Lords Committee calls on FCA to abandon plan to name firms under investigation

The report by the House of Lords Financial Services Regulation Committee, ‘Naming and shaming: how not to regulate’, emphasises serious concerns remain over the FCA’s consultation paper CP24/2 (Part 2), which proposed a shift in how the regulator publicises enforcement investigations.

Whilst the FCA already has the power to name firms under investigation in ‘exceptional circumstances’, in February last year, the regulator announced plans to shift to a ‘public interest test’ which would allow it greater discretion when choosing to publicly name firms.  

The proposals proved controversial from the start, drawing criticism from across the financial services sector, as well as from then Chancellor, Jeremy Hunt.

The Committee concluded that the FCA had not made a convincing case for the proposed shift away from its current policy of publicly announcing enforcement investigations and had failed to assuage prevailing concerns.

 “If the FCA is unable to find an acceptable balance in these proposals between increasing transparency to help prevent consumer harm, and managing the potential risks to firms, individuals, and market stability, it should not proceed with these proposed changes”, the cross-party Committee report noted.

Lord Michael Forsyth of Drumlean, Conservative chair of the committee said, “It was incumbent on the FCA to make a strong and unequivocal case for why such a fundamental change was needed and it has failed to do that”.

Forsyth branded the FCA’s consultation, “an abject failure”, adding that “even the FCA chairman acknowledged this has not been the FCA’s ‘finest hour’”.  

The report also noted that the proposal to make such public announcements more frequently by means of a more flexible public interest framework would afford the FCA considerable discretion, and risked firms incurring significant reputational damage before the facts of cases had been established.

For instance, the committee heard that, on average, FCA investigations last three to four years, and 56% result no further enforcement action. Forsyth argued that, based on this performance, the FCA’s proposals could result in half of firms investigated having their reputations unfairly damaged, an outcome he deemed “not acceptable.”

The report comes at a precarious time for the FCA, as it faces increasing pressure from the UK government to ease financial regulation to order to promote economic growth and competition within the financial services sector.

The Committee emphasised that the FCA’s proposals risked positioning the UK as an international outlier, and the report stated that the Committee were left “unconvinced that the FCA has adequately demonstrated how the proposals […] align with its secondary international competitiveness and growth objective.”

Noting that the regulator “would have been wise to have consulted with the Government on the initial development of these proposals”, it called on the FCA to engage with the Treasury in future when considering changes or developments relating to enforcement investigation proposals to ensure these align with its secondary international competitiveness and growth objective.

In response, the FCA pledged to “consider the committee’s report carefully, alongside the other feedback to our consultation, as we decide on the next steps on the proposals”.

The regulator conceded it “should have handled the initial consultation better, for example engaging on the proposals in advance”, whilst it had “engaged extensively with industry and revised our proposals”.