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Enforcement update: Trends and predictions for 2024
The UK financial services regulator, the Financial Conduct Authority (FCA), has caused consternation across the world with a major proposed change to the way it handles enforcement investigations.
Former senior official at the regulator, and partner in the Global Regulatory & Risk Advisory group, Ian Mason, considers what the proposals are, how they might affect funds and investors across the world, and the likelihood of the FCA's new plans coming into effect.
The FCA's radical new approach towards enforcement investigations
The FCA has put forward plans that has left the funds and financial services industry shaking their heads at what's potentially to come: the UK's regulatory body now plans to announce enforcement investigations at once, rather than when enforcement action has concluded. This would include announcing the company's name, and sometimes any associated individuals under investigation.
The FCA has said the reason behind the drastic change in approach is due to "public concern about whether we are taking appropriate action", with a view to also encouraging whistleblowers to come forward earlier in the process. For context, the FCA only imposed eight fines in 2023, according to FT Adviser.1 As of 31 July 2023, the FCA had 562 open enforcement cases relating to 224 separate investigations.
As a way of alleviating some of the concern, the FCA has proposed some criteria in deciding whether to announce an investigation in its "Public Interest Framework". The criteria (rather surprisingly, and in contrast to the existing policy) expressly excludes the impact on the company of announcing the investigation. Listed companies already need to let the markets know if they're under FCA investigation.
Originally intended to close in mid-April, the consultation was extended until the end of April due to the magnitude of the proposals put forward. The FCA is looking for responses from relevant regulated companies, industry groups and regulatory experts.
The implications
For international fund managers and investors, the FCA's proposed approach could negatively affect the value of their investments. For example, if a listed company is under investigation by the FCA and it's announced before the company has had time to prepare, there could be a hit on the stock price – or worse, a long-term decline as the investigation drags on.
There's also a serious cross-border impact that, if the proposals go ahead, is likely to take months or years to be fully realised. It's possible that other regulatory bodies, such as the SEC in the US, could start asking questions if a UK branch of a company is announced to be under investigation by the FCA.
We could also see a drop in external investment in the UK due to the changes. When looking at new markets to enter, business leaders don't want to see unfriendly policies being introduced. With firms potentially only having one business day (or, in some cases, no notice) to respond once the FCA announces its intention to investigate a company, it's an off-putting prospect for firms.
The new policy would apply not just to new investigations, but also to the FCA's existing portfolio of investigations. If the new policy is implemented, many firms already under investigation will be fearing the worst when it is announced.
Where a UK-regulated company is part of a global group, for example the UK branch or subsidiary of a foreign bank or asset management group, foreign regulators such as the SEC may also take a keen interest. If they asked for more details about the conduct under investigation from the entity they regulate, this could further complicate matters.
The industry reaction
The financial services industry's condemnation of the proposals has been swift and unanimous. A host of trade bodies, other lawyers and regulatory experts have publicly come out against the plans.
Recently, the House of Lords Financial Services Regulation Committee urged the FCA to put its plan on ice, commenting the approach "is at odds with almost all other financial services regulators". The committee's head, Lord Forsyth of Drumlean, has published his letter to Nikhil Rathi, CEO of the FCA, asking why a cost-benefit analysis for the proposals hasn't been undertaken, among other queries. On 1 May the UK Chancellor, Jeremy Hunt, stated to the Financial Times that he hoped that the FCA look again at the proposal and questioned whether it was in line with the FCA's new duty to promote growth.
The FCA has said it's working with lawmakers to ensure the change works for firms while giving the regulatory body a hard-line stance. "We have been consulting on announcing our investigations on a case-by-case basis, where it is in the public interest to do so. We believe doing so will give all the firms we regulate and the wider public better insight, earlier, about issues we are concerned about," an FCA spokesperson said.
Our take on the proposals
The impact of such a change in the FCA's approach cannot be understated. The beginning of any investigation is, naturally, a preliminary stage: evidence hasn't been gathered, interviews with key people conducted, or due diligence undertaken. Although the FCA announcement of the investigation will state that no decision has been made at that early stage, the reputational damage will have been done.
The reputation of any company is everything: if its customers can't trust the business, they will take their money elsewhere. An FCA investigation being announced at the very beginning could tarnish a company's image for years to come. This is even more egregious if the investigation concludes there was no wrongdoing.
Not only this, but enforcement investigations can take several years (and often longer) depending on the size and scale of the company and alleged misconduct. Given the co-head of enforcement at the FCA has confirmed nearly two-thirds (65%) of FCA investigations close without any action, the reputational damage far outweighs the gain.
This is clearly intended as a quick PR win for the FCA. With hundreds of potential cases in the pipeline as the regulatory landscape develops, getting the headlines makes it look like the regulatory body is acting quickly. The reality is that the documents, interviews and legal advice process must be followed in the same way – and that takes time.
What's the likelihood of this going ahead?
The FCA has been criticised in the past for not being sufficiently proactive and transparent, and these proposals are an attempt to show that it's on the front foot. It's likely the FCA will try and push through the reforms in some form, but less so that they'll stay in the same shape they are now. A watered-down version of the proposals is possible, but we'll have to wait and see how they look.
Despite originating from the UK, the FCA's plans have far-reaching consequences for global investors. If you're worried about the impact of these proposals, our global Regulatory & Compliance team is on hand to help – get in touch today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.