Freshfields Bruckhaus Deringer LLP – Written evidence (EGC0037)

Summary of position in relation to the Consultation,[1] prepared for the Financial Services Regulation Committee (the Committee)

1.1           Freshfields Bruckhaus Deringer LLP is an international law firm with significant experience representing clients in a broad range of regulatory and other investigations, many of which have multijurisdictional elements, throughout Europe, the US, and Asia. Of particular relevance here is our extensive experience of representing listed corporates, banks and other financial services institutions in FCA enforcement investigations. We have also discussed the Consultation with a large number and wide range of listed corporates and financial services clients, as well as industry associations and other market participants. Our position has therefore been shaped by those conversations, as well as by internal discussions between experienced practitioners in these areas.[2]

1.2           Overall, although no one of course objects to greater regulatory transparency when it is clear that there have been serious issues, or to greater regulatory efficacy in deterring such issues, the publicity proposals made by the Consultation are overwhelmingly unpopular, and have been met by interested parties across the business community with uniformly (and, in our experience, unprecedented) deep concern and dismay.

A.              The FCA’s approach

1.3           As an initial point, we are concerned that the Consultation should constitute a consultation in substance as well as form – i.e. that the publicity proposals should be properly debated in principle, as well as in practice, even if that ultimately means that they do not proceed at all. There has, however, been a pattern in relation to the proposals, whereby the FCA has repeatedly emphasised that it will listen to views, while strongly signaling that it intends to proceed with the substance of the proposals, irrespective of those views.[3] Most recently, the FCA, after some months of silence, has now indicated again that it intends to proceed with the proposals in some form, regardless of the legitimate and strongly held views of those whom it regulates, whether as financial institutions or as UK listed companies.[4]

1.4           We therefore welcome the opportunity to provide this summary of our views on the Consultation to the Committee, and are pleased that the Committee is considering the Consultation, which will no doubt assist in properly forming and framing the debate.

B.              The FCA’s publicity proposals

1.5           Overall, our position (which is set out more fully in our response to the Consultation itself), is and remains that the publicity proposals made by the Consultation are misconceived and should not proceed. In the remainder of this paper, we summarise the main reasons for that view.[5]

B(i)              Harm to FCA aims

1.6           First, we are concerned that the proposals are likely, in certain circumstances, and contrary to the FCA’s intentions, to have the unintended consequence of hampering the FCA in communicating effectively to deter misconduct and in carrying out its broader supervisory and enforcement aims. It is unclear how the FCA could legitimately disclose, or risk disclosing, confidential information under the Financial Services and Markets Act 2000 (FSMA) through these proposals, when these proposals could – far from assisting – actively risk harming the FCA’s operations and objectives. We consider, as further outlined at Section C below, that the FCA can meet its objectives in this regard far better – particularly by publishing more detailed and more frequent thematic guidance, which could meet the aims of these proposals more effectively than investigation opening announcements – and in a far less harmful way.

1.7           As a starting point, even if the initial announcement of an investigation or the updates that the FCA intends to provide could fairly be used as a deterrent (which we do not consider is in principle correct), it is difficult to see how such announcements and updates could in practice be sufficiently detailed to provide a meaningful guide for companies or firms on conduct that the FCA wants to discourage, or systems and controls that the FCA wants them to have in place, without risking the FCA breaching s.348 of FSMA. When the FCA commences an investigation, it only has to be satisfied that there are circumstances suggesting it suspects a breach may have occurred.[6] Although in certain circumstances misconduct and/or systemic deficiencies may then be identified earlier and more easily, this will not be the case in many investigations, which are highly fact specific. In these circumstances, broader conclusions and guidance of general application can only be drawn out from the surrounding factual context detailed in the relevant Final Notice.

1.8           Further, identifying investigation subjects may impede the FCA in communicating detailed thematic guidance on the investigation topic to the rest of the industry. Market professionals and media are likely to attempt to link identified investigation subjects with publications and thematic guidance elsewhere, to deduce confidential information relating to specific investigations (and potentially to identify relevant individuals). By publishing investigation-specific announcements, the FCA may therefore inadvertently limit its own ability to provide a useful description of the issues concerned and/or recommendations identified in industry-wide, thematic communications elsewhere.  The FCA will certainly have to scrutinize much more carefully what is said in all its publications, if individual investigations are announced, and this should also be weighed in any cost benefit analysis (which the FCA has now indicated that it will consider). 

1.9           There is also a real and serious risk that these proposals will damage the relationship between the FCA and the firms and companies it supervises, and thus hinder the FCA from carrying out its supervisory and enforcement aims, by making the relationship unnecessarily adversarial at an early stage. In particular, the increased likelihood of announcing subjects could undermine the important role played by FCA supervision, and underestimates the benefit that supervision teams talking directly to firms can have in shaping firms’ own improvements. As the FCA itself has stated: “[…] in a world where every element of supervisory discussion or fact finding became from the outset a potential element in a formal enforcement action, there would inevitably be more caution in firms’ disclosures to us, and more legal representation on their side and ours […] Moreover, as well as dissuading firms from being so open with us, such an approach may reduce the effectiveness of our supervisory system […]”.[7]

B(ii)              Harm to investigations, investigation subjects and the wider market

1.10      Second, and relatedly, we are concerned that announcements would cause serious harm to investigations themselves, investigation subjects and the wider market, in a number of possible ways. It is concerning that the FCA does not properly acknowledge this risk in its response to the Financial Services Regulation Committee, which merely in this regard: (a) notes the FCA’s belief that announcements do not generally cause harm; and (b) emphasises that only “relatively small numbers” of firms and companies will in any event be impacted, as the FCA only opens a handful of investigations a year.

1.11      Announcements will risk harm to the investigation and/or investigation subject, however, by: (a) risking the inadvertent disclosure of confidential material; (b) no doubt causing the investigation subject to receive a number of enquiries from stakeholders including customers/clients, and investors, which the investigation subject will be unable properly to answer; (c) causing reactions by customers, professional counterparties, and contracting parties, to remove business from or otherwise impact the investigation subject (including potentially by, for example, inadvertently triggering ‘event of default’ provisions under its lending arrangements); (d) unwarrantedly damaging the investigation subject’s reputation; and/or (e) generating litigation, particularly from those who do not appreciate, or choose not to appreciate, that an investigation announcement does not equate to misconduct.

1.12      In 65-67% of cases,[8] the FCA’s investigations do not result in an enforcement action. Effects of this sort, particularly of investigation opening announcements, will therefore be unfair and unjustified in 65-67% of cases (although in the remaining 33%-35% of cases, effects could still be disproportionate to specific outcomes). This is because the FCA will of course not know whether an investigation will or will not result in any adverse findings or in any proposed enforcement action, until it has finished conducting the investigation in question. Risking these harms to investigation subjects, in such circumstances and particularly where investigation subjects are unable (including because of confidentiality restrictions on them) to control or mitigate these effects, is unjustifiable.

B(iii)              Harm to public confidence in the FCA as a regulator, and to UK competitiveness and reputation for fairness

1.13      Finally, we are concerned that the FCA has not properly considered what effect the proposals could have on its own reputation, the market and the UK’s reputation at large. We are particularly concerned that unwarranted market movement following an announcement by the FCA (which is a different situation to the circumstance where firms/companies make announcements under their own obligations), and any collateral consequences, will risk significantly harming the investigation subject and the wider market. This could have the effect of undermining the FCA’s statutory objective of ensuring the public and market has confidence in it. Risking the UK’s reputation in these regards has potentially serious consequences, and contradicts the FCA’s secondary objective to support the medium to long term, international competitiveness and growth of the UK.

1.14      For example, announcements could wrongly give the impression that significant information is available to disclose (and is able to be disclosed), when that is not in fact the case in circumstances where the investigation in question is at its earliest or a very early stage (and information is in any event still protected by FSMA). Announcements could also wrongly suggest that conduct under investigation is misconduct, when the public and wider market may not understand that an announcement cannot equate to misconduct, where the investigation has not been concluded (and, in 65%-67% of investigations, will in any event close with no adverse findings or outcome). Further, selectively announcing some investigations and not others would suggest a real concern to consumers or market participants for investigations that are announced, when in fact there may be no cause for concern at all.[9]

1.15      Responses to announcements, and particularly uncontrolled and misguided media coverage and market reaction following the announcement of the opening of an investigation could, contrary to the FCA’s intention, lead to a decrease in consumer confidence not only in the company or firm under investigation, but also potentially more broadly in the financial services or other concerned sector. In some situations, it is not difficult to envisage, for example, that an announcement could give rise to an unwarranted rush by customers to withdraw or move deposits or investments, which may have a destabilizing impact on some businesses and markets, or even to the FCA itself risking creating a false market under LP6 for listed issuers, by causing uncontrolled market and media reaction. Market reaction could also risk unwarranted share price movements.[10]

1.16      The proposals will also have an adverse impact on the reputation of the UK as an attractive place to seek to be listed, to continue to be listed (particularly where a company or firm is already considering a relisting overseas), or otherwise to do business. This is because both: (a) the announcement of the identity of the company or firm under investigation cannot fairly and should not be used to create the deterrent effect envisaged by the FCA, in principle; and (b) the uncertainty and potential asymmetry and inconsistency in approach of naming investigation subjects in certain scenarios, but not others, will undermine the UK’s reputation for fair, consistent, and predictable regulation.

1.17      Significantly, the routine announcement of investigation subjects also represents a departure from the approach of other financial services regulators in major financial centres. The FCA’s response to the Financial Services Regulation Committee downplays this, providing: (a) the Monetary Authority of Singapore’s approach as the only positive comparator to its proposals, despite the Financial Services Regulation Committee’s letter expressly asking for an explanation of the “approaches taken by other supervisors internationally (other than the Monetary Authority of Singapore)”[11]; (b) a mild comparator of the Australian Securities and Investments Commission’s approach, which it says is to make a statement “when it is the public interest to do so”, balancing “public interest against the potential for prejudice to individuals […] and other factors”, but without providing any detail or insight such that the respective positions could properly be compared; and (c) otherwise a general statement about other authorities taking, contrary to the Consultation proposals, a “privacy first approach”, mentioning expressly only those in France, Switzerland and the US. 

1.18      In fact, financial services regulators not only in France, Switzerland, and the US, but also, for example, in Germany and the Netherlands do not take the approach proposed by the FCA. These regulators (and, significantly, the SEC), only usually announce investigations and the identity of the firm or individual(s) under investigation at a stage when there is sufficient evidence to bring a formal enforcement action or when adverse findings have been made, or in criminal proceedings when charges have been laid. Any divergence from the current approach of the FCA (announcing investigations only in exceptional circumstances) will thus, as the FCA seems implicitly to accept, contrast with the policy of almost all overseas regulators, again significantly undermining the UK as an attractive place to seek to be listed, to continue to be listed, or to do business.

C.               Conclusion

1.19      We recognize that the FCA may wish to publish additional information about the investigations that it conducts. We consider, however, that the current Consultation proposal is misconceived, and (as we explained in our Consultation response) that the FCA’s broader aims – including to report better to Parliament and to be more accountable to whistleblowers – can be better met in other ways. In particular, the FCA could: (a) routinely publish statistics on its investigations, such as a table or similar resource showing overall how many investigations are at each stage of investigation. This would allow external parties to understand FCA enforcement activity in terms of volume and pace more frequently than that which is published alongside the FCA’s Annual Report; and (b) increase the publication of and publicity around thematic statements, through, for example, further Dear CEO letters, thematic reviews, market watch newsletters, more detailed annual Business Plans, and good and bad practice examples such as those found in the financial crime guide or publications by other regulators. Increasing such statements (and their quality, given the FCA’s reports that they are said to lack substance[12]) would allow the FCA to publicise further, meaningful, and timely detail on its concerns and key messages to the whole sector, thus achieving better deterrence and transparency, in a far more meaningful, and a far less harmful, way.

1.20      We hope that, despite indications to the contrary, the FCA will come to recognise this in due course, too.

11 October 2024