What should the purpose of enforcement be? Should it be to bring individuals and firms to justice, or should it change behaviors and encourage higher standards by acting as a deterrent?
Therese Chambers, Joint Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority (FCA) set out that the regulator believes it is the latter. In a recent webinar hosted by legal firm Simmons & Simmons, Chambers laid out how the regulator’s new “name and shame” approach to investigations will be implemented – and what this means for firms going forward.
“Solve today’s problems, not yesterday’s problems”
Chambers explained that the new policy (set out in consultation CP24/2) is part of the FCA’s drive to speed up the current pace of investigations and to increase the deterrent impact of investigations in order to change behaviors across the industry, rather than simply hold individual firms to account. She emphasized that the shift in the FCA’s focus toward “name and shame” disclosures is a response to a changed world, where expectations around transparency are different, and parliamentary scrutiny of the regulator is much keener.
When asked about applying the new regulatory rationale retrospectively to previous investigations, Chambers said that on reviewing the last nine months of investigations, the FCA concluded that around two-thirds would have been likely to have been disclosed under the new approach.
Key takeaways on the FCA’s new approach
- The public interest test
Chambers explained that under current FCA policies, the regulator can only share details of cases in “exceptional circumstances”, and that the framework stands against giving public disclosures in general. Under the new approach, the regulator would judge whether to disclose that a firm is subject to an investigation by performing a “public interest test”. The FCA has designed this test by referencing its statutory objectives, and would utilize this test without any presumption in favor of publicity, actively considering whether the details of each case would be in the interests of the public to publish. - Case-by-case
Throughout the webinar, Chambers repeatedly reassured viewers that there was no “universal rule or timetable” relating to disclosures, and that each and every investigation announcement will be considered on a case-by-case basis. Decisions on announcements will be made at “appropriately senior levels within enforcement” and will include the legal team at the FCA, with all decisions and the rationale behind them being meticulously recorded. - Market impact
When asked if the FCA had considered potential impacts on share prices and the wider market, Chambers reasserted that all the facts and circumstances will be considered in each case before making decisions, which includes questions about market impact. She explained that, in some circumstances, the “public interest” element of a disclosure might outweigh the potential impact on the market or a firm. Chambers said that the FCA had yet to see signs of any significant market impact around these types of disclosures, but would welcome data from outside sources to the contrary. - Individual impact
While there was initial discussion around whether the scope of this new approach would include “naming and shaming” individuals involved in investigations. Chambers confirmed that the regulator is not currently anticipating naming individuals due to privacy and GDPR concerns, and is aware of the “backdoor risk” of senior level individuals being identified as being involved in investigations due to their position within a firm. - Reputation, reputation, reputation
The industry response to this change in direction from the FCA has focused on the potential impact on a firm’s reputation by having a regulatory investigation against them announced. Chambers countered this by saying the FCA is not “looking to be sensationalist” when announcing an investigation, and will give a “boring, factual, and balanced presentation of what it is in the scope of the investigation”. This will include disclaiming what the findings of the investigation are, and giving “equal publicity” to cases that close with no findings. - The media cycle
Part of the concern from firms around reputational impacts from investigation disclosures includes being subject to exposure via media reporting and ‘negative publicity’. Chambers outlined that incentives around firms reaching a settlement with the FCA remain largely unchanged, and allow organizations to have “input into the final narrative around outcomes of the investigation”, giving them a say in the narrative so they can draw a line under a story and move on. Chambers also emphasized that media coverage of the FCA is responsible and balanced, and that by giving equal publicity to cases closed without findings, it will help to ensure responsible reporting by the wider media. - The benefits
Chambers outlined the benefits of the new approach, seeing them as part of a drive to change behaviors and raise standards. She said that they “will shine a light on what issues regulators consider warrant beginning an investigation” which will act as a “heads up” for firms (similar to the Securities and Exchange Commission outlining what trigger factors will see them taking enforcement actions against CCOs). Chambers stated that the approach intends to “amplify the deterrent impact of work, educate firms earlier, enhance public confidence, and improve accountability”.
