Regulatory enforcement mini-series part 1: Will the FCA change its mind on its proposal to 'name and shame' firms?

Nathan:

Hello, and welcome to the Ashurst Regulatory Enforcement Podcast. I am Nathan Willmott, and I'm joined here in the Fruit and Wool Exchange in London by two fellow specialists in FCA and PRA investigations, my colleagues Adam Jamieson and Eleanor Robinson.

Thanks, Adam and Eleanor, for being part of our podcast today.

Eleanor:

Thanks for having me.

Adam:

Thanks, Nathan.

Nathan:

Now between the three of us, I think it's fair to say we have many years of grappling with regulators on enforcement matters, representing all types of financial services firms as well as their senior management. Our mission for this podcast series to share with you the new approaches and strategies that we're seeing from the PRA and FCA to highlight any areas of concern about how the regulators are conducting their investigations, and to suggest what they should be doing differently to ensure that they act both fairly and effectively.

In terms of our topic for today, it's something that has really, really exercised the industry over the last two months, and that is the FCA's consultation paper CP24-2, on the FCA's new enforcement guide and publicising enforcement investigations. Of course, we've now got to the end of the consultation period and we await the FCA's response to the consultation exercise.

So much has happened since the FCA published that paper. I wonder, Adam, whether you can have a go at bringing it up to date on the steps that we've since the FCA published that paper and the industry response?

Adam:

Well, it's been a journey, hasn't it? It feels a long time ago. Obviously, the consultation period was extended from what was initially being proposed.

I guess, initially, it was shock at the nature of the proposals. I don't think anybody was expecting the position in relation to the publicity point around announcing firms' names. I don't think anybody had considered that that might be something that the new enforcement directors would look to do as part of their new look enforcement strategy. It's interesting, when you break it all down, as to what they're proposing. I think everybody would have been suspecting that there would be streamlining of the portfolio, a focus on doing things quicker, a focus on alignment between the FCA's supervisory and policy objectives and enforcement, creating that deterrence impact that historically has been the FSA and then the FCA's approach, which I think has a lot of merit to it.

But this transparency piece, I think is what has obviously got all of the attention. After the initial reporting of it, very quickly the industry, I think, came together in a way that we haven't seen for a long time. Across different sectors of financial services as well, in relation to this - feels inherently unfair and goes against usual legal principles, innocent until proven guilty. And a deep concern that, if implemented, this policy could be extremely damaging for those who get caught up in it, in particular small and medium-sized firms, but also larger firms, listed firms.

The FCA enforcement directors and senior managers have been on a roadshow, going around various industry bodies, and roundtables, and law firms. We've been involved in some of those.

Nathan:

It feels like it's been a whistle stop tour, almost as if they're very keen to show that they've spoken to the industry and given the industry every opportunity to give them their views.

Eleanor:

Absolutely. I think the new executive enforcement directors have been keen to show their face and put themselves really behind the proposal. And also, to make it clear to firms and to the industry more generally that they are listening.

Adam:

Well, if they are in listening mode, then they will have been deafened, I think, by the chorus that's come out, because it's been I think almost exclusively against the proposal to publicise. Not just in terms of how that would work in practice, but the very principle of it.

Nathan:

Yeah. It feels almost as if, as you say, this universal view that this is wrong right across the industry, and yet, a sense that it was going to happen. That the FCA put so much capital into this that not to do it would be seen as a huge step backwards.

Adam:

There's always inevitability, isn't there, about lots of regulatory consultations? In terms of you're expecting potentially some changes, although not always, in the mechanics of how something might work and tweaks, but you're never expecting a full reversal of position, realistically. I think that that was acknowledged by those who've spoken out against this proposal early on, that it would only really be stopped if there was political buy-in and buy-in from Treasury, et cetera, and MPs who felt that this was going to, in particular put UK competitiveness back a step, and against everything that we're trying to promote, in relation to our financial services industry as against international competitors.

Nathan:

Yeah.

Eleanor:

Of course, that's what happened, hasn't it, in the sense it's the House of Lord's Financial Services Regulation Committee who've put a bit of a spanner in the wheels or spokes of the bicycle of the FCA, in the sense that they've caused a ruckus by asking for lots and lots of information, and making it quite clear that the FCA shouldn't carry on until the Committee have had a chance to really consider and scrutinise the proposals. And they've indicated that they are troubled by the impact of the consultation proposals on UK competitiveness and growth more generally.

Nathan:

It seemed like a very strong letter, the letter that was sent by Lord Forsyth, on the 18th April, to Nikhil Rathi, seemed surprising in its strength, albeit reflecting those views from the industry.

Eleanor:

Yeah. I think it was surprising, especially in the context that I had presumed when I read the consultation. I had presumed that this may be coming from Treasury or coming from voices in the government because the FCA does receive a lot of queries about what it's doing from MPs. So I thought that there'd be a weight of government or MP support behind this, and to read the slightly scathing text in that letter from the Committee was a surprise, to show that they really weren't onside. One of the questions being what led the FCA to do this and which representations did really trigger it to do this suggests an information gap as well, that they are mystified and don't seem to be fully understanding of the reasons as to why the FCA is proposing this.

Adam:

And trying to work out who is accountable for proposing it as well, in a sense.

Nathan:

That's right. In Lord Forsyth's letter of the 18th April, he asked for the FCA's response to those questions within a week, by the 25th April, so that that would come in before the end of the consultation period, which ended on the 30th April. The FCA did that, it wasn't a letter from Nikhil Rathi, it was a letter from the co-heads of enforcement. Adam, what's your take on that letter of the 25th April from the FCA?

Adam:

Well, I don't think the response was a huge surprise, in the sense that they defended the proposals and tried to explain the reasons why they've been put forward, and certainly didn't give any indication that there could be or would be a U-turn. But realistically, were they ever going to respond in a different way to that? Probably not, particularly as you say, given the tone of the letter that they'd received.

I do think that there was a growing momentum around the time that this letter was published that actually perhaps the FCA may change their mind in relation to the proposal. Then when this landed, I think we've seen the press, lawyers, industry bodies all pushing quite hard in unison and believing, in fact, that the FCA may change its position. As to whether this dampens that mood and that spirit, perhaps slightly. It comes across as quite defensive, in some respects, the letter, for that reason. I'm not sure it really fully acknowledges the weight of the concern that's been received during the consultation. Which perhaps they can say because the consultation period hadn't ended, but the reality is they know what the weight of feeling has been during that period at the time of sending the letter.

Nathan:

It's certainly a combative tone, isn't it, from the FCA in response. The thing that really struck me ... I've heard various people saying, "This is the FCA doubling down on their proposals". But really, what struck me was how they draw on the fact that it was MPs themselves that had asked for this, and therefore pushed that back to the Financial Services Regulation Committee of the House of Lords to say, "We're responding to Parliament and our ability then to share more information with Parliament about our ongoing investigations."

Eleanor:

Absolutely. I think it shows that the FCA are in between a rock and a hard place, in that sense. They have different stakeholders who have noisy opinions about what they should be doing and they're trying to respond to that. I think the British Steel Pension scheme cases are indicative because there was a huge amount of MP interest, and Treasury Select Committee interest. And I think that that was actually named as one of the triggers where a committee discussing the BSPS situation actually asked the FCA, "Had you not considered listing investigation subjects?" They can point to one particular example of where MPs had actually proactively asked for this.

They've also alluded to other media discussions, where MPs have asked them about things which they can't say much about. They've also quoted a situation where, with the case of Odey, where this came out in the Treasury Select Committee conversations and in Parliament. So I think that they are reinforcing their case that one of the main imperatives behind this is that they want to be on the front foot with MPs, and with the media more generally. I think they feel that they've had a lot of criticism in previous years, they're often accused of being asleep at the wheel, not being proactive, and I think they want to try and control the narrative more.

Adam:

I'm still hopeful actually, rereading the letter, that they may well still change their mind in relation to this proposal because one thing that they need to do is they need to balance all of the purported reasons they've put forward as to why this would be good from a transparency perspective against the competitiveness of the UK and our reputation as a global market. Whilst they may say MPs, et cetera, have been asking for this in the past, in light of the position put forward by industry bodies and the House of Lords Committee, et cetera, I'm sure that they will have to perform that balancing act quite carefully. It may well be that they back down on that basis.

Nathan:

What do you make of the reasons that they give for wanting to make these changes? Obviously, they made a number of reasons in the paper itself. They expand a little bit on those in this paper. Do they ring true to you?

Adam:

I think that's the huge frustration. The huge frustration is that I still don't think they've put forward a coherent argument as to what the benefit would be of publicising names at that early stage. In the letter, they talk about what a greater degree of transparency will do to amplify the deterrent impact of their work. They give four different reasons for this proposal around transparency.

They say, "It will makes firms aware in a much earlier stage of the process of important issues. They may then examine their own conduct and processes, and raise standards." Now, one of the big pieces of feedback throughout the consultation has been, "This is a good point. We can do this, but you don't need to name names to do that." There's a number of anonymized ways. You should be more transparent about what the nature of the issues you're investigation. Tell the market, of course people will then review their own practices. You don't need to name names to do that. People will still read it, and actually you can share more detail.

Nathan:

The reality is, in my view, that they do this already. They write Dear CO letters, they write portfolio letters to parts of the industry. Often they say in that, "We have a number of cases in enforcement on this issue." It seems to me that that's a reason that rings fairly hollow in terms of them actually going out to the industry and communicating their concerns.

Adam:

Yeah. The second one they talk about, which they've spoken about a lot during the consultation, is enhancing public confidence and demonstrating to the public that they're employing enforcement as a tool for the protection of consumers and markets, and that will help build trust. Again in the letter, they repeat later on, they say, "We know that consumers benefit significantly from knowing when the regulator is on the case." I would question that because what do consumers properly gain from understanding that an investigation is underway? Because in reality, if you find out that your bank or a financial services firm you're dealing with is being investigated for some systems and controls issue, you're not really going to understand what does that mean for you. As a consumer, what do you need to do? Is your money safe?

Of course, in reality, if the regulator, from an enforcement perspective, is investigating a firm, then they will have taken all the necessary supervisory actions to protect consumers. Now of course, that can include communicating with consumers as part of that process and they should do that to increase transparency, and let them know that, "We're looking at this firm. Your money is safe. Whatever the issue might be is something we're examining." But to tell people that there's an investigation underway, people are going to either not care and disregard it, or they're going to be potentially panicked and worried, they're going to be asking questions about what it means for them. They're not going to get full answers from the firm or from the FCA, because of course there's an investigation ongoing, there's no findings. They're potentially going to targeted by claims management companies, if it's a retail issue, to say, "You may have a complaint or a claim," and they may then give up a certain amount of their redress of compensation that they may be entitled to, as a result of that publicity effectively.

When in fact, very often, through enforcement case, redress will of course be something, the FCA have talked about this time and time again, that will be discussed with the firm, voluntary redress exercises, remediation. It's not as though there aren't other mechanisms for that issue to be dealt with. I just really question what are consumers going to properly gain from this?

Nathan:

That's right. I'm interested in your views on this because it seems to me that the FCA has very, very broad supervisory powers where it does have concerns about how consumers will be treated in relation to an ongoing issue, then it has the power to impose requirements specifically designed in order to protect consumers.

Eleanor:

Absolutely. The FCA has been using those intervention tools and other tools as well, even not as much as a full intervention, but other supervisory tools very effectively in the last couple of years. That has become a really important way of mitigating harm on consumers, but also giving out quick messages. The FCA has indicated that it will lean on its intervention powers more. There will be less investigations going forward. It is a bit of a mystery as to why they think that naming a firm under investigation will in some way improve consumer confidence, as they've got other mechanisms that already do that more effectively.

Adam:

It will damage consumer confidence if they don't then take action.

Eleanor:

Well, that's it. I think the FCA hasn't quite really quantified exactly how much work it might have to do in order to uphold accountability. I think that the more publicity will trigger a lot more questions and comments, and a lot more work, which may well slow down investigations. So I'm not completely sure how it would impact in that way, again improve on public confidence.

Adam:

If there is a public outcry and lots of press attention around an issue, it may well be that that's an exceptional case that they can, under their present policy, announce in any event.

Eleanor:

And already have in recent times.

Adam:

And reassure the public that, "We are looking into this."

Nathan:

They give some examples in relation to listed companies. Obviously, issues as they affect listed companies can be very different to issues as they effect financial services firms. Obviously sometimes, you have financial services firms who are also listed. But they cite some statistics in the letter effectively saying, "Well, in all but one case where the listed company announced an investigation, it had minimal impact on their share price." Is that something that should give us comfort in terms of the likely impact, in terms of investigations into all types of firms?

Eleanor:

I think we should be a little concerned about the case that the FCA cited because it was a listed firm and there was a massive, massive drop in its share price. Although the FCA's explained that by saying that it was in relation to the potential redress that the firm might have to offer, or also that it was due to media speculation at the time, I don't think that that necessarily explains or can give us reassurance because media speculation may well follow in every case. I think that was a bit concerning, the way that they analysed it.

Secondly, I don't think it's a full dataset, but anecdotally I can think of other firms who actually suffered financially as a result of having a massive influx of complaints, and whose then solvency was at risk. I don't know if the FCA can actually track that data effectively, to give us all reassurance.

Adam:

It's very fact specific as to what each firm's business is. If I were to phone up upon an investigation being launched, every retail customer of a financial investment firm and say, "By the way, the FCA are investigating the firm where you've got your money for overcharging," or for not providing high quality advice, what do we think the impact of that's going to be?

Nathan:

That's right.

Adam:

That hasn't been quantified.

Nathan:

Yeah.

Adam:

By looking at a listed company example.

Nathan:

I think there's also the fact that listed companies tend to announce the fact of an investigation, not as inside information, but as a note to accounts.

Eleanor:

Yes.

Nathan:

Giving an explanation as to why certain money may have been set aside, for example. That, by its nature, is likely to be a lot less concerning to investors than an announcement by the FCA that it's just launched an investigation into that firm.

Eleanor:

Yes. I think the other thing to bear in mind is the FCA have said directly that it expects to see its number of cases that close without action to be reduced, i.e. it expects that when it announces an investigation, more than likely it will end up with some kind of outcome against that firm. That's the inevitable result of it's changing strategy of trying to pick the cases that fit with its strategic portfolio and cases that are more serious and impactful. That being the case, how can we look back at previous data with a much larger case portfolio? Now we're going to have a smaller case portfolio going forward, but firms may well feel that if there's that announcement out there, their goose is cooked. People, consumers, the media, et cetera, will react in that way. I just don't think we can look back to previous data in the same way to give us reassurance about what might happen going forward.

Nathan:

The letter from the Lord Forsyth also asked for information about what other regulators do. In the annexes to the FCA's letter, we see some interesting analysis, both in terms of non-financial services UK authorities, for example the Serious Fraud Office and others, but then also their analysis of other financial services regulators internationally. Anything in particular you took from those analyses?

Eleanor:

My take from it is that generally, in Europe, nobody else is doing anything like this, and similarly globally really. I think big, important jurisdictions like the US, Hong Kong, privilege privacy so the UK would be an outlier. That was the main take I got from that. Given that our UK growth and competitiveness is key, it does seem that it might be a risky gamble from the FCA doing something that departs from its peers.

Nathan:

That's right. I think they refer to the French regulator, AMF, to the Swiss, FINMA, to the SEC and the DOJ, who all adopt a privacy first approach. They don't cite anyone other than, I think both the Monetarial Authority of Singapore, and then they also refer to the Australian conduct regulator, ASIC, who has apparently a longstanding policy it may make a statement about investigation when it's in the public interest to do so. But our understanding is in practice, that's more likely the exceptions circumstance case that the FCA currently adopts.

Eleanor:

I think that's another difficulty, isn't it? Is perhaps having the policy in place is one thing, and how it's actually employed in practice is another because the Monetary Authority of Singapore, whilst they have that mechanism where they can announce, I understand that in practice, it's not done very frequently.

Adam:

One of the odd main arguments that FCA is making in relation to this proposal as well is that it will improve their own accountability by enabling greater and more timely granularity, granular scrutiny of their effectiveness. i.e., "If cases are in the public domain earlier, then we'll need to complete them earlier and we can be held to account if we fail to do so." Because some of the data within the letter and that's been discussed by others - ,they're taking far too long to carry out regulatory investigations, years.

But to give that as a reason, where there's this potential detrimental impact on firms who could be caught up in these announcements, just seems very odd. Again, they know these metrics internally. They can hold themselves to account, in any event. They could publish that data, again on an anonymized basis, as frequently as they would like and they could be scrutinised by Treasury Select Committee and others, in relation to how long they're taking. It's completely unnecessary, and frankly it doesn't make any sense.

Eleanor:

I think in terms of their reasoning, there aren't many things that couldn't be accomplished without naming firms. I think the major one really is about witness evidence and whistleblowers. I think that's the one thing where the FCA has a potential case there for publication of the names of firms. But even then, I know that in the letter, the FCA talked about whistleblowers feeling undermined without updates from the FCA about what exactly it's doing with their information and they've felt helpless that they couldn't say anything really, to give reassurance. But there's not much more that they could say now, even if they said, "Oh, we are investigating." The whistleblower would still probably want to know more than that. For every piece of information that the FCA gives, people will always want more.

Adam:

It's a very particular type of case where they might need witnesses, particularly from the general public or people to come and speak out about an issue. I certainly don't think that's the norm. They can always speak to people from firms to find out more during the course of a normal investigation, without needing to publicise it.

Nathan:

Yeah. It feels like the one example where it may be helpful is non-financial misconduct investigations, which tend to be investigations into individuals, and therefore would fall outside the scope of this policy in any event.

Eleanor:

I think potentially in fraud-y type cases as well, scammy type cases. They quoted Raedex as one of the cases in which it was very useful to have witnesses coming forward and providing more evidence.

Nathan:

Yeah.

Eleanor:

There are cases where the operational effectiveness of the FCA would be improved and enhanced if it had more witnesses and more complainants, but then the downside of that of course is the more evidence, the more disclosure, the more quantity and the potential effect that might have on the length of the investigation. There are pros and cons to everything, really.

Adam:

Again, could they go down the exceptional route for some of those cases?

Eleanor:

They could.

Adam:

If they really felt that was necessary.

Nathan:

I think in fraud cases, you're absolutely right. It's the sort of case that would already typically be announced. If an individual has been defrauded, you're likely to be picking up the phone to the FCA anyway. If you're someone whose seen fraud by others, then you will know that that's the sort of thing that you can and should do. Whether that will make any real difference, I think is questionable.

The consultation period has ended. The Financial Services Regulation Committee at the House of Lords has indicated it doesn't want the FCA to take any further steps until it's finished its review. I'm interested in both of your views as to both what happens next and where will you put your money, in terms of where this is all likely to come out?

Eleanor:

Well, one question I would ask is if the Committee comes back and say, "We think this is an awful idea and we don't want you to go ahead with it," wouldn't the FCA be forced not to go ahead? I can't see a situation where they could go ahead. Some of it is contingent on what that scrutiny entails and what the outcome of that is.

Adam:

Yeah. I think it's going to be really difficult for them now, to push ahead with it. I think they had in mind that they would make some tweaks. People have talked about the notice period that they proposed, the 24 hours for getting notice, and it was very obvious very early that it was very likely that that will move. Making it clearer, actually, that a factor they would take into consideration would be the impact on firms as a primary factor, rather than just a secondary factor. I'm sure, again, maybe something they'd be willing to move on.

I agree with Eleanor, I think it's very difficult for them to move forward now. However, they are inherently unpredictable, as we all say. This is a key policy for them, from an enforcement perspective. It would be a big ... Reputationally, it would be damaging for them.

Eleanor:

I would also argue that a regulator that listens and has taken on board consultation views is a very positive thing, and that could be the way that this narrative goes. They would also have real comeback in the future, if MPs start asking them for more information about exposing the names of those under investigation, because it would be obvious you could say, "Well, we tried that and that wasn't the right thing to do at this particular time."

Adam:

They refer to opening the debate and they have opened the debate, and they've opened an interesting debate with what was viewed almost immediately as a very controversial proposal. What do you think, Nathan?

Nathan:

Well, we've all worked on the inside at either the FCA or its predecessor organisation and it feels to me that this isn't something that is universally desired amongst FCA enforcement staff or within the FCA more generally. As a result, I think within the FCA, some of those voices will begin to be heard as the consultation period has ended and there is active consideration as to whether this is really a desirable step for the FCA to take. I think that is likely to have, alongside the political strength of feeling, I think that is also something that the co-heads of enforcement are likely to take into account if they begin to hear this voices from those within the FCA enforcement division itself.

I think it's still very much in the balance. I think that as a result of some of the steps of the House of Lords Financial Services Regulation Committee, it feels far more likely than it was that they would think again. But I think where we've got to now is they're going to need to be required to think again. As you say, Eleanor, it's going to need to be very strong political will saying, "We don't think you should proceed with this," if they are going to change their mind. I think it could go either way.

Eleanor:

If the FCA does pull back on the naming point, how do you think the FCA's reputation, or what do you think the impact will be on the FCA generally?

Nathan:

I think they could move forward from this absolutely fine. I think they've made some very sensible proposals, in relation to the way that they're going to approach referrals to enforcement. Far more, in my view, the old FSA approach, it will apply a higher evidential threshold. I know they won't say that, but that's the logic if they're saying that, "More of our cases will end up in outcomes against firms," they'll be more in their priority areas, they will get through those cases more quickly as a result. I think that's highly desirable. I think this is a hugely unfortunate distraction from them getting on with the day job. They spend a lot of time speaking to firms, trade associations, law firms about their proposals, that's time they could be spending on their active caseload now. I think it's regrettable that they're not doing that.

Adam:

They've also been given lots of good ideas from industry and others, throughout the course of the consultation, in relation to how they can improve transparency without naming firms. Hopefully, that would be a part of what they would be coming back with, saying, "Look, actually we've come up some better ideas."

Nathan:

Absolutely. Now, I'm afraid that that is all we have time for in this edition of the Ashurst Regulatory Enforcement Podcast. Thanks so much, Adam and Eleanor, for sharing your experiences and insights with us today. A big thank you to you, for listening to the podcast. We hope you found it interesting and useful. As ever, if there's anything we discussed with you that you have your own views on, and I'm sure this is one of those topics, then please do drop us an email or give us a call, we would love to hear from you. Thank you very much.