Our response to the UK FCA on proposed changes to its approach to enforcement

The FCA’s extended period for responses to Consultation Paper 24/2: Our Enforcement Guide and publicising enforcement investigations – a new approach (CP24/2) ended yesterday. We have previously posted a summary of the key areas covered by CP24/2, and an overview of our thoughts on whether the FCA’s proposals can achieve their objectives.

Alongside the financial services industry, we have been closely involved in examining and responding to this controversial proposal. This has included extensive engagement with many of our clients and trade association/industry bodies, peers and the FCA. Highlights have included:

chairing the City and Financial Global – Market Abuse Summit on 27 February 2024 where Therese Chambers launched the consultation with her keynote speech;
co-panelling the Financial Services Lawyers Association roundtable event on 21 March 2024 where we discussed the proposals with peer law firms and members of the bar; and
hosting a client roundtable with Therese Chambers and Sara Williams (FCA Law and Policy) on 25 March 2024 to engage directly with the FCA on the issues.

We do not believe that the FCA’s proposals meet its objectives. The impact (intended or otherwise) on firms has not been given adequate consideration; nor has the impact of making the FCA an international outlier. We have now submitted our written response to the FCA’s consultation, a summary of which follows.

The proposal to ‘name and shame’ the subjects of ongoing FCA enforcement investigations (‘Investigation Subjects‘) is deeply concerning. We note that the proposal will impact both financial services firms that are regulated by the FCA, and listed companies that are not involved in financial services. The proposal risks causing severe financial and/or reputational damage to Investigation Subjects, ranging from significant impact on share price to calling into question whether a firm can continue as a going concern. This is exacerbated by the low statutory threshold for opening an investigation, the fact that FCA investigations tend to go on for years at a time and, according to the FCA, 65% of investigation cases opened by the FCA close without further action.

The proposal is misguided for several reasons. It undermines the statutory protections enshrined in FSMA and overrides the intention of Parliament. The purported rationale for the change of approach lacks any evidential basis. It is neither proportionate nor consistent with the FCA’s statutory objectives, and in terms of international competitiveness, it risks making the UK an international outlier. Moreover, the proposal may well have unintended consequences that risk undermining, rather than achieving, the FCA’s stated aims, including for example diminishing public confidence in the FCA.

No amount of amendment to the finer details of the proposal can counteract the damage it is likely to inflict upon Investigation Subjects and the UK market. The proposal requires a fundamental rethink by the FCA. We consider that the FCA’s intended aims can be achieved through better means which would not involve identifying Investigation Subjects, including the creative use of its existing tools. A more general communication to the market (for example, an ‘Enforcement Watch’ publication akin to the FCA’s Market Watch or Primary Market Bulletin) could take account of the broader spectrum of regulatory interventions in sending a message to educate and deter the industry more widely. We consider that if the FCA is serious about its stated aims, its full focus should be on completing investigations as quickly as possible. The industry is yet to see any serious and detailed proposal as to how the FCA intends to achieve this outcome.

We are also concerned about the way in which the FCA has approached the consultation on the wider proposed changes to its Enforcement Guide (the ‘EG‘). Specifically, new EG omits or materially alters several important procedural safeguards for Investigation Subjects, and risks leading to a casualisation of Enforcement and Investigation processes, including relating to when legal representatives of firms may attend interviews. These changes have not all been appropriately identified in the main body of CP24/2 itself. For example, the legal review process no longer appears in new EG. The proposal included in CP24/2 is opaque, as it does not contain a blackline markup, or other explanation, setting out what the FCA actually seeks to change or retain in its processes set out in one accessible document (i.e. EG). References to the FCA seeking to include more information on its Enforcement webpages are also concerning given a lack of clarity as to what this will involve, and a lack of appropriately accessible version control mechanisms over that material. The FCA should seek to clarify each of these points before making any final changes to EG.