In November 2024, the FCA announced a second round of consultation on its proposals for increased transparency concerning its investigations and enforcement processes – after the first-round consultation proposal to “name and shame” companies under investigation received backlash.
Investigations and enforcement can be seen as a last resort, kicking in when regular supervision and monitoring has failed. But these processes form a significant part of the FCA’s armoury, critical to preserving London’s international competitiveness as a financial centre, and essential to maintaining an effective and respected enforcement framework for the UK’s financial markets.
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Simultaneously, the FCA has been under pressure to improve its efficiency. To protect the rights of those under investigation, they generally proceed with strict confidentiality and secrecy.
This matters, not least because many FCA investigations have closed without formal action being taken. Allowing publicity to damage a firm’s reputation before any finding would be unfair. But if investigations are protracted, the underlying issue may become stale before a final outcome is announced: the scope for lessons to be learned becomes limited, and market participants may suffer harm through lack of awareness of an investigation.
In part, the “name and shame” proposals were criticised because if markets need to be protected, other options exist – for example, issuing a prohibition order. Similarly, there are other ways of educating the market, for example, by sending “Dear CEO” letters to businesses, or issuing updates based on anonymised examples.
FCA consultation-shift in emphasis
The latest FCA consultation reflects a shift in emphasis. Critically, the FCA is reviewing its enforcement portfolio – examining current cases to align with strategic priorities – with the aim of fewer and faster investigations. In April 2023, the FCA had 220 open enforcement operations; by November 2024, this fell to 147.
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By GlobalDataThe FCA notes that investigations in 2023-24 took an average of 42 months to complete, whereas more recently opened investigations are progressing more quickly – in some cases, less than half that time.
Moving away from only announcing investigations in “exceptional circumstances” which it believes does not serve the public interest, the FCA wants greater flexibility. Central to its new consultation on whether to announce an investigation is a “public interest test” – announcements would only be made where the public interest justifies it. Further, the FCA plans to give firms more notice before any decision to announce, and even if they make proactive announcements, this would apply only in a few cases.
Factors in favour of publishing an announcement include:
- A matter is already in the public domain, for example, through a disclosure made by the subject of the investigation.
- It could be in the interests of potentially affected customers/consumers/ investors.
- It would prevent indirect harm, for example, in cases of suspected fraud.
- It would provide educational benefit for the market.
Factors against publication may include:
- It would cause serious market or sector impact, financial instability or seriously disrupt public confidence in the financial system.
- It would have a severe impact on the firm or third parties concerned.
- It could hamper an investigation by the FCA or another regulatory body.
The intention to provide firms with at least ten days’ notice before an announcement allows representations to be made, and, after considering them, to give two further days’ notice of any final text to be announced before publishing. This would give firms time to take advice and consider whether to challenge an FCA decision through a review.
The FCA consultation paper includes case studies, based on past cases, to consider potential announcements during an investigation. In the examples covered, the text for what an announcement might have looked like indicates very limited content. As recognised in the consultation paper, anonymised announcements may be appropriate for FCA investigations into AML and financial crime systems and controls. Generally, announcing an investigation without naming the firm gives the FCA more flexibility and a greater chance of educating the market on expectations, by providing further details.
European regulators approach: BaFin
Responding to the Wirecard scandal, in 2022 German financial services regulator BaFin was granted authority to inform the public earlier and more transparently about its approach to balance sheet control. It may report on examination orders based on specific indications of a violation of accounting regulations. Announcements on the BaFin website and in the Federal Gazette state the company concerned and the reason for the examination, without any further details.
BaFin may also make public significant procedural steps and incriminating, or exculpatory, findings obtained during proceedings. If the indication-based examinations show that BaFin could not identify any violations of accounting regulations, it will publish the discontinuation of that investigation.
Every announcement is required to be in the public interest: BaFin weighs the public’s need for information against the affected company’s interest in keeping the ordered audit non-public. Determining factors are the probability of a violation of accounting regulations and its potential relevance for the capital market.
BaFin announcements are intended to enable the capital market to take note of relevant accounting control proceedings, to evaluate them adequately and take them into account in company valuations and investment decisions. Notably, an audit order does not mean that BaFin has already established an accounting violation.
AMF in France: more conservative approach
The French Financial Market Authority (“AMF”) cannot disclose information about pending investigations. AMF investigators are bound by professional secrecy rules: to breach them is a criminal offence. The rules applicable to the AMF are stricter than those applicable to France’s Public Prosecutor, whose investigations must remain confidential to protect the presumption of innocence.
An exception is that criminal investigations may be disclosed in specific circumstances, such as the prevention of the dissemination of incomplete or inaccurate information, to prevent a public order disturbance, or when the disclosure is justified by the public interest. Consequently, criminal investigations on market abuses may be disclosed by the Public Prosecutor under certain circumstances, whereas regulatory investigations on identical market abuses must remain secret.
The FCA’s softening of approach in this second consultation is welcome, although regulated entities still have concerns on the suggested approach.
The FCA will probably proceed with the proposed changes in some form, although the overall practical impact is likely to be limited to a few unusual cases. As the FCA embraces greater transparency, this may ultimately track into the approach in Germany and France.
Abdulali Jiwaji and Dr Jan Kraayvanger are Partners at Signature Litigation
