Chancellor calls for FCA to reconsider plans to publish information on enforcement investigations

The Chancellor of the Exchequer, Jeremy Hunt, has urged the FCA to reconsider its plan to name firms under investigation at an earlier stage- a rare instance of political pressure being placed upon the regulator, which operates independently.

The FCA proposed changes to its approach to enforcement in February, unveiling plans to publicly disclose information surrounding investigations, release information at an earlier stage and to increase the pace of cases, as well as announcing that cases have been closed without action sooner.

The FCA argued that changing its approach would increase transparency, deter wrongdoing, disseminate best practice, and encourage whistle-blowers and witnesses to come forward, assuring the public that it was acting to protect the integrity of the market. It also hopes its plans would increase case pace and impact, with cases currently lasting an average of 4 years.

The FCA’s plan to name companies under investigation has been met with fierce backlash from ministers, lawyers, and those across the financial sector, with critics claiming that the FCA’s plans to ‘name and shame’ those under investigation is at odds with its objective to aid the global competitiveness and growth of the UK financial sectors and could discourage international investment.

Speaking to the Financial Times, Chancellor Jeremy Hunt said, “I hope [the FCA] re-look at their ‘naming and shaming’ decision” which he argued is ‘inconsistent’ with their objective to stimulate UK growth and competition. The Chancellor’s comments were highly unusual, given that the regulator is independent.

The Chancellor’s comments chime with those of other ministers. In March, Business Secretary and Equalities Minister, Kemi Badenoch, accused the FCA of ‘regulatory over-reach’, whilst on Wednesday, Economic Secretary to the Treasury, Bim Afolami also criticised the FCA’s proposal to change its approach to enforcement, along with its plans to increase firms’ reporting requirements as part of a bid to improve D&I among employees.

In an interview with the Financial Times, Afolami argued that regulators must embrace greater levels of risk within the system to boost innovation, and that the FCA’s recent proposals had sent a signal to international investors and the public that “the regulator still doesn't get it”. He continued:

"When [the Regulator] say they don't have resources sometimes to deal with things, I say stop focusing on things that are non-core like naming and shaming or this diversity consultation, and focus on conduct and making sure the system works properly for consumers and producers”

The comments from the Chancellor came after 16 trade associations, including UK finance and the City of London Corporation, signed a letter to the FCA claiming that naming firms subject to investigation would “have an unduly negative impact on the reputation of firms” and the “potential to destabilise financial markets”.

Whilst naming a firm under investigation is standard in multiple other regulatory circles, Chief Executive of UK Finance, David Postings, emphasised that as 65% of FCA investigations currently conclude with no action, there is a risk that publicising investigations before evidence of misconduct has been found could unjustly cause “real reputational damage”.  

Furthermore, Posting claims that relations with investors, customers, employees and other stakeholders could be impacted and warning that this “could ultimately undermine market confidence in a firm or a group of firms operating in the same industry through contagion risk [and] [at] its most serious, […] could also be harmful to wider financial stability”.

The FCA Responds 

On the 8^th May, FCA Chair Ashley Adler told the select Treasury Committee that it had not expected such a “stern reaction” from the industry after releasing its proposal to name companies under investigation.

FCA Chief Executive Nikhil Rathi said it would take several months to consider a backlash but suggested that the regulator do not plan to dismiss the initiative. Instead, Rathi emphasised that “change and a degree of greater transparency are necessary” as the regulator’s current approach does not “support an appropriate degree of transparency and accountability”, adding that “clean markets with more effective enforcement” support competitiveness.

Furthermore, Alder reiterated that the “narrative […] which implies in most cases we would name the subjects of investigation is” inaccurate, emphasising "It is ... really clear there is no presumption to disclose or name (companies),". Both Alder and Rathi argued that “applying a public interest test” when deciding whether to disclose enforcement information “is not inconsistent with competitiveness”.

Rathi also cited examples which he argued highlighted the insufficiency of the regulator’s current approach to enforcement disclosure, referring to a firm under investigation with several million UK customers who would be likely to be named under the new approach.

The firm has disclosed in a filing in an overseas securities market that the FCA may be investigating it and is subject to public enforcement actions elsewhere; this, Rathi noted, “is the kind of case where in a factual and measured way, we would confirm an investigation is underway [under the new approach].