Plans by the FCA to name and shame firms it is investigating have run into stiff opposition, culminating in the House of Lords Financial Services Regulation Committee calling for the move to be paused.

A letter from Committee chair Lord Forsyth of Drumlean to FCA chief executive Nikhil Rathi says: “Innocent until proven guilty is a fundamental principle of our justice system.

“The committee is presently unconvinced that the FCA has justified departing from this important principle and taking an approach that is at odds with almost all other financial services regulators.”

Increase transparency

The new approach was outlined in February at the Market Abuse Summit by Therese Chambers, Co-Executive Director, Enforcement and Market Oversight at the FCA. She said the regulator’s intention was to deliver an “impactful deterrence through our enforcement activity. We want to increase transparency around this work, quicken our pace and strengthen our focus.”

Ever since, worries have been expressed by many within financial services about where this could lead, with discontent building to point where the FT led its Monday edition with the story FCA faces backlash over plan to ‘name and shame’ companies under investigation.

The letter from the Lords Committee contains 11 questions it seeks answers to “in the absence of a cost-benefit analysis.” These include;

• “What led the FCA to make these proposals? Were they based on any particular representations? If so, from whom?
• “Why do you consider that disclosure will more effectively educate the sector than publishing guidance on the FCA’s approach? 
• “Have you performed any analysis on the likely impact of a publicised investigation on the reputation, share price and ability to trade of an affected firm? If so, what were the findings?”

The letter concludes: “I would appreciate a response to these questions by 25 April. I note that the consultation formally closes on 30 April: the Committee intends to take evidence on this proposal and asks that you do not take further steps to implement this change until it has had the opportunity to do so and reach a final conclusion.”

We spoke to a panel of industry experts and asked their views on whether the proposal will go ahead and what they think may or should happen next. The experts are:

• Jake Green, Practice Group Co-Head, Global, Finance Regulatory at Ashurst;
• Lewis Gurry, director at C & G Regulatory Solutions, who has experience managing and delivering complex regulatory change projects as an executive and group compliance officer in FICC markets;
• Lana Hampicke, partner, T3 Consultants, specialists in environmental, financial regulation, and complex change management;
• Rob Mason, Head of Regulatory Intelligence, Global Relay;
• Stephanie Paparizos, independent Compliance and Risk Consultant, whose previous experience includes roles as Global Head of Financial Crime Compliance and MLRO at banks and trading firms;
• UK Finance, a trade association for the UK banking and financial services sector, representing over 300 firms in the UK providing credit, banking, markets and payment-related services.

The industry is generally not in favour. Do you see the FCA scrapping the idea?

Gurry said: “Not entirely. The FCA might consider watering down the proposal, potentially by excluding individuals from it. This adjustment would remove the complexity of having to consider applicable laws and regulations that offer protections to individuals. Additionally, increasing the notice given to subjects could prove beneficial. The FCA’s proposal only affords one business day’s notice before publication under normal circumstances. This may not afford the subject adequate time to seek appropriate advice.”

Paparizos said: “My view on this is that this should not be carried out. I have worked for a firm that had to appoint a skilled person. They spent money and obtained resources to ensure that the firm became compliant to ensure that they came out of the skilled person review two years later, with zero fines.

“Why should they be named? They took the FCA report seriously and ensured compliance. Naming them would have only caused a reputational issue that would have been hard to dispel even though no further action was taken by the FCA.”

Hampicke said: “Prematurely naming and shaming firms before investigations are conclusive can severely damage the firms’ reputations and potentially destabilize the market. Such actions may lead to a loss of goodwill, a decline in share value, and substantial financial losses. These outcomes are at odds with the FCA’s mission to ensure market stability and promote honesty within the UK financial markets.

“There is a delicate balance the FCA must maintain. The FCA’s strategy includes conducting thorough and fair investigations to protect the integrity of the market and consumer interests without unnecessarily harming the firms involved. This approach aligns with their overarching goal of ensuring a stable, fair, and transparent financial environment, fostering long-term market confidence even as it navigates the complexities of regulatory enforcement.”

Would an extension of the consultation make any difference?

Gurry said: “Only if the FCA plans to fundamentally alter its approach, which has not been common in past consultations. However, considering the controversy surrounding this issue, it may be forced to reconsider. If the FCA proposes to alter its approach to the public interest test, then an extension could be valuable.”

Hampicke said: “The issue with many of the consultations in place is reach and volume. I don’t think a time extension would make a difference.”

Can the FCA afford to take on the extra work (without extra staff)?

Gurry said: “We would not expect to see a material increase in investigation work, as that is already part of the FCA’s regular duties. However, the FCA may experience a strain on resources when engaging with legal representatives of subjects who dispute the grounds for publication. This could involve arguments against publication on the grounds that it is not in the public interest.”

Hampicke said: “The FCA budget has gone up considerably by 10.7% this year. The increase covers its regular activities and new initiatives. The FCA is in the last three-year phase of its business plan so a key consideration for it will be to consider if it wants to divert funding toward this policy instead of [other policies set out in its business plan].”

Is this FCA response in reaction to the NAO reporting FCA delays?

Gurry said: “it may have been a factor, but the lack of publicly visible enforcement activity is a common point of conversation in the industry. It is not unusual for market participants to hear about the circumstances leading to an enforcement action several years after the event. The FCA appears to be aware of this, and believes that publicising investigations will improve public confidence in its enforcement approach.”

Mason said: “It is difficult for the FCA who were criticised by the NAO for slow investigations as well as a limited number of cases brought over the last two years. The approach could also encourage a firm to settle early to avoid uncomfortable publicity and it may actually work.

“However, competition issues, driving activity overseas as well as the share-price and reputational concerns of a potentially unproven issue has resulted in this challenge. The new Enforcement Leads have placed lot of emphasis on this radical change so it will an interesting period as they navigate through the consultation which has been called upon to be extended post the end April date.”

What do you think will and should happen next?

Green said: “The FCA’s proposals are counter intuitive. They will (and have already) created mistrust and will not help the UK in a post Brexit environment. I am almost sure these proposals will be shelved. And they should.”

Hampicke said: “London has lost a lot of talent and revenue to Paris since Brexit – the FCA will avoid controversial policies especially ahead of elections. This will go on hold until later this year.”

Gurry said: “Given the attention this issue has received, it would seem prudent to extend the consultation period to allow time to properly consider the impact of such a significant change.”

Paparizos said: “I would hope that the FCA listens to the backlash that it is facing. I feel maybe the industry should take notice of what the FCA is trying to do and pre-empt FCA visits by ensuring compliance. More firms need to own up to their shortcomings and fix them before a regulator comes in.”

A spokesperson from UK Finance said: “The FCA’s proposals to publicly name firms under investigation are highly problematic. We believe the current proposals are disproportionate as they could result in firms suffering real damage in terms of their reputation and valuation, especially given the majority of FCA investigations are closed with no further action.

“We also think the proposals could harm the UK’s competitiveness and attractiveness as a financial centre. We will be shortly responding to the FCA’s consultation, setting out the industry’s views and concerns.”