FCA enforcement investigation proposals criticised

Anthony Harrison and Jonathan Cavill, financial services experts at Pinsent Masons, were commenting after the Financial Services Regulation Committee found that the FCA had not made a convincing case for the proposed shift away from its current policy of publicly announcing enforcement investigations into firms before they have concluded only in “exceptional circumstances”.

Harrison said: “The committee’s report does not pull its punches with the FCA’s proposals. Its scepticism draws on wider concerns previously raised by firms around reputational damage and market impacts on share prices for those listed companies.”

The report highlights that the FCA’s proposal to make such public announcements more frequently by means of a more flexible public interest framework affords the FCA considerable discretion, and may expose firms to significant reputational damage before the facts of the case have been established. The committee also identified that the proposals risk positioning the UK as an international outlier in terms of regulatory enforcement, in a manner that appears misaligned with the FCA’s secondary competitiveness and growth objective.

Although the report recognises the work that the FCA has done to listen to stakeholders’ concerns in the aftermath of its initial consultation in April 2024 – including through issuing revised proposals in November – the committee concludes that the FCA could have avoided much unnecessary controversy by engaging with stakeholders in the development stage of the proposals.

A number of recommendations have been made with the committee calling on the FCA to demonstrate that stakeholders’ concerns have properly been addressed before implementation.

The committee is also urging the regulator to withdraw proposals if it has not found an acceptable balance between the consumer protection benefits and managing the potential risks to firms, individuals, and market stability. Other recommendations include a change to the policy of producing a cost benefit analysis, as well as greater transparency, focusing on current measures which are helping to expedite investigative processes before making substantial changes to the wider enforcement framework.

Harrison said: “The committee’s recommendation to focus on current measures which expedite investigative processes is a sensible and proportionate suggestion. Rather than making wholesale changes that have potential unintended consequences; adopting more incremental measures which look to streamline investigations may strike a more appropriate balance between reputational protection and transparency – as well as being better aligned with the government’s agenda to stimulate economic growth.”

The committee has urged the FCA to publish further guidance on how the factors contained in its proposed public interest framework will work in practice as well as an additional ‘lessons learnt’ document, reviewing the appropriacy of the FCA’s internal processes and communication strategies for consulting on a change of this scale, setting out measures to prevent similar mistakes in future.

Cavill said: “Whilst the proposed ‘public interest’ test has been fine-tuned a little further by the FCA, it is difficult to see how this will be sufficient in addressing stakeholder concerns. The fundamental worry remains that businesses’ reputations, and by extension senior leaders’ reputations, may be harmed in situations where wrongdoing may be far from proven”.