Association for Financial Markets in Europe – Written evidence (EGC0029)

The Association for Financial Markets in Europe (AFME) welcomes the opportunity to comment on the HOUSE OF LORDS’ FINANCIAL SERVICES REGULATION COMMITTEE CALL FOR EVIDENCE ON CP24/2: OUR ENFORCEMENT GUIDE AND PUBLICISING ENFORCEMENT INVESTIGATIONS.  AFME represents a broad array of European and global participants in the wholesale financial markets. Its members comprise pan-EU and global banks as well as key regional banks, brokers, law firms, investors and other financial market participants. We advocate stable, competitive, sustainable European financial markets that support economic growth and benefit society.

AFME is the European member of the Global Financial Markets Association (GFMA) a global alliance with the Securities Industry and Financial Markets Association (SIFMA) in the US, and the Asia Securities Industry and Financial Markets Association (ASIFMA) in Asia.

Executive Summary

AFME welcomes the decision by the Financial Services Regulation Committee to scrutinise and challenge the FCA’s proposal as set out in CP24/2 (“the CP”). The FCA’s proposals to announce and publish updates on investigations, including the names of the subjects, has caused very significant concern amongst our members, particularly in relation to:

• The FCA’s process: that these have been published without the customary notice to the market and without any accompanying (albeit voluntary) cost-benefit analysis.
• The proposed public interest test: the CP provides limited detail and the impact on firms and the market has not been sufficiently considered
• The lack of consideration of the impact on firms and the market: this potentially very significant impact appears not to have been fully thought through, along with the risk that public announcements could be misunderstood or misused, particularly in a media/social media context. Further, CP proposes giving firms insufficient time to prepare for publication.   
• The lack of global precedent: there is no comparable regime within the global financial services regulatory landscape and comparisons made to other regulators’ approaches are not, in our view, accurate or helpful. Becoming an outlier in this respect is likely to harm UK competitiveness at a global level. 
• The legal basis: we are concerned that no solid legal basis for these proposals exists.

We continue to believe that the FCA can meet its objectives via means other than publicly naming firms and that this has not been given sufficient consideration in the FCA’s proposals. We encourage the Financial Services Regulation Committee to raise this with the FCA in the context of our concerns above regarding their proposals.

Consultation Response

FCA Process

No notice of such a significant review of enforcement procedures was given (for example via the Regulatory Initiatives Grid[1], which is an extremely valuable planning tool for the industry). The CP itself was marked as “two-star” with only a six week comment period, suggesting that the FCA itself did not consider it to be of the highest impact level, which is surprising given the content.

We also believe that, although there is no obligation for the FCA to provide cost-benefit analysis (CBA) on these proposals, the significance of the change should have warranted one. The lack of CBA also contributed to industry concern that the full impact of the proposals on firms and markets was not being suitably considered, as we set out below.

While the FCA did undertake an extensive programme of industry meetings to discuss the proposals, the explanations and detail given within these meetings did not completely align with the content of the CP, making it harder to comment in our written response.

Proposed Public Interest Test

We are concerned by the lack of detail in the framework proposed by the FCA. While we understand that there will be no presumption of publicity, it is not clear how the test will be applied in practice or how the FCA will exercise its discretion in doing so. It is implicit in the CP that the FCA intends to publicise more widely, so we are concerned that this will, in effect, lead to most cases being publicised

The CP is lacking useful detail such as worked examples to give an indication of the cases that would likely remain confidential and those where the FCA considers the public interest test would support some form of publicity, e.g. using historic outcomes or highlighting the types of cases that would / would not have been publicised, how and at what point.

In addition, in meetings held between the FCA and the industry, the decision process was set out differently, as a two-stage test (public interest + relevant factors/circumstances of the case), followed by a final consideration of what form the disclosure should take. While this is a clearer explanation, this is not evident from the consultation, therefore difficult for us to address in our written response.  

Impact on Firms and the Market

Paragraph 3.8 of the CP specifically notes that the FCA does not take impact on investigation subjects as a specified factor in its proposed framework. This is of great concern to our members and is, in our view, unjustifiable and inappropriate. It is also potentially inconsistent with the FCA’s obligations as a public body. It is not enough to simply have a catch all reference to “taking all relevant facts and circumstances into account”. The impact of publication on the firm is undeniably a material factor which should be considered in all cases, particularly due to:

• Risk of misunderstanding, for example that the notice signalled culpability, potentially exacerbated by speculation/misinformation in the media/social media. The FCA has not cited evidence to support its apparent view that consumers in general will be able to understand the nuances and does not appear to have taken any account of the risk of consumer harm from inaccurate understanding of the position, nor to have conducted consumer testing. This risks harm to consumers, who may change provider or make financial decisions based on the publication of an investigation. Further, this risk could lead firms to feel they must also comment publicly, which could lead to divergent views being expressed by the firm regarding whether any breaches have arisen and what the consequences of the investigation are.
• The proportion of investigations that end with no further action, currently over 60%. There will be more media attention paid to announcements of investigation opening than closing and the wording of closure notifications may not always totally ‘exonerate’ firms.
• Risk of damage to shareholder value from speculation and confusion. We note the example that in March 2014 the share price of several insurers fell significantly following the publication of a news item indicating that the FCA intended to investigate 30 million closed book insurance policies. More recently, banks offering motor finance policies faced a reduction in share price following the FCA’s January announcement that it intended to investigate this activity. Publication in these circumstances could actually lead to the FCA’s own actions undermining its statutory objectives (e.g. in relation to market integrity, consumer protection), with effects exacerbated by the lengthy timeframe of investigations. The FCA has, in industry meetings, alluded to analysis that shows firms’ own market announcements have no impact, from which the FCA has extrapolated any of its own announcements would not have a market impact. Statements from a regulator carry a different weight to those made by a firm, and it is not statistical averages that firms are concerned about, but the risk of outlier reactions.
• Risk of unfair treatment, since the FCA’s other proposals in this CP could lead to it opening fewer investigations on a more strategic basis and this has been reiterated in speeches since the publication of the CP. Those firms selected for investigation, if publicised, could suffer unjust harm related to shareholder value or consumer decisions versus firms not selected, particularly given the high proportion of investigations that end with no further action.
• Impact on investigation conduct, that the FCA might feel more compelled to build a case to justify the investigation it has already publicly announced – even more so if that publicity had an adverse financial or reputational impact on the firm. The firm might also feel that there are fewer benefits to early resolution through the settlement process and more reasons to fight the negative publicity. We strongly disagree that transparency is necessary or appropriate to increase the speed or accountability with which the FCA progresses its investigations – the FCA’s governance and oversight structures should be adequate to achieve this.
• Impact on business or regulatory relationships, particularly due to requirements to make disclosures about ongoing investigations (which could now be triggered earlier, or where not normally required), as in this case the firm would not be protected by confidentiality of investigations. This could lead to firms being offboarded or being denied the ability to undertake business activities or services or could impact Environmental Social & Governance (“ESG”) ratings, leading to increased costs and impacting access to capital in the market. This is a particular concern for firms operating across multiple regulatory regimes.
• Increased risk of litigation/third party claims, which bring cost as well as challenges in managing concurrent court actions (with potential disclosure requirements).
• Risk of identifying potentially accountable individuals, despite the FCA stating that this is not the aim. Information available via the FCA Register and through public sources could make it easy for to identify accountable Senior Manager(s) and/or some sales and trading staff.

Finally, we note that the FCA only proposed to give firms 24 hours’ notice of publication. While, in subsequent discussions, AFME got the impression that this was intended as a starting point for discussion with the industry, rather than a firm proposal, this would allow no meaningful time:

• to engage with the FCA about the proposal, including its appropriateness or content (such as to correct factual errors, identify any confidential information or ensure balance); or
• to prepare appropriately for the consequences of any announcement, including with internal stakeholders (who may be at a global level), communications advisers or other (global) regulators, or to anticipate and plan its own response to questions from other stakeholders (e.g. clients, counterparties, shareholders, etc). Even where publication was known as a possibility, these actions could only be undertaken after formal notification.

Lack of Global Precedent

The UK competes with several other major financial centres as a location for financial firms, and the FCA has undertaken extensive work in recent years to seek to strengthen the UK’s position in global markets. Work to strengthen the UK’s position in global wholesale markets has been identified as a key strategic priority for the FCA in its 2024/25 business plan.[2] No other major global financial services regulator has taken the FCA’s proposed approach; there is a real risk that this will reduce the attractiveness of the UK as a financial centre and undermine UK competitiveness.

The FCA has cited the approach taken by the Monetary Authority of Singapore (MAS) in its CP but the MAS practice is to provide minimal information about individual investigations on a very infrequent basis. The FCA also cites Ofcom and Ofgem, but Ofgem does not generally publish details of the commencement of its REMIT investigations and the approach of both Ofcom and Ofgem to publicity in other contexts is under review. Further, both Ofgem and Ofcom are very different regulators, supervising and exercising powers over very different markets in which far fewer market participants operate. Their role and approach is not comparable to that of the FCA.

Legal Basis

The Financial Services and Markets Act 2000 (“FSMA”) contains a detailed legislative framework which addresses publicity in relation to the FCA’s enforcement activity.[3] Section 391 FSMA creates a specific statutory framework for the publication of warning notice statements, decision notices and final notices in recognition of the impact of publicity, particularly at the earlier stages in the enforcement process. There is no provision empowering the FCA, on a statutory basis, to disclose the commencement of an FCA investigation – in contrast to the CMA (see s25A of the Competition Act 1998).[4] Even with this, the CMA’s practice is to give minimal public information on investigations and certainly not sufficient information to ‘educate the market’ as the FCA claims it intends to here.

Furthermore, we note that s348 of the Financial Services and Markets Act 2000 prohibits the FCA from making public “confidential information” to the business/affairs of another person received by the FCA for the purposes of/in discharge of its statutory function). The FCA has historically cited §348 FSMA 2000 as precluding it from commenting on such investigations.3

Per CP24/2, the FCA has indicated that it now believes it can lawfully publicise new and ongoing investigations, however it does not explain the reasons why it has now changed its assessment (notwithstanding the statutory confidentiality restrictions to which it is subject), or which gateways it considers permit disclosure in the form proposed. Whilst the CP references the FCA’s statutory objectives, the relevant test here is whether the disclosure enables or assists the discharge of a specific public function performed by the FCA.

Finally, we note that a change of interpretation of FSMA in this case would then make it much harder for the FCA then to argue that section 348 prevents disclosure of other confidential information in other contexts – e.g. the provision of confidential information arising out of the FCA’s supervisory activities to the Treasury Select Committee4.

Alternative Methods of Achieving the FCA’s Objectives

We understand the FCA’s objectives are to give earlier insights to consumers and firms about FCA areas of concern, promote market confidence by showing that action is being taken, deter misconduct, educate others and provide accountability. However, we do not believe that that naming firms under investigation is the only, or even a proportionate way to achieve them.

Instead, each of these objectives can be achieved by the FCA providing additional details about its portfolio of Enforcement activity on a more frequent but aggregated and anonymised basis. Such an approach would also avoid the damaging consequences outlined above.

One way in which this could be achieved would be providing a periodic summary of key areas of Enforcement activity – e.g. number of new investigations commenced/closed, sectors involved, broad issues being investigated, etc. This would be similar to the Market Watch publications that the FCA issues on market abuse issues, which our members consider extremely valuable.[5] The MAS, cited by the FCA in the consultation paper, takes a similar approach with its periodic Enforcement Report.[6]

There may be some appropriate circumstances for named disclosure. However, we consider that this can be dealt with on a case-by-case approach following assessment of clearly defined criteria, for example where there is reason to believe that it might encourage witnesses, or whistleblowers to come forward to assist the FCA’s enforcement work.

Finally, we note that the FCA has broad powers to obtain evidence from third parties for the purposes of an investigation, and the consultation cites no data to support the contention that a publicity power is necessary to identify or procure evidence that the FCA has otherwise been unable to obtain.

11 October 2024