CP24/2 The Financial Conduct Authority’s Proposed Early Publication of Investigations

The Financial Conduct Authority (FCA) has proposed significant changes to its approach to the announcement of the opening of investigations. Currently, the FCA does not usually publicly announce the opening of an investigation into a regulated firm. The FCA has proposed that it will now routinely publicly announce the opening of an investigation, when that is deemed to be in the public interest, and if there are no compelling legal or other reasons not to.

In this article, we address the FCA’s reasons for the change, the current proposals, and the possible implications for auditors.

The FCA has recently indicated that it will be re-shaping the proposals set out in CP24/2, having reflected on stakeholder feedback. We will update readers on any revised proposals in due course – this article examines the proposals in their current form, highlighting those features which might justify the further consultation promised by the FCA. 

FCA Consultation Paper CP24/2 (February 2024)

FCA motivations for change

In its Consultation Paper, the FCA states that increased transparency in relation to its investigations will improve regulatory outcomes, help to reassure and educate the public, and advance the FCA’s own accountability. It highlights three key purported benefits from early publication of investigations:

1. building trust in the regulatory system by increasing regulatory visibility and reassuring the public that the FCA are “on the case”;
2. providing greater clarity about the types of misconduct which the FCA considers warrant formal investigation, which, in turn, will help other regulated firms learn relevant lessons and raise their standards at an earlier stage; and
3. supporting the FCA’s own accountability by “shining a light on the efficiency and pace of our investigations”.

There are concerns that, absent visibility of FCA interest in a regulated firm, the public may still be at risk. For example, in the recent London Capital & Finance (LC&F) scandal, in the hiatus between the FCA becoming aware of potential issues with the mini-bonds and publicly ordering LC&F to stop selling the bonds, many members of the public continued to invest and suffered hundreds of millions of pounds in lost investments[1].  The FCA address this at para 1.3 of the Consultation Paper:

“There can inevitably be some time between the misconduct and harm we identify, and the announcement of our resulting interventions and sanctions. We currently publish very little information about the investigations we have opened that lead to those actions. Public concern about whether we are taking appropriate steps can develop in this gap, which can also undermine the educational value and deterrent impact of those outcomes.

The FCA also hopes that increased visibility around investigations arising from early publication will result in an increased number of third-party reports to the FCA. It is notable that the FCA’s failure to respond promptly to third-party reports was a key failure detailed in Dame Elizabeth Gloster’s report into the LC&F scandal[2]. 

Proposed publication approach

• The FCA intend to take a more pro-active approach to publication, using a new public interest framework, and taking all relevant facts and circumstances into account, although in certain cases,  the FCA will keep the fact of their investigation confidential, for example when the FCA considers that publication might adversely affect the investigation (or other linked investigations), the interests of consumers or the FCA’s operational objectives (para 1.13).  
• The FCA have indicated a modification to that approach in relation to the investigation of individuals to take into account the rights of individuals within the context of the UK GDPR and Data Protection Act 2018: they will not usually announce that they are investigating a named individual (para 1.14).
• The FCA will make clear that the FCA has not yet decided whether there has been misconduct or a relevant breach of FCA requirements (para 1.15), unless it is inappropriate to do so (for example, where there has been a previous FCA investigation against the subject of the current investigation which has made formal findings of a breach).

The new public interest framework includes a set of non-exhaustive factors which will be considered by the FCA when it is deciding to publish the opening of an investigation:

The balancing of that public interest will be a delicate exercise and is potentially ripe for judicial review challenge. Not only must the FCA consider the public interest in publication in the specific circumstances of the proposed investigation but, having identified the factors for and against disclosure in that context, it must then, critically, articulate their relative weights in the balancing exercise; it will be insufficient simply to columnize factors in favour of and against publication, even if those are articulated by reference to the specific circumstances of the proposed investigation.

Notably, the interests of the firm subject to the proposed investigation do not feature in the FCA’s identification of public interest factors weighing against publication. On its face, therefore, there is no recognition by the FCA that the existence of, and possible damage to, regulated firms’ commercial interests are themselves matters of public interest.

The FCA will also need to be ready to receive representations as to any decision to make an announcement, provided that parties to be investigated are to be given sufficient time in which to make them. A lack of such time may afford grounds for challenge. The Consultation suggests that the FCA will normally give no more than one business day’s notice of intention to publish. The provision for notice indicates recognition by the FCA of a need for notice. Such short provision, however, suggests that, practically, a regulated firm will have very little time in which to offer any substantive representations, still less avail itself of any legal remedy available to it to prevent, or at least temper, any adverse effect from publication. The tension between the FCA’s evident recognition of a need for notice and its proposal of such a short period of notice puts the FCA in a potentially uncomfortable position. Again, in this context, the FCA will need to consider the specific circumstances of the proposed investigation, and whether a regulated firm should be given a longer period of notice of publication. Regulated firms will need to be very quick off the mark in that event, if only to achieve from first indication of proposed publication, a sufficient time in which to explore the substantive issues around publication with the FCA.

The format of the announcement will usually contain (para 3.20):

• The identity of the subject of the investigation;
• The industry sector and regulatory or legal provisions to which the investigation relates; and
• A summary of the suspected breach, failing or other misconduct being investigated.

In respect of the timing of publication of the announcement, the FCA will consider whether an announcement or update is potentially market sensitive and, if so, it will generally inform the subject of the announcement or update after markets have closed, with publication to follow the following morning at 7:00am (para 3.26).

The FCA have confirmed (para 3.10) that when it has published an announcement and then subsequently closes its investigation without any regulatory, civil or criminal action having ensued, it will publish an announcement to that effect and/or amend the original on their website.

Consultation Responses

The consultation has stimulated a broad range of responsive concern. By way of example:

• The House of Lords Financial Services Regulation Committee in a letter of 18 April 2024[3] highlighted the potential risks of a disproportionate effect where a firm is ultimately cleared of any wrongdoing, particularly given the length of many investigations. The Committee is also concerned about the potential impact of publications on the integrity of the market (for example unwarranted drops in share price) and the potential harm to reputations;
• UK Finance, the trade association for the UK banking and financial services sector, strongly disagreed with the proposals[4], arguing that the they could damage the FCA’s overarching strategic objective of ensuring financial markets function well, by “unnerving firm’s stakeholders including customers, depositors, employees, investors and rating agencies, who may take a ‘no smoke without fire’ approach”. UK Finance also doubted whether the proposals would help promote consumer protection, noting that consumers could be “spooked by an announcement, prompting them to withdraw deposits or liquidate investments making them less able to meet their longer-term financial objectives”;
• The International Swaps and Derivatives Association (ISDA)[5] raised significant concerns about the proposed public interest test, including in particular the apparent failure of the test to acknowledge the impact of publication on the investigation subject. ISDA continued that “the proposals appear to significantly underestimate the adverse impact on firms and the wider market, and the potential for confusion and misunderstandings as a result of early publicity. This is particularly so given the FCA’s proposed approach is not taken by any other comparable financial services regulator”; and
• CityUK[6] strongly opposed the FCA’s proposals, again highlighting the potential impact that the publication of opening an investigation might have on firms found not to have committed any wrongdoing, and the potentially distorting impact publication may have on the market.

The FCA is currently considering these and other responses to the Consultation Paper.

Implications for auditors

The FCA’s proposed proposals may be unwelcome for auditors and audit firms facing regulatory investigation by the FRC. The FRC has conventionally published the opening of an investigation under the Audit Enforcement Procedure (AEP), to include the name of the audited entity. A change in approach by the FCA removes any regulatory alternative to publication for auditors to point to.

There is significant overlap between the FCA’s public interest factors and the Conduct Committee’s Publication Policy[7] under the AEP (para 11), which requires the Conduct Committee to consider whether announcement will:

• help to maintain confidence in statutory auditors;
• help to maintain public confidence in the regulation of statutory auditors;
• protect users of financial statements;
• protect investors;
• help to prevent malpractice that is potentially widespread;
• contribute to the effectiveness of the investigation itself, for example bringing forward witnesses;
• help to allay concern;
• help to contain speculation or rumour; or
• otherwise help or contribute to the public interest.

Parallel public interest frameworks may give rise to the FCA and the FRC debating between them their respective operation and impact. Auditors may wish to follow closely, to the extent that regulatory transparency is afforded in either context, the development of both regulators’ approach to the public interest in announcing investigations.

Auditors will also need to consider the potential impact of the FCA publishing an announcement of investigation in relation to issues of going concern or non-compliance with laws and regulations when conducting audits of FCA-regulated entities.  

Wider implications

Announcing investigations will invite wider and unwelcome scrutiny for regulated firms, for example from litigants and litigation funders, and from investigative journalists, particularly those bent on pursuit of Freedom of Information Act 2000 requests.

Announcements may also stimulate investigations by other regulators or parliamentarians.

Whether announcements will have the positive effect on the FCA’s own performance for which it professes enthusiasm, is unknowable. Publicity around an investigation may encourage speedier investigations by the FCA in order that it might avoid accusations of delay. A risk to which the FCA will need to be alive is that of its investigative steps becoming unduly responsive to press commentary, and how, under that spotlight, it times and announces closures of investigations.

Update

On 18 November 2024, the House of Lords Financial Services Regulation Committee published the uncorrected transcript of an oral evidence session that took place on 13 November 2024[8], as part of its inquiry into the FCA's consultation paper on a new approach to publicising enforcement investigations (CP24/2). The witnesses at the session were Nikhil Rathi, FCA Chief Executive, and Ashley Alder, FCA Chair.

At this session, the FCA acknowledged that CP24/2 could have been better trailed before publication and that the FCA could have better explained some of the drivers of its proposals. The FCA also clarified that it would not expect to announce every investigation, and this was not the intention behind the proposals. In actuality, the proposals would involve incremental transparency each year with a small number of cases (potentially two or three). However, in a busy year, there could be more, with very specific contextual reasons for each case.

Since CP24/2 closed to responses, the FCA stated that it has been engaging with stakeholders. Notably, the FCA expressed that the range of feedback received on a wide range of topics means that, if they are progressed, the proposals will be "fundamentally reshaped" and will be subject to an FCA board decision in Q1 2025. When asked when the reshaped proposals would be issued, the FCA responded that it hoped to come back to the market with an update "within the next week or so", from 13 November 2024.

When re-consulting the market, the FCA will seek to articulate the costs and benefits of any reframed proposals and give more data concerning them. This will include setting out case studies of instances where the FCA could have publicised investigations, the numbers involved, the types of cases, the trajectory on its operational performance and how the FCA board will oversee such publications.

The FCA will also assess the public interest framework in response to concerns that it is too vague and unpredictable; the FCA explained that it wants to bring more clarity to this element. It stated that it would carefully consider the impact on a firm, be particularly mindful of small firms and give a minimum of ten business days for representations to make sure there is a process whereby firms can properly engage with the prospect of a formal announcement, an issue highlighted by this article in respect of the current proposals.