Enforcement transparency – jurisdictional comparisons – article published in Compliance Monitor

At the end of November 2024, the FCA announced a second round of consultation on its proposals for increased transparency as to its investigations and enforcement processes.

The first round of consultation was in February 2024.  It received a stern backlash in respect of the proposal it then made to "name and shame" companies under investigation.

In some ways, the investigations and enforcement process can be seen as a last resort, kicking in when the more day to day supervision and monitoring of firms has failed to yield the outcome which the regulator wants.  But the FCA's investigation and enforcement processes are a significant part of its armoury, and important as part of a framework to maintain the standing of the UK's competitiveness as a leading financial centre.  London needs an effective and respected enforcement framework for the successful operation of the financial markets.

Against this, the FCA has in recent years been under pressure to improve the efficiency of its investigations and enforcement functions.  For example, looking at investigations closed in 2023-2024, these took an average of 42 months to complete.

Investigations have generally proceeded on the basis of strict confidentiality and secrecy, which protects the rights of those under investigation. This is important for a number of reasons, including because historically a high number of investigations have closed without any formal action being taken by the FCA.  It would be unfair for early publicity to damage a firm’s reputation when there has been no finding of breach.  But the problem is that if investigations are taking so long to close, by the time a final outcome is announced, the underlying issue may be stale; the market may have moved on so that any learning from the process is limited.  Furthermore, the market may have suffered harm through lack of awareness of an ongoing investigation into a firm.

This delay in the market becoming aware of an investigation process is among the reasons for the FCA to review its approach to publicity.

Part of the market criticism of the FCA's "name and shame" proposals was that if there is a pressing need to protect the markets from harm from breaches of regulation, the FCA has other options – for example, issuing a prohibition order.  Also, if the desire is to educate the market, there are other ways of doing this, for example by writing to businesses through “Dear CEO” letters or issuing updates to the market based on anonymised examples.

Against that backdrop, the latest consultation does reflect a shift in stance and emphasis.  A key part of the FCA's change in approach is that it is reviewing its enforcement portfolio – looking at the cases it is investigating to align with strategic priorities – the aim being to have fewer and faster investigations.  On this, the FCA has noted that on 1 April 2023, it had 220 open enforcement operations, but by 28 November 2024, this number had reduced to 147.

The FCA has also said that whilst investigations in 2023 to 2024 took an average of 42 months to complete, many more recently opened investigations are taking less time, and in some cases, less than half that time.

Overall, the FCA wants more flexibility, moving away from an existing approach where it will only announce that it has opened investigations in "exceptional circumstances" - the FCA does not think that this serves the public interest.

On the new approach which the FCA is consulting on, a key plank of any decision as to whether to announce is based on a "public interest test" which will be central to whether to announce.  In addition, the FCA is planning to give firms more notice before making a decision to announce.  These are both aimed at providing reassurance that announcements would not be made in situations where the public interest would not justify it.  Further, the FCA’s expectation is that even if they make proactive announcements in future, this would apply only in a small number of cases.

Looking at what the FCA has in mind on the public interest test, the factors in favour of announcement would include:

1. Whether a matter is already somehow in the public domain, for example, through a disclosure made by the subject of the investigation.
2. Whether publishing could be in the interests of potentially affected customers/consumers/ investors.
3. Whether publishing would prevent indirect harm, for example in cases of suspected fraud.
4. Whether publication would provide an educational benefit for the market.

By contrast, factors which may go against publication include:

1. Whether publication would cause serious market or sector impact, financial instability or seriously disrupt public confidence in the financial system.
2. Publishing would have a severe impact on the firm or third parties concerned.
3. Publishing could hamper an FCA investigation or an investigation by another regulatory body.

The intention is to provide firms with at least ten days' notice before an announcement is made to allow representations to be made, and then, after considering the representations, to give a further two days' notice of any final text to be announced before publishing.  These periods would allow time for firms to take advice and consider whether to raise any challenges through a review of any FCA decision to publish.

The consultation paper includes some interesting case studies, based on the FCA’s review of past cases to see what the approach may have been to making an announcement during an ongoing investigation.  Looking at the examples covered it is striking that the text for what an announcement might have looked like indicates limited content.

For example:

The FCA has begun an investigation into X in connection with its role as auditor of Y.  We have not reached any conclusions as to whether regulatory requirements have been breached.

The FCA is investigating X in relation to its suspected breaches of a requirement not to take on high risk customers intended to address potential weaknesses in the firm's financial crime control framework.  We have not reached any conclusions as to whether regulatory requirements have been breached. 

The FCA has begun an investigation into X in connection with its trading in European shares.  We have not reached any conclusions as to whether regulatory requirements have been breached.

The very brief announcements contemplated would not seem to have much benefit in terms of protecting the market or educating the market, which goes back to the original question. As the FCA itself recognises in the consultation paper, anonymised announcements may be appropriate for many of their investigations into AML and financial crime systems and controls.  Generally, announcing an investigation without naming the firm under investigation gives the FCA much more flexibility, and gives it a greater chance of educating the market on expectations.

It is interesting to compare the position of regulators in other financial centres.

In reaction to the Wirecard scandal, in 2022 German financial services regulator BaFin was granted the authority to inform the public earlier and more transparently about its approach to balance sheet control. It may report on examination orders based on specific indications of a violation of accounting regulations. The announcements on the BaFin website and in the Federal Gazette state the company concerned and the reason for the examination, without going into further details of the investigation.

BaFin may also make public significant procedural steps and incriminating, or exculpatory, findings obtained during the course of the proceedings. If it becomes clear in the course of the indication-based examinations that BaFin has not been able to identify any violations of accounting regulations, the supervisory authority will publish the discontinuation of that investigation.

All announcements are subject to the requirement that there be public interest in such actions. Therefore, in each individual case, the BaFin weighs the public's need for information against the affected company's interest in keeping the ordered audit non-public. The deciding factors here are the probability of a violation of accounting regulations and its potential relevance for the capital market.

The BaFin announcements are intended to enable the capital market to take note of relevant accounting control proceedings, to evaluate them adequately and to take them into account in company valuations and investment decisions. It is important to distinguish: an audit order does not mean that BaFin has already established an accounting violation.

However, the position in France is more conservative.  The French Financial Market Authority (“AMF”) is not entitled to disclose information about pending investigations.

On the contrary, the AMF’s investigators are bound by professional secrecy rules, and to breach these rules is a criminal offence.  Therefore, the rules applicable to the AMF are stricter than those applicable to France’s Public Prosecutor, which investigations must remain confidential to protect the presumption of innocence.

An exception to this is that criminal investigations may be disclosed in specific circumstances, such as the prevention of the dissemination of incomplete or inaccurate information, to put an end to a public order disturbance, or when the disclosure is justified by the public interest.  Consequently, criminal investigations on market abuses may be disclosed by the Public Prosecutor under certain circumstances, whereas regulatory investigations on identical market abuses would have to remain secret.

Concluding remarks

The softening of the FCA approach in this second round of consultation is welcome, although regulated entities will still have concerns on the suggested approach.

Ultimately the FCA is likely to go ahead with the proposed changes in some form, although the theme of the latest publications is that the overall practical impact is likely to be limited when it comes to the ultimate decision as to whether to announce an investigation or not.

With the FCA moving towards more transparency, this may track into the approach in Germany and France in due course.