Clifford Chance

The Financial Conduct Authority (FCA) has opened a consultation on changing its approach to publicising enforcement investigations. At the same time, the FCA has announced a more "focused" and "streamlined" approach to enforcement, appearing to indicate a move away from using enforcement as a diagnostic tool wherever breaches may have occurred, towards more targeted use of enforcement for deterrence.

In this article, we explain the changes and deal with some of the main issues.

What's the current position?

Investigations are currently announced in exceptional circumstances. At present the FCA is permitted under its Enforcement Guide (EG 6.1.3) to announce an investigation in exceptional circumstances, where "desirable" to (1) maintain public confidence in the financial system or the market; (2) protect consumers or investors; (3) prevent widespread malpractice; (4) help the investigation itself, for example by bringing forward witnesses; or (5) maintain the smooth operation of the market. In deciding whether to make an announcement the FCA must consider the potential prejudice to the subject of investigation.

Consistent with the "exceptional circumstances" threshold, the FCA has rarely announced investigations. An example of prior announcements is the FCA's announcement of its investigation into the LME's suspension of its nickel market (FCA Statement: Update on Our Public Statement on the London Metal Exchange), following an earlier announcement of section 166 skilled person review into the same issue (Joint statement from UK Financial Regulation Authorities on London Metal Exchange and LME Clear).

What's the proposed change?

In summary, the FCA is proposing to remove the presumption of confidentiality in relation to enforcement investigations into firms (as to individuals see below).

The FCA says that it wants to proactively publish more information about enforcement investigations including their opening and progress, as well as to publish the identity of the subject of the investigation if it assesses that it is in the public interest to do so and there is no compelling legal reason not to. These changes will be retrospective and apply to investigations that have already been commenced.

The new Guidance provides that it will usually be in the public interest when the announcement will (1) facilitate the protection of the interests of potentially affected customers, or consumers or investors more generally; (2) assist the FCA’s investigation, for example by encouraging potential witnesses or whistleblowers to come forward; (3) address public concern or speculation, including by correcting information already in the public domain; (4) provide reassurance that the FCA is taking appropriate action; (5) deter future non-compliance with the FCA’s rules or other requirements or prohibitions that the FCA is responsible for enforcing; or (6) otherwise advance one or more of the FCA’s statutory objectives, including protecting and enhancing the integrity of the UK financial system.

The FCA has intentionally omitted reference to potential harm to the firm itself from the list of factors that it says may weigh against making a disclosure. Its consultation states that, while in balancing the public interest all relevant facts and circumstances will be considered, the FCA considers other factors which support the promotion of its statutory objectives to be more important.

Why does the FCA want to make this change?

In the FCA's view, the deterrent and educational effect of enforcement is weakened if the FCA must wait until it takes enforcement action at the end of an (often long) investigation to disclose its work. The FCA therefore wants to be more transparent about its enforcement work, hoping to have educational and deterrent impact earlier in the process.

Does the proposal apply to individuals under investigation too?

The proposed new guidance includes an explanation that the FCA will not usually announce an investigation into a named individual "having regard to restrictions imposed by data protection legislation and other applicable statutory restrictions". But the FCA indicates that it may publish an announcement or update naming an individual if that can be done without breach of law.

The consultation highlights that the UK GDPR prohibits, with some exceptions, processing personal data unless there is a lawful reason for it. For regulators such as the FCA, this processing must generally be necessary for them to perform a task in the public interest or in the exercise of official authority. The FCA concedes that, a result (and also considering the ECHR) its proposal is usually not to announce that it is investigating a named individual.

It appears that the FCA intends in some cases to announce investigations into individuals without naming them. One difficulty with this is that even without naming individuals, others, including the press, will be able to work out who is under investigation. It's not clear to what extent the FCA intends to take this risk into account.

How many cases will this affect?

Although not entirely clear, it seems likely that the FCA intends to disclose and provide updates in relation to most investigations into firms.

In a speech to announce the change, Therese Chambers emphasised that the new public interest test would be applied to the facts of each case and that there would be no presumption in favour of disclosure. But given the breadth of the proposed new test interest – including assessment of whether an announcement would provide "reassurance" that the FCA is taking action - it seems possible that the FCA expects to disclose the majority of its enforcement investigations and to identify the firms under investigation in many of those cases. The stated aims of deterrence and reassurance are likely to be factors in favour of disclosure in most, if not all, enforcement investigations.

It may be that disclosure of investigations happens more often in relation to some issues / sectors, particularly those directly affecting consumers.

One question raised by the consultation is the extent to which, after this proposed change in policy, the FCA will be able to resist requests for more information about enforcement investigations under FOIA. This will likely be a factor the FCA considers in determining how which cases to disclose.

When will the change take effect?

The FCA's consultation ends in April 2024 and we expect the FCA to implement the change shortly thereafter.

What about investigations existing today?

The FCA intends to disclose both new investigations and those ongoing when the change in policy takes effect. This may seem surprising and arguably unfair to those currently under investigation who were told, or could reasonably have expected, that their investigation would remain confidential. It's possible the FCA has adopted this approach because it believes that, having changed its approach to disclosure on new investigations, it would not be able to resist freedom of information requests relating to existing investigations on a blanket basis.

It's unclear how the FCA intends to disclose existing investigations. Does the FCA envisage a single "bulk" announcement of all investigations which merit disclosure under the new test, perhaps in the form of a list. Or will be there be separate press releases for each existing investigation even where those have been going-on for years?

How much detail will the FCA provide?

The consultation makes clear that the content of investigation announcements will vary from case to case but the proposed new guidance provides that an announcement may contain: (a) the identity of the subject of the investigation; (b) the regulatory or legal provisions to which the investigation relates; c) a summary of the suspected breach, failing or other misconduct under investigation; and (d) a statement that the opening of the investigation "should not be taken to imply that the FCA has reached any conclusion that any regulatory or legal provision has been breached or otherwise made a finding of misconduct or other failing or determined the appropriate resulting enforcement action to be taken."

It's less clear what level of detail will be included in investigation updates (as opposed to original announcements). Will these be simple confirmations that the investigation is ongoing? Or does the FCA intend to provide more granular detail, for example explaining when interviews have been conducted?

The FCA will not be able to include any information whose disclosure would breach section 348 FSMA. Broadly speaking that means that the FCA will not be able to disclose confidential information that it has obtained in its investigation – for example information about what witnesses have said in interviews.

The FCA will also not be able to include any statements which could amount to a "public censure" or criticism (see further below).

What will the FCA do when there are investigations by multiple authorities?

The proposed guidance provides that, in the FCA's view, it will not normally be in the public interest to disclose an investigation where to do so would prejudice the investigation by another regulator or law enforcement agency. But that does not preclude the FCA announcing an investigation involving another authority, even if that authority does not agree with the decision to announce. We would not expect, however, the FCA to disclose the fact of a parallel investigation by other authorities. The consultation indicates that the FCA has consulted the PRA on the proposed changes and the PRA does not object.

Can a decision to publicise be challenged?

The consultation indicates that the FCA will normally give the subject of investigation no more than 1 business day's notice of an intention to disclose an investigation which names them. This is a similar amount of time to that currently given to firms to comment on press releases to be issued alongside enforcement outcomes. The purpose of giving this time is to allow the firm to comment on the factual accuracy of the press release. It is likely that the FCA will take a similar approach and submissions about tone and balance are unlikely to be actioned.

The proposals do not include any mechanism by which the subject of investigation can make representations to challenge the decision to make an announcement. In principle it would be open to the subject of an investigation to challenge the FCA's decision by way of judicial review and potentially to seek injunctive relief in support of that challenge. But such a challenge may be very difficult given the general discretion given to public authorities and the breadth of the proposed new public interest test. Along with the short notice firms would have of an intention to publish.

It might be possible for firms to make pre-emptive representations on whether an existing or anticipated enforcement investigation should be disclosed. But the FCA might give such representations limited weight in circumstances where they do not propose to consider impact on the firm as a discrete factor separate from the public interest test.

Many investigations are closed with no action - will FCA also publicise closure?

The new guidance makes clear that if the FCA subsequently closes its investigation without taking action, it will make a public announcement to that effect "and/or amend the original announcement on its website accordingly." It's not clear what closure announcements will say. Typically, FCA closure notices do not provide positive confirmation that the relevant potential breaches have not been committed. Rather they tend to state simply that the investigation has been closed.

What's not certain is how much attention such closure announcements will receive. The FCA leaves open the possibility that it could amend the webpage containing the original announcement without publicising that it has done so.

It is also not clear what approach the FCA will take when the complexion of an investigation changes – for example where concerns about insider dealing fall away and what remains is a systems and controls case. This potential imbalance between what is said at the beginning and end of an investigation will be of significant concern to firms who may be left with an unwarranted stain on their reputation.

Will this make enforcement more likely?

Probably not. In parallel the FCA has said that it intends to be more "focused" and "streamlined" in its use of enforcement. It remains to be seen but this may mean a reduction in the number of overall enforcement cases.

But of course the FCA's approach to the use of enforcement changes over time. In future we might well see another increase in enforcement actions, especially if the FCA finds that enforcement becomes more attractive with the ability to announce investigations and provide updates.

How will this affect how the FCA conducts enforcement investigations?

The change of guidance relating to publicity will not have any direct impact on how the FCA conducts investigations. But there may well be indirect impacts, both positive and negative. These could include:

1. The FCA speeding up its investigation process mindful of the need to provide updates and avoiding any public perception of delay if updates don't show progress.
2. Investigative steps being increasingly driven by press speculation and commentary, as journalists investigate in parallel off the back of FCA announcements.
3. The FCA being more reluctant to close investigations in some cases, having announced the existence of the investigation.

Will subjects of enforcement be permitted to make their own announcement?

Currently, notices of investigation require the subjects of enforcement to keep the investigation confidential and not to disclose any information relating to the investigation unless legally necessary or for the purpose of seeking advice.

It's not clear whether the FCA will maintain this requirement in future. Even if the FCA seeks to do so, it's not clear whether firms could reasonably be expected to comply with such a request once the FCA has itself disclosed the investigation and started to provide ongoing updates.

It seems likely that firms will need to consider with their advisers whether to make an announcement in response to the FCA's announcement and, if so, in what terms. In view of the short notice period that the FCA will provide, firms will need to prepare for this potential eventuality as soon as they have an inclination an investigation may be commenced.

How else might this change how firms deal with enforcement?

The changes are likely also to have a range of other impacts on how firms respond to investigations.

1. Early announcement of an investigation by the FCA will likely trigger shareholder / customer complaints (and potentially litigation) and other stakeholder engagement which may put pressure on firms to conduct their own investigation and potentially make the results of that investigation public ahead of the FCA's findings.
2. Even if the FCA does not name individuals under investigation, the FCA's announcement might put pressure on relevant senior managers making it more difficult for them to remain in post.
3. Settlement may become less attractive as the benefit of having some control over settlement findings is undermined by the fact that the issues under investigation have already been made public.
4. The option to leapfrog the RDC might become more attractive, as the advantage of the matter remaining confidential through the RDC process will be reduced.

What about the impact on third parties – other authorities, litigants, customers, the press, politicians?

We expect that one of the main impacts of the proposed change will be to generate a great deal more activity by third parties who have an interest in the FCA's work.

1. Litigants and litigation funders will closely follow announcements and use them as a route map or platform for building claims.
2. Journalists will use announcements as a basis for investigations including making freedom of information requests which may be more difficult to resist in light of the policy change. Announcements could well fuel press speculation which might impact the firm and individuals, including senior management, even if they are not under investigation.
3. Other authorities in the UK and overseas may commence investigations or request information off the back of the FCA's disclosures.
4. Select committees may use the announcements to conduct their own progress investigations by calling the firm and/or others to disclose additional information.

Is this approach common for other regulators?

The FCA indicates that it considers the proposed approach to be consistent with "a number" of other bodies, including the CMA and Ofgem in the UK and the MAS in Singapore. Whilst these authorities do sometimes name the subjects of investigations there are differences between what they do and what the FCA proposes to do. Ofgem for example does not normally disclose its market abuse investigations.

Other financial services and markets regulators in major jurisdictions do not adopt this approach, making the FCA an outlier.

Will this change also apply to the FCA's investigation of listed firms?

The FCA proposes that the new policy will apply to all enforcement investigations, including those it pursues against listed firms in relation to potential breaches of the Listing Rules, Listing Principles and MAR.

How will the FCA handle price sensitive information?

The FCA appears to concede that there may be cases in which its announcements will involve disclosure of market sensitive information. This could relate to the subject of investigation or others connected with the investigation. In this regard the FCA states:

"If an announcement or update is potentially market sensitive, we will generally inform the subject of the announcement or update after markets have closed, publishing on our website at 7.00am and via an FCA-approved primary information provider. If the subject is a listed company in another jurisdiction, and the announcement or update is potentially market sensitive, we will, where possible, try to avoid publication during stock exchange hours in that jurisdiction (FCA consultation paper CP24/2, paragraph 3.26)."

What's not certain is how the FCA will justify disclosure of price sensitive information.

As the FCA says in its guidance for public authorities in handling inside information: "you can only disclose inside information where it is necessary to do so in the normal exercise of employment, a profession or duties (See MAR, Article 10 (Unlawful disclosure of inside information), MAR Article 14 and case law - Grøngaard and Bang (Case C-384/02) [2005] ECR I-9939). Disclosing it in any other circumstances is an offence under MAR." (Primary Market Bulletin 25) (emphasis added)

In the consultation paper the FCA appears to concede that an announcement of an enforcement investigation will not generally be necessary (albeit that they might be desirable:

"we cannot generally publish the name of an individual we are investigating or otherwise process their personal data unless it is necessary to do so for the purposes of our investigation … As a result, and considering also the ECHR, our proposal is usually not to announce that we are investigating a named individual."

So it's not clear on what basis the FCA will avoid infringing Article 10 MAR where an announcement contains price sensitive information relating to UK or EU MAR financial instruments.

It may be that where disclosure involves potentially price sensitive information, the FCA will put pressure on the relevant issuer to disclose that information first so that the FCA itself avoids an Article 10 MAR breach.

Is this policy permitted under FSMA? What about fairness / natural justice?

The FCA states in the consultation that there is no provision in FSMA which prevents it from making the proposed announcements. The consultation does not, however, include a full discussion of the potentially relevant FSMA provisions. Sections 207 and 208 of FSMA require the FCA to follow due process before it can publish a statement which amounts to a public censure of a firm. The FCA's predecessor, the FSA, described these FSMA provisions as follows in a Discussion Paper 08/03:

"In short, significant procedural safeguards were specifically built into FSMA in order to prevent the casual, rash or unchallenged use by the regulator of public statements that could damage a financial services firm’s reputation and commercial standing. This in turn reflected the lengthy discussion and debate in Parliament during the drafting and passage of FSMA on the balance between the regulator’s enforcement and other powers and the rights of the regulated."

"It follows that calls by some for us to ‘name and shame’ firms as a matter of course is not the approach envisioned by Parliament and is not one we can readily meet under FSMA" (Transparency as a Regulatory Tool paragraphs 4.14 and 4.15).

DP08/03 also highlighted that, when considering making an enforcement investigation public in exceptional cases, the regulator should consider the impact on a firm:

"We believe there are several significant issues and competing priorities regarding the use of publicity in the enforcement context, particularly where investigations or proceedings are ongoing and there has been no determination of culpability. A balance needs to be struck between various factors, including:

1. the relevant statutory limits on what we can say;

2. the potential benefits that could flow from greater publicity of enforcement investigations by demonstrating to the market our concerns about certain areas or conduct, better informing consumers and deterring bad practice;

3. the scope for publicity to hamper or prejudice investigations and enforcement action or, alternatively, to assist in bringing forward witnesses; and

4. concerns about the fairness of publicity by us – and, potentially, consequential media attention – potentially prejudicing those who are the subject of an investigation where the case is ongoing" (Transparency as a Regulatory Tool paragraph 6.5).

The FCA's Transparency Framework, published in 2013, endorsed the explanation of the legal framework as described in DP08/03.

"Aside from the amendments to section 391(1) of FSMA regarding what can be published about enforcement action (described below), no material changes have been made to the legal requirements regarding disclosure that were explained in the earlier FSA Discussion Paper on transparency (DP08/3").

"The main legal constraints in FSMA that will apply to the FCA are the restrictions in relation to publishing confidential information and the due process requirements regarding public censure."

"Sections 207 and 208 of FSMA require the FCA to follow due process before it can publish a statement which amounts to a ‘public censure’ of a firm…. these due process requirements effectively constrain the FCA from making public statements that criticise a firm’s conduct before it has issued a warning notice" (FCA Feedback Framework page 8).

The FCA's most recent consultation, in turn, states that it is consistent with the FCA's 2013 Transparency Framework (CP24/2 Our Enforcement Guide and Publicising Enforcement Investigations paragraph 2.10).

The FCA makes clear that, in its view, its proposals relating to announcing investigations do not engage the FSMA protections relating to public censure ((CP24/2 Our Enforcement Guide and Publicising Enforcement Investigations paragraph 2.16). In other words, the FCA does not consider that its proposed announcements and updates will amount to criticisms triggering the protections. But there is no discussion of why the FCA holds this view.

The FCA may be relying on the fact that proposed announcements will always indicate that the FCA has not formed any conclusions. But it's not clear that this will be sufficient to avoid such announcements constituting a public criticism. In practice, an announcement is likely to state that the FCA considers that there are circumstances suggesting that the firm has breached various regulatory or statutory provisions. The nuance that the FCA has not reached a final decision may be lost on many readers and may not be sufficient to mitigate any unjustified reputational harm.

The Financial Services Act 2012 introduced new powers to allow the regulator to publish information about a Warning Notice where certain conditions are met. The regulator emphasised at the time that this change would allow the FCA to make information about its enforcement investigations public at an earlier stage, to achieve educational and deterrent effect.

The FCA's position now appears to be that it can achieve educational and deterrent effect by providing updates on an enforcement investigation all the way up to the Warning Notice stage without the need to rely on the powers introduced by the Financial Services Act 2012. Those updates can include a description of the breaches the FCA considers may have occurred and name the firm.

In practice, what is the difference between, on the one hand, a press update late in the investigation process stating (or implying) that the FCA continues to consider there are circumstances suggesting a breach, and, on the other hand, a Warning Notice statement shortly thereafter indicating that the FCA believes the firm has committed breaches, but emphasising (as all Warning Notice statements do) that "a Warning Notice is not the final decision of the FCA".

At the very least it seems open to question whether Parliament can have intended the FCA to have such strict restrictions on what it can say about a Warning Notice, but not to have any similar restrictions on press releases with very similar content.

Is there any potential area where the proposal can realistically be altered/watered down?

If the proposal is to be implemented two obvious improvements would be:

1. for the FCA to be required to consider the impact on the firm as a separate factor in assessing whether to make a disclosure.
2. A mechanism for firms to make representations before the FCA makes an announcement naming the firm. This could be similar to the process followed in respect of Warning Notice statements by the RDC. In summary:

a) A copy of the document is shared with the firm specifying a time window (usually 14 days) in which the firm must make representations.

b) The firm may request an extension.

c) If submissions are received the RDC must consider those and decide whether to publish.