporting’. Such reporting tends to persist for years, even after closure (including for instance subsequent press reporting of older ‘controversies’), serving to lock in the negative impact on named firms, even if ultimately cleared.

• The credibility of the FCA’s proposals is significantly undermined by its statement in paragraph 3.8 of CP24/2 that it recognises the proposed new approach “may raise concerns about the potential impact on our investigation subjects. We have, however, not included such impact as a specified factor in our proposed framework”. The potential impact on firms and their customers (who may also suffer a negative impact from reputational effects) of the proposals ought to be a key consideration, given that the FCA states that around 65% of its investigations are closed without further action. 

• The reputational damage to small firms and start-ups, in particular, could be fatal to the business if customer or investor confidence in the business is irreparably damaged. This risks the unintended consequence of stifling innovation and hindering the growth of newer entrants to the market.   

• This is underscored by the fact that the FCA can already name the subjects of an investigation in exceptional circumstances where it believes doing so will support its objectives, but it rarely does so. In addition, currently, when ‘Warning Notices’ are published, the subject can be named; but again, this is rarely done. We question the logic of proposing to publish information at an earlier stage than is currently the case when a Warning Notice is published, noting that the FCA is further on in its investigation at such a stage.  

• Moreover, by affecting market confidence in a firm that is subject to an FCA announcement, the proposals risk negatively affecting the Prudential Regulation Authority’s (PRA) objectives to promote safety and soundness and the Bank of England’s (BoE) objective to promote financial stability. This is particularly the case given the risk of some media outlets and social media sensationalising announcements and potentially prompting a loss of consumer/market confidence in a firm. Such reporting could also result in potentially unwarranted complaints to the Financial Ombudsman Service (FOS) and unintended consequences for how claims management companies operate. 
• The FCA’s assertion that the proposed changes are compatible with its secondary international competitiveness and growth objective does not appear to be evidence-based. The proposals are out of kilter with how other jurisdictions operate - including in the EU, Hong Kong, the USA and Singapore - and risk making the UK a less desirable place to invest and conduct business. For example: 

• In the US, the Securities and Exchange Commission’s (SEC) Enforcement Manual mandates confidentiality during the investigation process: ‘It is the general policy of the SEC to conduct its investigations on a confidential basis to preserve the integrity of its investigative process as well as to protect persons against whom unfounded charges may be made or where the SEC determines that enforcement action is not necessary or appropriate…the SEC cannot disclose the existence or non-existence of an investigation or any information gathered unless made a matter of public record in proceedings brought before the SEC or in the courts’[2].
• In the EU, the European Securities and Markets Authority (ESMA) does not disclose information about the start of an individual investigation[3].
• In Singapore, the Monetary Authority of Singapore (MAS) does not normally publicise enforcement actions before they are concluded. The abiding consideration appears to be whether it is in the public interest to make an announcement, and it will also consider whether an announcement will jeopardise the investigation or prejudice court proceedings. Empirically, the announcement of investigations which are ongoing and not yet concluded is rare, and analysis suggests that in the 18 months covered by the latest enforcement report, they published less than 1% of such cases. 

• The proposals are also out of kilter with the BoE/PRA approach, who make clear that they ‘do not usually make public the fact that we are investigating a particular firm or individual’[4]. In determining whether to make a public announcement, the PRA would ‘consider any potential prejudice, risk of unfairness and/or disproportionate damage’ to investigation subjects, and not publish information having determined that publication would be: (a) unfair to the persons concerned; (b) prejudicial to the safety and soundness of relevant bodies; and (c) detrimental to the stability of the UK financial system. It seems contrary to principles of consistent and sound regulation for UK regulators to adopt different standards for enforcement. 
• The FCA has not adequately explained why it believes its predecessor’s approach is no longer appropriate. The Financial Services Authority (FSA) set out its approach to enforcement investigations in CP17[5]. It stated that "We propose that, as a general policy, the FSA will not make public the fact that it is (or is not) investigating a particular matter. Publication of the fact that an investigation has been commenced by the FSA may prompt unwarranted public concern about the matters and persons within the scope of an investigation. It may put consumers’ funds at risk or do unwarranted damage to the reputation of firms, issuers or individuals involved.”  
• The consultation paper notes three significant benefits of communicating more about FCA investigations. We believe that these benefits could be achieved more proportionately by adopting an anonymised and thematic approach to communications regarding FCA investigation and enforcement activity. There are also several existing alternative means to achieve these proposed benefits without causing harm to firms (and their customers) under investigation, such as through ‘Dear CEO’ letters, industry workshops, speeches, seminars and press articles. Addressing each of the three purported benefits that the FCA highlights in its consultation: 

• “It builds trust in the system and the public will know we’re on the case”. The FCA does not explain why naming parties, as opposed to simply announcing the market being investigated and the nature of it, would create additional trust. 
• “Firms and the market will benefit too. By being clearer about the types of misconduct we think warrants a formal investigation, it allows other firms to learn lessons, raise their standards and think twice about doing the same at a much earlier stage than currently.” It appears that this benefit could be fully realised by simply announcing the nature of the investigation and the relevant market. It is not clear – and the FCA does not explain – why naming parties would help achieve this benefit. 
• “It will support our accountability by shining a light on the efficiency and pace of our investigations.” The FCA does not explain how naming the firms under investigation is at all relevant to this objective. It is unclear how publicising investigations would improve the efficiency or the pace of investigations. Rather, there is a concern that the FCA’s announcement of the investigations could put pressure on the FCA to speed up investigations in a way that could undermine the outcome 

FCA’s proposed public interest framework 

• There is no evidence to support the FCA’s assertion that including the identity of the subject of an investigation would influence any of the factors that the FCA puts forward in its proposed public interest framework. It is particularly concerning that ‘addressing public concern or speculation’ is a factor the FCA proposes to consider when naming a firm. Public concern or speculation is not a sufficient basis to ‘name and shame’ a firm before any evidence of wrongdoing has been established. 
• Indeed, the FCA’s approach seems contrary to the stated aim of the FCA as set out in a speech[6] by its chief executive who noted “…we aim to act proportionately, based on evidence. To collect more if we need it.”  As noted above, there are more proportionate ways to achieve the FCA’s stated objectives. 
• Moreover, given that the complaint statistics from the Financial Ombudsman Service (FOS) are regularly published, if a consumer has concerns about a potential product, service provider or firm, it can use the complaint information from FOS to identify (a) what is the product complained of; (b) how many complaints have been issued against a particular firm; and (c) how many of those complaints have been upheld by FOS. 
• The FCA, by its own admission in CP24/2, has not considered the potential impact on its investigation subjects as a specified factor in its proposed framework. This demonstrates a lack of understanding and appreciation of the potential impacts on firms, their employees and customers, and the reputation and stability of the UK as an international financial centre, all of which we would submit are clearly relevant considerations. 
• In its engagement with industry on its proposals, the FCA has suggested that under its proposed public interest test, the majority of cases would be announced at the start of the process. This suggests that the FCA is proposing a presumption in favour of announcing before it has considered the circumstances of each case. Given the negative impacts of such an announcement, such a presumption and lack of consideration is concerning and inappropriate.

Proposed content of FCA announcements 

• The fact that the FCA says its announcements will “make clear that the opening of an investigation does not imply that we have reached a conclusion that there has been a breach, failing, or other misconduct unless it is inappropriate to do so” will not achieve the FCA’s intended objective of clarity. In our experience, such a statement will not prevent market participants, the press and the public from making adverse presumptions about firms that are publicly named as under investigation. Indeed, once a firm has been named, we do not think that any statement can be guaranteed to mitigate the adverse impact.    
• As we note above, there is a real danger of significant reputational damage to firms, and to individuals whose lives may be seriously impacted, if publicly ‘named and shamed’ as subjects of investigations, even if they are subsequently exonerated of any wrongdoing. Experience suggests that announcements of corrections or exonerations do not gain as much media attention as announcements of investigations or perceived wrongdoing and, in any event, the existence in the public record of having been under investigation is likely to have an ongoing negative impact. For example, by making counterparties more reluctant to deal with the firm(s) in question.  

Proposed methods of publicising an announcement and updates

• We do not believe that the proposal to give the subject of an announcement one business day’s notice is remotely sufficient. The proposal does not provide for any period of consultation or involvement of the FCA’s Regulatory Decisions Committee (RDC). This contrasts with the FCA’s approach to publishing Warning Notices, which are consulted on with persons about whom the warning notice has been given. Firms have 14 days to make representations if they wish to challenge the FCA’s decision. It is unclear why the FCA does not intend to take a similar approach in this circumstance.  
• Whatever the amount of time given to the firm to prepare for the announcement, it is clear that any announcement will have negative impacts on the firm. More broadly, the FCA has not fully identified how it will approach the timing of an announcement if an investigation subject is listed in multiple jurisdictions.  
• Given the complexity and length of investigations, we do not think it is justifiable that the subject of an investigation should be exposed to ongoing reputational damage. This is underscored by the fact that around 65% of the FCA’s investigations end with no action being taken. It should also be noted that the FCA already has powers to publish Decision Notices, which include details of the subject, and the penalties imposed upon them through enforcement action.

11 October 2024