London and International Insurance Brokers' Association (LIIBA) – Written evidence (EGC0043)

London and International Insurance Brokers’ Association (LIIBA) is pleased to respond to House of Lords Financial Services Regulation Committee’s Call for Evidence on Financial Conduct Authority’s (FCA) consultation paper (CP) on its Enforcement Guide (EG) and publicising enforcement investigations.

LIIBA is the trade association for Lloyd’s insurance brokers active in the specialist markets in London.  Our members bring $160bn of gross written premium to the market with two thirds of the business being placed on behalf of overseas clients.  The London market as a whole contributes £50bn to UK GDP each year, around a third of that made by the City of London as a whole.  Given the make up of our customer base, LIIBA is especially interested in the impact that any FCA proposal might have on our international competitiveness.  We set out some concerns in this regard below.

General comments

LIIBA does not believe the proposals as a whole will be beneficial to the UK financial services industry.  We do not believe that FCA has demonstrated sufficient evidence of market failure for this proposed intervention to be justified. It is our belief that the existing measures are already significant and adequate.  Where FCA does seem to have identified an issue with the speed of resolution of enforcement action we believe that this would be better addressed by it improving the efficiency and effectiveness of its process rather than merely making the public aware of ongoing investigations prior to resolution. 

Unjustifiable Reputational Damage

According to FCA’s own statistics, 65% of current investigations conclude that there is no case to answer and thus publicly announcing an investigation without adequate evidence of wrongdoing will undoubtedly cause, at the very least, reputational damage to both firms and individuals. It could also cause widespread financial loss to both the firm and shareholders and ultimately consumers who may hold such shares directly or via pension funds. Such unilateral action by the FCA could also negatively impact the PI Insurance market, which is already very restricted and could ultimately lead to firms withdrawing from certain markets and thus negatively impact competition, or the ability of some firms to obtain PI insurance either that is affordable or at all.

In the long run, however, a likely consequence is that the public will come to appreciate that the clear majority of announced investigations are not meritorious; among other things, firms themselves will emphasise this point as a means of defending themselves to business partners and the public.  If and when the public does come to appreciate that most investigations are not meritorious, the FCA’s public pronouncements regarding enforcement will be taken less seriously; and when the FCA’s public pronouncements regarding enforcement are taken less seriously, the FCA will sacrifice its ability to increase deterrence, drive positive behavioural change, and achieve other goals it has set for itself. 

None of this therefore would be in the interests of the public or in line with the FCA’s statutory objectives of enhancing market integrity, promoting competition or indeed consideration of the UK’s international competitiveness.

We would ask the FCA to consider the following points.

a)  Whether the changes regarding publicity of investigations will achieve the FCA intentions.

The FCA states it believes greater publicity of its investigations will demonstrate what types of issues they investigate for the benefit of other firms, thereby having a deterrent effect and increasing public confidence. Evidence has not been provided to support these assumptions. A strong deterrent already exists for most firms who already pay attention to such matters through existing supervisory tools.

It is already within the FCA’s gift to make a public announcement of an investigation. Therefore, a revised approach to commenting on ongoing cases may be fairer and ultimately more effective than such a wholesale change.

b)  An amended approach to the range of investigations which are announced.

The consultation paper uses the phrases “investigation” and “enforcement investigation” interchangeably in the body and draft rules. There is no glossary definition of either, however, an understanding of the current and proposed EG handbook suggests that this could capture all forms of activity by the FCA where they investigate a potential breach of rule or principle or potential misconduct. The consultation paper states the proposal “will apply to all our investigations commenced by way of statutory appointment of investigators, under FSMA or otherwise”.

Given a recent comment by Matt Brewis, Director of Insurance at FCA, that firms should expect far more S166 requests in the future, as a supervisory tool rather than just used to drive enforcement, and that this is a step change for the regulator, we would ask for clarity over whether they intend to assess all new skilled person reviews against the public interest framework for publicising. Equally, given the proposed removal of the option to issue private warnings, clarity over how some supervisory notifications will be treated in the context of this proposed framework would be welcome.

It is suggested that limiting which investigations are announced to those with potential impact to consumers and/ or the market, rather than broader operational or governance related matters, could still meet FCA objectives. This could reduce the frequency of FCA announcements but still enable the FCA to demonstrate its active engagement in investigating firms causing harm.

c)   Cost benefit analysis.

We note the FCA hasn’t conducted a costs benefits analysis of its proposals. While not required by legislation as the proposals are not rule making, it is surprising in the circumstances, given the likely impact to the industry and individual firms. Such an assessment would be prudent given the proposals are such a departure from the previous approach. Currently, there is no evidence the FCA has considered the impact to firms.

d)  Definition of the public interest test

As drafted, the scope of the public interest framework appears broad and open ended. The CP provides an outline of some factors which the FCA describes as indicating that an announcement or update will be in the public interest but also describes such factors as being ‘non-exhaustive’. The definition as drafted would effectively allow the FCA to publicise all investigations. If the wider proposals were to be taken forward by the FCA we would encourage consideration of a narrower definition of public interest be applied to ensure that only those cases which have the most significant consumer impact be publicly announced. An example of this working in practice already being the FCA’s recent announcement to undertake work in the motor finance market.

Impact of the proposed changes on firm behaviour

The speed of investigation and the willingness of the FCA to consider reasonable steps and mitigations is important to incentivise firms to continually look to take the best course of action and prevent financial regulation infringements. 

However, LIIBA does not believe that the FCA’s proposed changes in CP regarding publicising enforcement investigations will strengthen the deterrence of financial regulation infringements.

The proposed changes may result in many more firms being publicly cited as under investigation, with associated potential (lasting) reputational damage, even if, eventually there is found to be no case to answer. The basic premise seems to be that firms would be “guilty until proven innocent”, notwithstanding the FCA’s proposal to clarify upon announcement that it has not (yet) reached a conclusion.  Given the press has a tendency to be keen to report issues such as a firm being under investigation but that it may see a firm’s exoneration as being less newsworthy, this is a particular concern. We understand that FCA investigations can take anywhere from 3.5 years (civil) to 6.5 years for statutory investigations. Where the FCA deem that there is no case for enforcement then reputational damage could continue until the investigation closed. In this time, the firm would need to brief both the market in which they operate as well as clients of the ongoing investigations – sometimes without full information as to why the investigation has commenced in the first place.

There is a potential risk that the proposed changes will lead to firms being less open and transparent with the FCA when they identify issues that the FCA would expect to be informed of, for fear of the firm’s name being publicly cited

Proposed method of announcement

The proposal to give the subject of an announcement up to one business days’ notice is completely insufficient, given the amount of activity required to prepare for such an announcement, potentially across multiple jurisdictions.  It is not clear whether the firm would have a right of reply or the option to amend any information proposed. Furthermore, a firm might have legitimate grounds to challenge an announcement and this timescale might prejudice their ability to do that.  FCA has confirmed that the intention was that firms would not be expected to respond to the draft notice, thereby rendering notice meaningless.  Firms should be given the opportunity to review the draft notice and be given sufficient time to do so.

If the firm notice is to be a valuable process, the appropriate firm contact details would need to be used. It is our experience that the FCA is inconsistent when it comes to communicating requests for information and other correspondence, sometimes using contact details noted against the firm details on the FCA register and other times contacting Connect principal users or CEOs or SMFs directly.  It will be critically important to ensure that the FCA has the relevant and up to date contact details of the correct individual at a firm given the stated intention to contact firms outside of market hours after markets have closed where matters are potentially market sensitive.

Impact on UK financial services market and our international competitiveness

One effect of these proposals could be to force firms to reconsider whether they want to do business in the UK or to rationalise the types of business undertaken in the UK for fear of public censure, which is contradictory to the FCA’s objective to promote competition.  This is a particular issue in the London insurance market which is highly populated with overseas firms. Firms could relocate outside of the UK and conduct business in the UK on an overseas exemption basis.  For example,reinsurance businesses could be established in the US or Europe instead of the UK. This would reduce the control that the FCA has over these firms as well as a loss of fee income for the FCA.

We note the comments FCA makes about the approach of other regulators.  However, we would point out that, in practice, Monetary Association of Singapore (MAS) does not normally publicise investigations. This is also true for regulators in United States and Europe, whilst the regulators in Hong Kong are bound by secrecy requirements to keep the detail of ongoing investigations confidential[1].  We are not convinced that FCA’s comparisons to UK utility regulators, which oversee localised monopoly markets, are relevant to the way in which it regulates an open and competitive market for financial services.  Notably, firms in the utilities market face no immediate competition and so customers are unable to switch suppliers in the immediate aftermath of an investigation announcement

Even though the FCA is proposing to not (generally) name individuals, Senior Management Functions (SMFs) by association and according to role will be implicated by the publication of any announcements.

Alternative suggestions

We consider that all of the FCA’s goals can be achieved in other ways.

We believe that FCA should consider, as an alternative, reporting the themes of ongoing investigations without naming the firms involved.  There are a number of channels already open to the FCA to achieve this such as Market Watch, Dear CEO letters, Business Plan. These communications could be more regular and publish the details of current enforcement themes. It could also include details of the number of new enforcement actions, open and closed investigations which would demonstrate the workload that the FCA has. This would achieve its objective of making the rest of the industry aware of areas of concern without unnecessary reputational harm.  This would be in keeping with FCA’s approach around Section 166 (S166) work and quarterly reporting of s166 reviews, themes, and firm type.

Publishing half a page outlining a new enforcement action with the firms’ name and no further detail will have unintended consequences. The FCA’s aim to increase deterrence will be better served by publishing detail of thematic concerns which will enable firms to conduct their own gap analysis and remediation exercises, if required. This could include providing the detail of the firms being investigated to the FCA Supervisors who can take more targeted action within those firms.

Another alternative would be to report anonymised information about specific ongoing investigations.  This step would similarly make the industry aware of areas of concern but would also promote the FCA’s desire to convey to the public that it is “on the case,” as well as its desire to hold itself accountable for the pace of individual investigations; all without causing unnecessary reputational harm to firms.

The threshold set out in Financial Services and Markets Act 2000 (FSMA) at which the FCA commences an enforcement action is currently low, with little requirement for FCA to present evidence of wrongdoing . If the FCA pursues the action to publish then consideration should be given to increasing this threshold to ensure that some evidence exists that there is a case for enforcement. Only once evidence exists then the FCA could announce the enforcement action.

14 October 2024