The cross-party House of Lords Financial Services Regulation
Committee is calling on the Financial Conduct Authority (FCA) to
not proceed with its plans to routinely announce enforcement
investigations early if, after the FCA's second consultation
closes, concerns have still not been addressed.
Following its inquiry on the FCA's consultation paper on
publicising enforcement investigations, the Committee, which was
established last year, has today published its first report,
Naming and shaming: how not to regulate.
The Committee concluded that the FCA has not made a convincing
case for a change to its existing powers, which already allow it
to announce an enforcement investigation early in exceptional
circumstances. Respondents to the Committee's Call for Evidence
pointed to the lack of evidence provided by the FCA to justify
the shift.
If the FCA presses ahead with these changes, it could increase
the risk that investigations could be announced, reputational
damage to firms and individuals could occur, media speculation
could arise, but no regulatory action is ultimately taken. The
Committee remained unconvinced that the proposed public interest
framework will allow for proportionate and consistent decision
making over whether to announce an enforcement investigation
early.
The FCA process has been singled out by the Committee for
criticism, particularly the lack of engagement with financial
services firms beforehand and the failure to give any prior
warning to industry that the consultation was forthcoming.
of Drumlean, Chairman of the
House of Lords Financial Services Regulation Committee, said:
“It was incumbent on the FCA to make a strong and unequivocal
case for why such a fundamental change was needed and it has
failed to do that. Its consultation on the changes has been an
abject failure and even the FCA Chairman acknowledged this has
not been the FCA's "finest hour".
“Less than 18 months ago the FCA stated that it recognised that
the disclosure of an enforcement investigation could
inappropriately damage a firm's reputation if the investigation
did not substantiate the FCA's concerns. We simply could not
understand the FCA's about-turn in such a short period of time.
“The FCA told us that the average duration of investigations is
around three to four years and in 56 per cent of cases no further
action was taken. If it presses ahead with its proposals on past
performance it could mean that half of the firms it investigates,
and the people involved in them, will have their reputations
unnecessarily and unfairly damaged. This is not acceptable.”
The Committee's other findings and conclusions include:
- The FCA's consultation prompted an immediate and widespread
backlash from across the financial services sector and from legal
firms, and even drew criticism from the previous Chancellor of
the Exchequer. The Committee was concerned at how surprised the
FCA was to the reaction its consultation generated and how it
demonstrated a disconnect between the FCA's senior leadership and
the sector it regulated.
- Witnesses were worried that the UK was at risk of becoming an
international outlier as no other jurisdiction routinely
publicise investigations in the way the FCA is proposing. The
Committee were warned about the potential negative impact of the
proposals on the FCA's secondary growth and competitiveness
objective. Fears were expressed that they could undermine the
UK's attractiveness as a place to invest and position the UK as
an international outlier.
- Despite being asked to carry out and publish a cost benefit
analysis (CBA), the FCA has thus far refused to do so on the
basis that it only does CBAs for rules and guidance on rules. The
Committee recommends that the FCA changes this policy and
practice.
