The House of Lords Financial Services Regulation Committee has published a report raising significant concerns about the Financial Conduct Authority’s (FCA) proposals to publicise enforcement investigations. The report, titled ‘Naming and shaming: how not to regulate,’ critiques the FCA’s Consultation Paper CP24/2 (Part 2), questioning the rationale behind the regulator’s shift in policy and highlighting the potential risks associated with increased transparency in enforcement cases.
Key concerns raised by the committee
Currently, the FCA announces enforcement investigations in exceptional circumstances only. However, under its proposed approach, the FCA would have greater discretion to make public announcements based on a flexible public interest framework. The Committee’s report challenges whether the FCA has made a convincing case for this change, raising several key concerns:
- Reputational risks to firms: The Committee highlights that firms could suffer significant reputational damage before investigations are concluded, potentially impacting businesses that ultimately face no action.
- International comparisons: The report emphasises that the FCA’s proposed approach could position the UK as an outlier compared to other major financial jurisdictions. Most international regulators do not disclose enforcement investigations at an early stage due to concerns over fairness and reputational harm, making the FCA’s move a potential risk to UK competitiveness.
- Consumer impact: While the proposals aim to enhance consumer protection through increased transparency, the Committee warns that premature disclosure of investigations might lead to unintended consequences. Consumers may misinterpret an investigation as an indication of wrongdoing, potentially causing unnecessary panic or financial instability for firms.
- Lack of early stakeholder engagement: While the FCA has adjusted its approach following feedback from the initial consultation in April 2024, the Committee notes that much of the controversy could have been avoided if stakeholders had been engaged earlier in the process.
Recommendations for the FCA
The Committee has outlined several recommendations to ensure a more balanced approach to enforcement transparency:
- The FCA should clearly demonstrate that it has addressed stakeholder concerns following the closure of the second consultation in February 2024.
- If an appropriate balance between consumer protection and market stability is not found, the proposals should be withdrawn.
- A cost-benefit analysis should be conducted to assess the wider impact of these changes before they are finalised.
- The FCA should publish further guidance clarifying how decisions to publicise investigations will be made in practice.
- The regulator should consider improving transparency through existing investigative processes rather than making sweeping changes to enforcement disclosure policies.
- Future consultations should be better signposted, and internal processes should be reviewed to prevent similar issues in the future.
- The FCA should work closely with HM Treasury to ensure that any enforcement policy changes align with the Government’s wider regulatory objectives.
- The FCA should publish a ‘lessons learnt’ document reviewing the effectiveness of its internal processes and communication strategies in relation to this consultation to prevent similar issues in the future.
A shift in approach without clear justification?
The Committee’s report underscores concerns about the FCA’s reasoning behind these changes. Lord Forsyth of Drumlean, Chairman of the Committee, noted that the FCA has not provided a strong case for this fundamental shift, stating:
“Less than 18 months ago the FCA stated that it recognised that the disclosure of an enforcement investigation could inappropriately damage a firm’s reputation if the investigation did not substantiate the FCA’s concerns. We simply could not understand the FCA’s about-turn in such a short period of time.”
He further pointed out that the average FCA investigation takes three to four years, with 56% of cases resulting in no further action. If the proposals proceed, this could mean that many firms and individuals face unnecessary reputational damage despite ultimately being cleared of any wrongdoing.
Next steps
With these concerns now formally raised, the FCA will need to carefully consider the Committee’s recommendations before making a final decision. As the regulatory landscape continues to evolve, balancing transparency with fairness remains a critical challenge for financial oversight in the UK.
To read the full report, click here: House of Lords Report.
