Enforcement watch: FCA proposes to name firms under investigation as part of new enforcement approach

The FCA has published a consultation paper which proposes a number of changes to its approach to enforcement, including a proposal to name firms when the FCA opens an investigation (together with a summary of the suspected breach) and to publish updates as the investigation progresses. As proposed, the shift to naming firms under investigation will have retrospective effect and could extend to investigations opened before the guidance came into force.

This is a significant departure from current practice, where the subject and the fact of an investigation is treated as confidential until an advanced stage (either upon settlement or following representations to the Regulatory Decisions Committee). Currently, the FCA can publish a summary of nature of alleged breaches in the case of disciplinary Warning Notices, but these are anonymised and generally high level. Apart from this and statistics published by the FCA on types of investigations in the pipeline, there is limited information in the public domain when the investigation is at an early stage.

Why is this change proposed?

Therese Chambers explained in a recent speech that:

"Enforcement is not just about the prison sentences, fines and censures. It is about communicating what our plan is and deterring bad behaviour. 

For while it is satisfying to see criminals going to jail, it is even more satisfying if we deter them from committing crime in the first place. Not to mention cheaper for firms and taxpayers."

The FCA's justifications for this change include:

• Enhanced transparency
• Greater FCA accountability around the efficiency and pace of its investigations
• Boost confidence in markets by reducing the delay between the misconduct and the imposition of a penalty

When might firms under investigation be named or the FCA publish an update?

The FCA has made it clear that the decision as to whether to publish the firm's name or an update on the investigation will be made on case-by-case basis where it is in the public interest, including factors such as:

• Protecting potentially affected customers from harm (or consumers and investors more generally)
• Encouraging whistleblowers and witnesses to come forward to assist the investigation
• Address public concern or speculation.
• Provide reassurance that appropriate action is being taken
• Deter future breaches

When might the FCA agree not to name firms under investigation or not publish an update?

The FCA will consider whether publication may not be in the public interests including where there may be an adverse impact on:

• The conduct of the FCA's investigation or another regulatory/law enforcement investigation
• The interests of consumers
• The stability of the UK financial system

The FCA will also consider legal constraints such as the restrictions imposed on confidential information received that relates to firms or individuals under s.348 of the Financial Services and Markets Act 2000 (FSMA), GDPR requirements and will follow due process before publishing a statement amounting to a 'public censure' under s205 FSMA. Firms will normally get 1 business days' notice of publication but, in certain circumstances, no notice will be given.

Will individuals under investigation also be named?

The FCA will not usually announce that it is investigating a named individual. This leaves the door open to some form of anonymised announcement from which it is possible to ascertain the identity of the individual when viewed together with the announcement of an investigation into their employer, for example.

What happens if the FCA closes its investigation without imposing a sanction?

The FCA proposes to publish an announcement where it decides to close an investigation without regulatory, civil or criminal action and/or amend the original one.

Other key proposals

A number of other proposed changes include guidance suggesting:

• The FCA may refuse to allow certain legal advisers to attend FCA interviews, where it may reasonably be assessed as potentially prejudicing the investigation due to a conflict of interest or duty of disclosure (such as where the legal adviser representing the employer wants to attend an FCA interview of an employee).
• Sharing of a firm's internal investigation report is encouraged and the firm's willingness to volunteer it and underlying materials is likely to be taken into account when deciding what action to take, if any. This includes notes of interviews by lawyers and other professionals.
• The FCA invites firms to consult them on the commissioning and scope of an internal investigation.
• Internal investigations are not encouraged where this may prejudice or hinder the FCA's own investigation, particularly in the case of criminal investigations where alerting suspects could have adverse consequences such as in cases of abuse of trust or insider dealing rings.
• The FCA will accept reports over which a limited waiver of privilege is asserted, which reflects their general approach to date.

Whilst the FCA acknowledges that firms are not obliged to share legally privileged material, the potential for adverse inferences to be drawn or some other impact on the conduct of the investigation cannot be ruled out as part of mounting pressure on firms to waive privilege.

Most of these proposals are not new and reflect our experience of previous enforcement team practice. However, the proposed changes will bolster the FCA's confidence to push for a particular approach, such as full disclosure of internal investigation materials.

Comment

The proposal to name firms under investigation is likely to cause firms to be concerned about significant reputational damage, precipitate unwelcome press speculation and the potential for litigation risk to crystallise early as a result of these announcements. Arguably publication is premature given the announcements will be made before any investigatory steps have been undertaken by the Enforcement division. We expect the grounds on which publication can be resisted will be extremely limited given we have seen in analogous cases where publication of Warning Notices has been unsuccessfully contested that arguments in relation to reputational damage are often dismissed except in the most serious of cases, such as where there is the potential to precipitate insolvency.

This consultation closes on 16 April 2024.