The regulator has significantly rowed back on aspects of the proposals following industry and government feedback.

By Andrea Monks, Rob Moulton, Nell Perks, Anna James, and Charlotte Collins

On 28 November 2024, the FCA published revised proposals for announcing enforcement investigations. The original consultation, launched in February 2024, proved to be one of the most controversial proposals put forward by the regulator and received an unprecedented response from industry and the government (for more detail on the original proposals, see this Latham blog post). The FCA has attracted a great deal of criticism since the launch of the first consultation, culminating in an evidence session before the House of Lords Financial Regulation Committee a few weeks ago, which made for uncomfortable viewing.

In light of the feedback received, the FCA has made some significant changes to its proposals, and acknowledges that it ought to have handled their communication better by signalling the proposals to the market in advance of their publication. The regulator also acknowledges the importance of considerations around its secondary objective relating to international competitiveness and growth in relation to these proposals.

Key Changes

1. Firm Impact: The FCA would include the impact of an announcement on the firm as part of the public interest test, and this would be central to its decision of whether or not to announce. It also proposes removing the general reference to “otherwise advancing one or more of our statutory objectives” from the list of relevant factors. This is very welcome, as a key concern with the original proposals was that the regulator would not take the potentially serious ramifications for firms into account when deciding whether or not to announce.
2. Notice Period: Firms would generally have 10 business days’ notice to consider the proposed announcement and make representations, with a further two business days to review the final text before the FCA proceeds with an announcement if it decides to go ahead. Originally, the FCA had proposed to give firms only one day’s notice, which was difficult to justify. However, the FCA notes that in some “extreme” cases, it would not be appropriate to give firms this much notice and it would move more quickly. Helpfully, the FCA also states that where firms have other disclosure obligations, such as under MAR, it may be content for the firm to issue its own announcement first and the FCA to follow with a reactive confirmation. The FCA envisages that any decision to announce would be made at the Executive Director level.
3. Market Ramifications: The FCA would include the potential for an announcement to seriously disrupt public confidence in the financial system or the market as a new factor in the public interest test. Again, one of the key criticisms of the proposals was that announcing an investigation could cause market instability or even firm failure.
4. Ongoing Investigations: The FCA would not announce investigations that are already underway when the changes come into effect. This is a welcome reversal, as it would have been extremely difficult for the FCA to justify announcing investigations that had been approached on the understanding that they would not be announced until their conclusion. However, the FCA proposes that it may still reactively confirm ongoing investigations that are already in the public domain, if it considers this meets the public interest test.

Potential Impact

The FCA has not included a cost benefit analysis with the revised proposals, stating that it only prepares such analyses for consultations on rules or guidance on rules (the proposed changes to the Enforcement Guide are neither). This is an interesting stance, given the criticism the regulator received from Parliament for not having conducted a cost benefit analysis on the original proposals. However, the FCA has included information on the potential impact of the proposals.

The FCA is emphatic that its proposals would only affect a very small number of firms. According to the regulator, it typically opens around 10 to 12 investigations into regulated firms per year, and would seek to announce only some of these. The regulator also states that, in many cases, it would consider an anonymised announcement. However, in one of the examples provided, it states that there are currently 15 open investigations that are not in the public domain. Of these, the FCA indicates that it may have sought to announce nine (two of which on an anonymised basis). While this does not seem like an incremental increase, it appears to be the main justification the FCA puts forward as to why the proposals are proportionate.

The FCA is also keen to stress that it expects the number of cases that are closed with no further action to reduce significantly as it has raised the bar for opening investigations. Further, it envisages that cases not involving extensive prior supervisory engagement would likely be announced at the three-month review stage at the earliest, which the FCA hopes would limit the number of investigations announced that end in no further action. It also plans to report annually on the numbers of cases in which it made an investigation announcement and then took no further action, to aid transparency.

The FCA explains in some detail how it would approach decisions to announce, emphasising that it would take the decision in stages, first considering the public interest test, then appropriate timing, and lastly what details to announce. The FCA also provides four illustrative case studies of past investigations that it would have sought to announce had the proposals been in place at the time, to give firms an idea of which cases would pass the FCA’s thresholds. Further, the FCA describes the sorts of cases that it might announce without naming firms, to provide the market with greater transparency regarding its key areas of enforcement activity. The FCA cites anti-money laundering and market abuse systems and controls failings as areas that could be suitable for anonymised announcements.

Next Steps

Responses are requested by 17 February 2025, and the FCA board is due to make a decision on the proposals in Q1 2025.

Firms’ reactions to these proposals may prove interesting. While the FCA has made some major concessions, ultimately it is still planning to go ahead with its changes, and firms will remain concerned about how frequently, and in what circumstances, the FCA will seek to publicly announce investigations. Interestingly, the FCA has not published a revised draft of the relevant Enforcement Guide text, so firms must rely on the FCA’s description of the changes when considering the amended proposals.