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FCA name and shame enforcement proposals challenged – Abdulali Jiwaji published in Retail Banker International

By Abdulali Jiwaji

Partner Abdulali Jiwaji discusses in Retail Banker International the Financial Conduct Authority’s proposals to ‘name and shame’ companies under investigation in order to deter wrongdoing and strengthen its enforcement work, and why this may not be the optimal approach to improving the regulator’s enforcement strategy.

Abdul’s article was published in Retail Banker International 23 May 2024, here. A version of this article was also published in Financial Reporter, 23 May 2024, here.

Last year, the Financial Conduct Authority appointed new joint heads of enforcement and market oversight: FCA veteran Therese Chambers and Steve Smart from the National Crime Agency. According to the FCA, both appointees would play ‘a vital role’ in expanding its enforcement and market oversight leadership team as part of the agency’s three-year strategy to reduce the growth of financial crime.

Notably, both the volume and value of FCA fines have recently been in significant decline: only twelve fines totalling £53.4m were levied last year compared to 26 fines with an aggregate value of £215.8m in 2022. This downward trend has since accelerated further. To date, only two FCA fines have been issued in 2024 with a combined total of just £930k.

Are public and market confidence in the effectiveness of FCA’s enforcement function diminished as a result, and if so, how can they be restored?

In their co-authored foreword to an FCA consultation paper published in February, Chambers and Smart sought to address these questions and detail the agency’s future strategy on enforcement:

“Fines, bans and prosecutions are often what the public notices most about our enforcement work, and they are vital tools in holding to account those who don’t meet our standards. But enforcement action is not simply about individual instances of punishment. Its greatest impact is as deterrence, and in educating the whole market on what we expect, and where others have fallen short.”

They then added: “The deterrent effect of enforcement action is greater the closer it is to misconduct occurring. The longer it takes for outcomes to be determined, the longer it takes for us to send important signals to the markets we oversee about what we consider serious misconduct to be.”

It is clear from the consultation that deterrence is a key plank of the FCA’s enforcement strategy.  In the FCA’s view, this translates into a greater emphasis on publicity in relation to investigations, and in practical terms, this means that the FCA plans to give serious consideration to making a public announcement when an investigation into a firm has begun.   Those deciding on such announcements will apply “careful consideration” on a case-by-case basis as to whether it is in the public interest. Moreover, the agency will not “generally” announce when it has opened an investigation into a named individual (as opposed to a firm) because of legal considerations.

Based on deterrence, naming and shaming is designed to bolster the FCA’s enforcement efforts and enhance public confidence in them. It has two further aims: to inform the market about the various categories of misconduct that require a formal FCA investigation, and to encourage potential whistle-blowers to come forward at an early stage.

But it is already clear that naming and shaming has its limitations. Whatever reassurances are given about individuals ‘generally’ remaining anonymous, due process concerns still arise.  During the consultation period, which closed earlier this year in April, opinions were sought about whether details of future FCA investigations should be made public.  The weight of the submissions that the FCA has received in response to the consultation has been overwhelmingly to reflect market concerns about the FCA’s proposal.

The impact of publicity can be devastating for small firms and their owners who are under investigation: invariably, dealing with the consequences will undermine their capacity to manage their business, which may become irreparably damaged as a consequence.  The FCA has recently released some interesting statistics.  The FCA has noted that in 2023/2024 it closed 153 investigations, and 67% of those investigations were closed with no further action.  For the businesses concerned, the potential burden of adverse publicity will create further stress that could ultimately cause them to fold, and with the likelihood that the investigation may be closed with no further action.

Another statistic from the FCA – investigations in 2023/2024 took an average of 43 months from the decision to open an enforcement investigation through to closure. Between an investigation being launched and its conclusion, delay is inevitable. But if the paramount concern is clear messaging, there are alternative options that can serve to put the market on notice – for example, publishing cases under investigation with anonymised details. The critical choice is between “innocent until proven guilty” being the preferred basis upon which to proceed, or instead creating a more transparent climate that could potentially result in some rough justice being meted out.

In addressing the current lack of enforcement outcomes/fines, the FCA needs to implement meaningful change. Its recent consultation stated that it wants to achieve this by speeding up investigations “with a streamlined caseload of investigations better aligned to our strategic priorities”. Ultimately, the FCA hopes that by focusing on fewer priority cases, it will deliver better results, putting consumer needs first by combatting market abuse and financial crime.  As part of this, we can expect the FCA to target cases that involve breaches of the Consumer Duty, which came into effect last July. Breaches that cause harm, or create a risk of harm to consumers, will be prioritised. Senior managers will therefore need to be alert to the potential consequences.

Unlike the Prudential Regulation Authority, which has recently announced fines in relation to senior management default, the FCA has been less forthcoming on the issue. The FCA will therefore likely want to focus on formal action in cases involving Consumer Duty breaches where senior management responsibility is also in question.  Supporting the FCA’s primary goal of educating the market, these investigations may, if the proposed reforms are implemented, be publicised at an early stage.

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