Major changes proposed for FCA enforcement regime

The FCA has launched a consultation on changes to its enforcement regime. If enacted, this will be the biggest shake up of the regulator’s approach to enforcement since its inception in 2013. 

What might change?

Publicity

The headline proposal relates to publicity around investigations. Until now, the FCA has not disclosed its live enforcement investigations to the public, other than in limited circumstances. The proposal is that in future, the FCA will publish information about the opening and subsequent progress of investigations into firms (including the identity of the relevant firm subject to investigation) if it decides that such publication is “in the public interest”. It will also confirm if it closes an investigation without taking action. The FCA will decide whether and what to publish on a case-by-case basis.

The FCA proposes to make announcements in line with its existing notice procedure, which is to provide a firm with “appropriate advance notice”, typically one business day (although it may provide no notice if it considers that it needs to announce an investigation urgently).

These changes will not apply to investigations into individuals, as the FCA recognises that specific legal considerations apply when the subject of an investigation is an individual.

The FCA’s Joint Executive Directors of Enforcement, Therese Chambers and Steve Smart, believe that the changes will boost transparency and confidence in the regulator’s performance of its functions. They also hope that it might encourage witnesses and whistle-blowers to come forward. 

The consultation paper notes that the proposal would align the FCA with market practice by other regulators both in and outside of the UK, such as the Competition and Markets Authority and the Monetary Authority of Singapore.

Speed

The consultation paper expresses a desire to make investigations faster. It suggests the FCA will achieve this by opting for a “streamlined caseload of investigations better aligned to our strategic priorities of putting consumers’ needs first, delivering assertive action on market abuse and reducing and preventing financial crime.”

The Enforcement Guide

The FCA has said that it will also comprehensively update the Enforcement Guide, which is the key published source of information on how the FCA runs its enforcement investigations. 

One notable example of a proposed change to the EG is to delete the option of “private warnings”, which would no longer be used as an enforcement tool. The appropriateness of private warnings in enforcement has been questioned before.

Comment

Since the new Heads of Enforcement took over at the FCA, many have been waiting to see in what direction they may take the regulator, whose effectiveness has often been criticised. It is not surprising that there is a desire to mark a significant step change from previous processes.

The consultation paper acknowledges that at present, by the time regulatory decisions are published, the “reassurance, educational value, and effectiveness of that information…is often significantly reduced.” It is welcome to see the FCA acknowledge that the slow pace of enforcement is undesirable. 

Under the existing process, if an investigation were opened and later closed without any adverse finding, the public at large would never know it had happened at all. One can see how it could therefore be helpful for consumers and market participants to have more information about these steps published.

That said, early disclosure raises its own problems. The announcement that a firm is subject to formal enforcement proceedings is likely to be highly detrimental for the firm and its employees, even with an FCA disclaimer that opening an investigation does not imply that there has been any misconduct. 

Given that full details of the investigation would be confidential, it may also be difficult for a firm to properly respond to an announcement or to defend its position. In recent years a high volume of enforcement investigations have been closed without further action, so it is questionable whether the potential harm that relevant firms may suffer by the publicity is proportionate to the FCA’s objective of increasing the transparency of its enforcement function.

The suggestion of a “streamlined caseload” seems to indicate a clear intention to depart from previous Executive Director of Enforcement Mark Steward’s policy, which was to investigate cases until the point of readiness for litigation before outcome decisions were taken. It is perhaps an acknowledgement that the enforcement division has been stretched too thinly, and needs to focus on a smaller number of key investigations which reach outcomes in a much more effective timeframe.

Lastly, although the FCA states that it has discussed these proposals with the PRA and will engage with it further before finalising the proposals, there is no mention of the PRA’s own enforcement regime changes, which we discussed in our blog post “PRA unveils its new early settlement scheme – what might the likely impact be and should we expect similar for FCA Enforcement?”. The FCA does not refer to any consideration of an equivalent of the PRA’s new Early Account Scheme. Although both regulators are making significant changes to their enforcement processes, it seems at present that the FCA is not prepared to go as far as the PRA in introducing a new process for the faster resolution of enforcement cases.

The consultation is open for responses until 16 April 2024. We expect the consultation to generate a high volume of responses. The forthcoming Policy Statement will be one to watch out for.

Read the consultation paper.