Little support for FCA’s ‘name and shame’ plans in Lords’ call for evidence responses

Respondents to a call for evidence on plans by the UK Financial Conduct Authority (FCA) to reveal the names of firms under investigation have overwhelmingly rejected the idea.

Several of them questioned the legality of the initiative, and the majority felt it was the wrong solution to the problem of often years-long investigations by the regulator.

The House of Lords Financial Services Regulation Committee has published 34 written submissions to its call for evidence so far. The committee launched its inquiry in April because of concerns about the “potential harm to firms, individuals and market integrity” from the FCA’s proposals in Consultation Paper (CP) 24/2.

Natural justice

Law firm Clifford Chance said in its submission that the proposals were contrary to natural justice.

“Making such public criticism prior to an investigation having been undertaken (and without following the procedural safeguards built into the Financial Services and Markets Act (FSMA) that Parliament intended should apply before such criticism is made) cannot be fair or consistent with the principles of natural justice,” it said.

The firm believed Sections 207 and 208 of the Financial Services and Markets Act 2000 required the FCA to follow due process before it made announcements that amounted to “public censure”.

Fellow law firm Bryan Cave Leighton Paisner shared this view. “In our view, there is a real risk that the format of early announcement proposed by the FCA will in effect amount to a ‘public censure’ of firms within the natural meaning of the term in Sections 207 and 208 FSMA, but without the relevant procedural safeguards,” according to the firm’s submission.

Overreach

In CP24/2, the FCA said its proposals were consistent with those of other UK regulators, including the Competition and Markets Authority and communications watchdog Ofcom.

However, law firm Herbert Smith Freehills pointed out that Parliament specifically included express authority in legislation for them to publicise information about their investigations.

Nearly all of the responses mentioned the high proportion (65%) of enforcement investigations that are discontinued by the FCA. Similarly, responses from trade associations and law firms said the regulator already has the power to name those under investigation in exceptional circumstances, for example, to maintain public confidence in the financial system and to protect consumers.

Most respondents believed the FCA should concentrate on reducing the length of time it took to reach an outcome in enforcement investigations, rather than naming firms under investigation.

Individuals harmed

Several responses raised the possibility of harm to individuals resulting from jigsaw identification of senior managers if the FCA named a firm under investigation. The Senior Managers Regime requires a named senior manager (SMF) for key functions at regulated firms, including technology, operation resilience and money laundering.

As all SMFs of financial firms are publicly identified on the FCA website, the Futures Industry Association (FIA) said, an announcement that their firm is under investigation may cause them to “suffer individual reputational damage with limited ability to defend themselves”.

Meanwhile, the Association of Foreign Banks (AFB) also warned that the risk of identification could harm the UK’s ability to attract top talent.

“AFB is concerned that the proposals are likely to deter overseas talent from accepting senior UK roles, further harming the UK’s strength as a financial centre. Staff may not commence employment, or may leave their role, if the FCA announces an investigation into that firm, as there is a risk of being publicly linked to the investigation, unlike in other jurisdictions. This risk would be greater for small firms with fewer senior managers, as individual staff could be more easily identified,” said the AFB submission.

Support for FCA

Responses from the UK Individual Shareholders Society (ShareSoc), UK Shareholders’ Association (UKSA) and Citizens Advice Scotland (CAS) backed the FCA proposals, however.

They disputed the suggestion that the media and consumers would misinterpret any investigation announcement by the regulator. Rather, CAS said, the publication of investigations would help reassure consumers the FCA was taking appropriate action.

“Currently the FCA publishes very little information about its investigations, and as such it can feel as if bad practice and behaviour goes under the radar or is not being investigated. This undermines public confidence, not only in the FCA as a regulator but also wider financial markets,” CAS said in its submission.

ShareSoc and UKSA said they believed the financial services industry had labelled the plans “name and shame” in a deliberate attempt to sink them.

Encouraging whistleblowers

The FCA said in CP24/2 that a key reason behind its proposal to announce investigations was to encourage whistleblowers to come forward, and to reassure them that it would act on their information. Yet its handling of reports by whistleblowers has been repeatedly criticised, including by respondents to its own satisfaction survey.

The charity Protect said it believed naming firms under investigation would help address one of the key concerns that whistleblowers reported to it — namely, the lack of information on any follow-up by the regulator.

“Publicising investigations represents a pivotal next step in bolstering whistleblower confidence and encouraging disclosures,” Protect said in its submission.

It added the announcement that an investigation was underway could not only encourage other whistleblowers to come forward but also prevent firms retaliating against individuals who report wrongdoing. Protect’s research among whistleblowers in 2023 found that 83% of those who brought their concerns to the regulator also reported suffering retaliation.

However, Whistleblowers UK, a non-profit organisation that supports individuals making protected disclosures, said naming firms under investigation was “not the silver bullet” to better protecting and informing financial services whistleblowers. It shared the view that more timely investigations by the FCA was preferable.

The body also said that a better solution to encourage individuals to come forward would be for the regulator to do more to protect those who made protected disclosures and to punish firms’ who retaliated against them.

Less enforcement

Transparency Task Force (TTF), a social enterprise that promotes financial services sector reform, urged the committee to look beyond the industry outcry over “naming and shaming” and challenge the FCA to explain its intention, set out in CP24/2, to reduce the number of enforcement investigations it carries out.

TTF said it was concerned about this “pivot” had not been set out in “an honest and transparent fashion”, and added: “Many stakeholders may consider that the FCA’s enforcement activities are already insufficient, and that more is needed, not less.”