Financial Services Lawyers Association – Written evidence (EGC0038)

1                          We refer to the Committee’s Call for Evidence in respect of the Financial Conduct Authority’s (“FCA”) consultation paper CP24/2: “Our Enforcement Guide and publicising enforcement investigations—a new approach” (the “CP”). This response is submitted on behalf of the Financial Services Lawyers Association (“FSLA”)[1].

2                          In offering these views for the Committee’s consideration, we welcome a recent speech[2] by Therese Chambers, the FCA’s Co-Head of Enforcement, in which she indicated that at least some of the issues with the CP which we discuss herein were being seriously considered by the FCA. We strongly suggest that Ms Chambers’ speech merely underlines the need for renewed consultation concerning the CP. The speech is considered further in paragraph 16 below.

Background 

3                          FSLA is a voluntary association with over 2,000 members who specialise in financial services regulatory work (both contentious and advisory).  FSLA’s objectives include: “… [providing] a forum for the open exchange of views and the dissemination of knowledge and ideas relating to financial services law and regulation….. foster[ing]co-operation between the various financial services stakeholders including lawyers and policy experts in industry, academia, regulators and government”.

4                          Our members have significant experience advising a wide range of financial services firms and individuals on how to manage enforcement investigations. Our member’s expertise is based on our experience in private practice, in-house at financial institutions and experience working directly for the FCA (and other regulators). The organisation is thus uniquely placed to provide the Committee (and indeed the FCA) with pragmatic, informed and balanced feedback on the proposals detailed in the CP.

5                          FSLA submitted a formal response to the CP on 30 April 2024 (link here) (the “CP Response”). The CP Response and this letter were informed by the contributions from our membership[3] principally gathered at two events held in March 2024.

The FCA objectives 

6                          The CP states that the proposed amendments to the current Enforcement Guide (the “Current Enforcement Guide”) are focussed on delivering three key objectives: to reassure by building trust in the system and showing the public that the FCA is “on the case”; to educate and deter by being clearer about the types of misconduct which will warrant a formal investigation; and to improve accountability of the FCA by shining a light on the efficiency and pace of its investigations. 

7                          FSLA strongly supports the FCA’s stated objectives, but we are concerned that the FCA’s proposal to publicly announce the opening of an enforcement investigation, including the identity of the subject of the investigation, if it considers it in the “public interest” to do so[4] (the “Publication Policy”) is likely to be counterproductive to the FCA’s aims and objectives. FSLA does not consider that the proposed public interest framework[5] underlying this policy (the “PI Framework”) is adequate to ensure that the FCA’s decision making is fit for purpose and meets the obligations of the Regulators Code, which requires Regulators to avoid unnecessary regulatory burdens and take a proportionate approach.[6]

8                          FSLA has serious concerns that many of the proposed amendments to the Enforcement Guide, as set out in the CP, go further than what is necessary, legitimate and proportionate. FSLA’s position is based on both legal and practical concerns relating to the basis for and the likely implications of the Publication Policy which are summarised below:

A: Legality of the FCA’s proposals

9                          FSLA’s concerns relating to the legality of the FCA’s proposals, stem from the overriding concern that the proposals are not aligned with the FCA’s statutory objectives. The legal concerns are wide-ranging and raise difficult issues with respect to: (i) the obligations of the FCA to act in a proportionate manner; (ii) the misalignment between the Publication Policy and statutory protections in FSMA; (iii) the FCA’s own statutory obligations; and (iv) human rights considerations.

10                     The starting position is that, as per paragraph 2.8 to 2.11 of the CP, the FCA’s justifications for (in essence) reversing its approach to investigations confidentiality prior to the issue of a Warning Notice or settled outcome are twofold: (i) that the Legislative and Regulatory Reform Act 2006 (the “LRRA”) provides a basis for using “transparency as a tool”; and (ii) therefore that the proposed Publication Policy would facilitate the exercise of the FCA’s general functions and its pursuit of its operational objectives (as introduced by the Financial Services Act 2012).

11                     The CP assumes that this explanation is satisfactory, and therefore that the Publication Policy is compatible with the FCA's statutory obligations. However, FSLA has serious concerns in this regard.  By way of example:

11.1 The principles now relied upon from the LRRA have been in place since 2006. Both before and after the LRRA, the FCA has issued various statements which cautioned against a policy that presumes publication and that “to ‘name and shame’ firms as a matter of course is not the approach envisioned by Parliament and is not one we can readily meet under FSMA”[7]; and

11.2 The CP's reliance on the LRRA overlooks other obligations which militate against the imposition of a policy favouring widespread publication. One such is at Section 21(2)(b) LRRA, which requires that “regulatory activities should be targeted only at cases in which action is needed”. FSLA considers that a presumption towards publication would fail to “target” those investigations where publicity is genuinely needed – not least because the pre-existing “exceptional circumstances” framework already permits this.

12                     On top of the lack of a clear statutory footing for the Publication Policy, these proposals appear to FSLA to be out of step with the publication procedures created by FSMA for Statutory Notices and Public Censure. In contrast, the Competition and Markets Authority and the Office of Gas and Electricity Markets (both cited in the CP as analogous regulators) have clear statutory footings for their publication policies[8].

13                     It is not clear how the LRRA provides the necessary basis for what would amount to a fundamental reversal of longstanding FCA policy, one demonstrably at odds with both prior FCA thinking on the matter and FSMA’s statutory framework.

B: Competitiveness and the FCA’s Secondary Objective

14                     The Publication Policy would result in the FCA being an outlier in respect of the approach taken by financial regulators in other major financial centres (including the US, Hong Kong, Australia, Germany, France and Italy), which either require absolute secrecy or make announcements only on an exceptional basis. This misalignment with the approach of international regulators is relevant to assessing international competitiveness because a perception that firms and individuals could be subjected to reputational damage through the publication of information about investigations as a matter of course may discourage firms from choosing to operate in the UK when other financial regulators do not adopt the same approach. As such, the Publication Policy runs counter to the FCA’s Secondary Objective.

C: The disproportionate impact on investigation subjects

15                     Our overriding concern here is that the FCA has significantly underestimated the potential detrimental effect of publication on investigation subjects and the strong likelihood of damage to a subject’s reputation and financial position (be it firm or individual).  In the view of FSLA’s members, the likely harm to investigation subjects warrants removing the proposal to identify them altogether. No amount of amendment to the finer details of the proposal will mitigate the risk of harm to investigation subjects if the proposal remains for investigation subjects to be identified.

16                     Notwithstanding FSLA’s primary position above, concerns arise relating to the factors underpinning the proposed PI Framework which do not expressly reference, or appear to bring into the balance, the interests of the subject under investigation in being (or not being) named. As indicated in paragraph 2 above, FSLA welcomes the recent indication that having received more than 130 responses to the CP, the FCA is considering (among other things) whether the PI Framework should ultimately be more clearly defined, and how firms might be given more time to provide their views; and wants an “ongoing conversation”. This development is welcome. However, even if these changes would fundamentally alter the CP and the PI Framework, a number of our overarching concerns remain unaddressed (notwithstanding the indication made by the FCA in discussion forums that it will look at “all the facts and circumstances of each case”). In FSLA’s view, therefore, there is a need not just for a “conversation” but for further formal consultation.

17                     The FCA suggests that the CP proposal will not amount to a “presumption for publicity”, but its review of investigations commenced in the nine months prior to March 2024[9] confirmed that two thirds would likely have been announced under the new approach – and thus that in the majority of cases the FCA’s assessment of consumer interests will prevail over the interests of the investigation subject. As currently proposed in the Publication Policy, this assessment lacks meaningful safeguards including in relation to: (i) the notice period: (ii) any right for investigation subjects to be consulted on and take legal advice in relation to the publication decision and/or the content of the announcement; and (iii) the timing of the announcement.

D: The position of individuals

18                     The potential adverse effect on individuals is significant, be it by direct identification or by indirect identification arising from announcements into investigations into firms (or any updates announced during an investigation). Many FSLA members have seen their individual clients suffer severe and often life-changing (or, worse, life-threatening) impact from the publicity surrounding FCA investigations, and the CP proposals risk exacerbating this impact by subjecting those merely subject to an investigation to the same publicity and doing so at a much earlier stage.

E: The adverse practical implications for FCA investigations

19                     Under the previous leadership of the Enforcement and Market Oversight Division, the approach and stated policy of Enforcement, was to lower the bar for the commencement of an investigation. This approach resulted in protracted and delayed investigations.  In the opinion of most FSLA members, the resulting inflated number of investigations and operational inefficiencies have been main hindrance to the FCA’s delivery of effective, credible and timely enforcement; FSLA members frequently hear these concerns from subject firms and individuals, witnesses and whistleblowers, impacted consumers and other market counterparties. In this context, it is important to recognise that according to the FCA, case closure rates are accelerating and timescales shortening, owing to more streamlined processes and other developments. This is to be welcomed, but underlines the fact that it is Enforcement policy and practice, not a lack of transparency, which has hindered operational efficiency.

20                     In addition to the likely adverse impact on investigation subjects (and the consequent increased risk of disputes between investigations subjects and the Enforcement division), there is a real and serious risk that the Publication Policy would result in the diversion of FCA resources to manage an increased number of witness, whistleblower, consumer and press interactions early in an investigation. This may slow down the pace of investigations, rather than expedite them, and increase the likelihood of satellite litigation concerning decision-making under the PI Framework.

21                     FSLA also has concerns with respect to the practical implications of the FCA’s proposal to apply the Publication Policy retrospectively to ongoing enforcement investigations and the legitimate expectation of those subjects that the investigation would remain confidential.

22                     FSLA stresses that it is in favour of greater transparency as one of many tools to improve the contribution the FCA’s enforcement activities make to its stated objectives. One such way – in FSLA members’ view a more effective and efficient one than the steps outlined in the CP – is to provide more information to the market on current enforcement investigations on an anonymised and thematic basis through a regular publication (for example, via an “Enforcement Watch”). Such steps are both more  straightforward and in FSLA’s view likely to contribute more significantly and effectively than the CP, including an increase in evidential and legal scrutiny at early stages, and early fact-finding interviews with key individuals.

Next steps

23                     We would invite the House of Lords to review the CP Response, as submitted to the FCA, for more detail about FSLA’s legal and practical concerns in respect of the Publication Policy. As part of this process, FSLA has urged the FCA to conduct a further consultation process which: (i) addresses the various legal issues and concerns raised by the industry in response to the CP; (ii) provides further details on the FCA’s position (which appears to have shifted post publication of the CP as part of speeches and informal forums); (iii) provides more practical detail on how the Publication Policy will operate in practice; (iv) sets out a cost-benefit analysis of the FCA’s proposals; and (v) provides a detailed mark-up of the proposed changes to the current Enforcement Guide (which are difficult to identify in the CP given that only a high-level outline of the key changes has been set out).

24                     FSLA considers the cost-benefit analysis to be particularly important. It is incumbent on the FCA to provide evidence to demonstrate its assertions as to how the Publication Policy will advance the objectives of the CP, such that the detriment which could flow for investigation subjects, other interested parties and the UK’s financial services industry as a whole is outweighed.

25                     FSLA would be pleased to discuss this matter further in order to assist the Call for Evidence.

11 October 2024