FCA enforcement proposals - is transparency the answer?

Abdulali Jiwaji, financial litigation partner at Signature Litigation, explains why 'naming and shaming' will only get the FCA so far, and why the regulator must instead implement meaningful change to tackle the issue of lack of enforcement.

Related topics:  Regulation,  Special Features
Abdulali Jiwaji | Signature Litigation
23rd May 2024
"The additional burden of adverse publicity will create further stress that could prove to be terminal for the business concerned."

It is now more than twelve months since Therese Chambers and Steve Smart were appointed as joint executive directors of enforcement and market oversight at the Financial Conduct Authority (FCA).

According to the FCA, they will play ‘a vital role’ in the expansion of its enforcement and market oversight leadership team.

But last year, only twelve fines were issued by the FCA, raising a total of £53.4 million. This compares with 26 fines levied in 2022 with an aggregate value of £215.8 million. The downward trend appears to be accelerating further this year. According to the latest FCA data, only two fines have been issued so far this year with a combined total of just £930k.

So, what does this dramatic reduction mean in terms of both public and market confidence in the effectiveness of FCA’s enforcement function? Answers to these questions, and an indication of the agency’s future strategy on enforcement, can be found in an FCA consultation paper, which was published in February. The foreword, written by Chambers and Smart, begins:

“Fines, bans and prosecutions are often what the public notices most about our enforcement work, and they are vital tools in holding to account those who don’t meet our standards. But enforcement action is not simply about individual instances of punishment. Its greatest impact is as deterrence, and in educating the whole market on what we expect, and where others have fallen short.”

It then adds: “The deterrent effect of enforcement action is greater the closer it is to misconduct occurring. The longer it takes for outcomes to be determined, the longer it takes for us to send important signals to the markets we oversee about what we consider serious misconduct to be.”

A key plank of the FCA’s new enforcement strategy, as outlined in the consultation, is deterrence: the agency wants to have the ability to publicise that an investigation into a firm has begun. Decisions on such announcements would be taken on a case-by-case basis, applying “careful consideration” of whether it is in the public interest to do so. However, the agency would not “generally” announce when it has opened an investigation into a named individual.

An objective of naming and shaming, based on deterrence, may be aimed at strengthening the FCA's enforcement efforts and to increase public confidence in them. It is also designed to inform and educate the market about the types of misconduct that the FCA considers justify a formal investigation, and to encourage whistle-blowers to come forward at an early stage.

Pour encourager les autres? But it is not yet clear whether such changes, if implemented, will act as a sufficient deterrent.

During the consultation period, which closed in April, opinions were sought about whether details of current FCA investigations should, indeed, be made public. The response to the consultation has been overwhelmingly to express concern that the proposals, if implemented, could do more harm than good.

Notwithstanding the reassurances about individuals not “generally” being named, there are due process concerns. For those under investigation, particularly small firms and their owners, the impact can be devastating: dealing with the consequences will inevitably undermine their management of the business, which may be irreparably damaged as a result. The additional burden of adverse publicity will create further stress that could prove to be terminal for the business concerned.

From recent statistics published by the FCA, it is also notable that of the 153 investigations closed by the FCA in 2023/2024, 67% of those were closed with no further action. This just underlines that for those subject to an investigation, there is a large majority who, it would seem, have done nothing wrong.

Another important statistic released by the FCA – investigations closed in 2023/2024 took an average of 43 months from the decision to open an enforcement investigation through to closure. That’s over three years for the subject of investigation to be at risk, with the overhang of publicity without a clear outcome.

Although delay is unavoidable between an investigation being launched and its conclusion, transparency may not be the right answer. If clear messaging is the paramount concern, then alternative options exist to put the market on notice, such as anonymising any published examples of cases under investigation and the associated issues. The broader question is whether "innocent until proven guilty" is the basis upon which we want to proceed, or instead the choice is made to create a more transparent climate that could result in some rough justice.

To increase the effectiveness of its enforcement activity, the FCA must implement meaningful change, including speeding up the pace of investigations. In its recent consultation, the FCA stated that it wants to do this “with a streamlined caseload of investigations better aligned to our strategic priorities”. It is a less is more argument: focusing on fewer priority cases that will deliver better results in putting consumer needs first and combatting market abuse and financial crime.

Looking ahead, it is likely that we will see more selective enforcement action from the FCA. A focus area is likely to be cases that involve breaches of the Consumer Duty, which came into effect last July. In doing so, the agency will prioritise breaches that cause harm, or create a risk of harm, to consumers. Senior managers will need to be alert to this and the potential consequences.

The Prudential Regulation Authority recently announced fines in relation to senior management default. It is reasonable to anticipate that the FCA will want to showcase certain cases involving Consumer Duty breaches where senior management responsibility is also in question. These investigations may, of course, be publicised at an early stage, supporting the FCA’s primary goal of educating the market.

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