The latest in the FCA's naming and shaming saga is now out.  We have previously covered this topic on no less than six occasions:

It has incurred extensive industry, legal sector, government and other stakeholder angst and time, for an essentially unjustified proposal.

The House of Lords Financial Services Regulation Committee ("HLFSRC") has now published a report entitled "Naming and shaming: how not to regulate".  Hopefully, this is a step on a journey that will address the damage done to the sector's confidence in the FCA and prevent future unnecessary damage to the reputation of firms, staff and the broader financial services sector.

Core concerns

HLFSRC set out numerous concerns in its report.  The very core of its concerns included the following:

  • On CP24/2 first consultation its key concern was that "the FCA had not found an acceptable balance between realising the potential benefits of increasing transparency to help prevent consumer harm, and managing the potential risks to firms, individuals and market stability."
  • On CP24/2 Part 2, whilst it corrected some significant gaps in the original consultation, "The revised proposals, however, do not resolve the fundamental issue that by broadening the justification for proactively announcing investigations, it could increase the risk that investigations could be announced, reputational damage to firms could occur, media speculation could arise, but no regulatory action is ultimately taken. We remain unconvinced that the proposed public interest framework will allow for proportionate and consistent decision-making over whether to announce an enforcement investigation early."
  • On exceptional circumstance v public interest test: "We are still unclear why—if there is an immediate risk of consumer harm—it would not be considered an 'exceptional circumstance' which would demand disclosure of an investigation."
  • On the impact on individuals: "We recognise that the proposals do not extend to naming individuals under investigation publicly. We believe, however, that there is a serious risk inherent in the FCA's proposals that senior managers and other key individuals involved in a firm under investigation can be readily identified through the FCA's register (or otherwise). This potentially exposes those individuals to reputational damage regardless of the outcome of the investigation".

HLFRSC further noted in relation to the secondary international competitiveness and growth objective that:

  • "We remain unconvinced that the FCA has adequately demonstrated how the proposals contained in CP24/2 Part 2 align with its secondary international competitiveness and growth objective."

Conditions for proceeding with the proposals

HLFSRC has set out some key conditions that, in its view, would have to be satisfied for the FCA to proceed with the proposals:

  • "The FCA should consider whether it should focus its efforts on expediting its investigative processes to increase transparency before making substantial changes to the wider enforcement framework."
  • "Following its second consultation, on CP24/2 Part 2, the FCA needs to be able to demonstrate that stakeholders' concerns have been addressed by these new proposals and that the motivations behind the proposals have been clearly articulated and understood. This should include setting out the evidence to support this and, if necessary, additional amendments to its proposals to address any further concerns raised. We ask the FCA to report back to this Committee with its findings before the changes are implemented."
  • "If it is evident after the current consultation that the FCA has not found an acceptable balance between realising the potential benefits for consumer protection, and managing the potential risks to firms, individuals, and to market stability, it should not proceed with these proposed changes."
  • "Before any final decisions are taken to proceed with the proposals, the FCA must be able to demonstrate that its proposed new regime is underpinned by robust, fair and proportionate processes for the assessment of 'public interest'. Further guidance on how the factors contained in the public interest framework will work in practice should be published, before any final decisions are taken."
  • "Given that the enforcement investigation proposals represent a significant departure from the FCA's previous approach, it remains our firm view that proposed changes of this extent necessitate a robust and detailed analysis of the direct costs to the sector. Wider factors in the UK's growth and competitiveness should form part of this analysis. The need for such an assessment will be underscored if, as happened following the publication of the first consultation, the feedback the FCA receives on its second consultation reiterates the call for a cost benefit analysis—the FCA must be transparent about the views expressed on this issue."

Process improvements

HLFSRC set out its views on improvements the FCA needed to make to its processes as illustrated by the handling of CP24/2, including the following:

  • "The FCA should review its internal processes and communication strategies employed throughout this process, including a review of how appropriate its internal processes were for consulting on a change of this scale."
  • "The FCA should publish a 'lessons learnt' document from this process, setting out where it went wrong and how it will prevent similar mistakes from occurring in the future."
  • "The FCA should ensure that consultations are properly registered on the Regulatory Initiatives Grid. It should also review its internal processes to ensure that earlier engagement with the sector is carried out when appropriate."
  • "The FCA should engage with the Treasury over any future developments relating to its enforcement investigations proposals to ensure that they are aligned with the Government's view of the secondary international competitiveness and growth objective."
  • "In light of the questions raised over the absence of a cost benefit analysis for the enforcement investigation proposals, and following the recommendations made in the Financial Conduct Authority Cost Benefit Analysis Panel's report, the FCA should change its policy of producing a cost benefit analysis only for rules and guidance on rules."

The FCA's response to this report will inevitably be eagerly awaited and subject to intense scrutiny.

House of Lords tells FCA how not to regulate

Authors