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At the end of last year, the UK’s Financial Conduct Authority (FCA) launched the second phase of its consultation on increasing transparency in enforcement investigations, following a series of public interventions by trade associations in the financial sector and former City minister Bim Afolami.
The new consultation, which is open for feedback until February 17, 2025, intends to refine how transparency measures could operate in practice.
Key updates to the proposals include incorporating the potential negative impact on firms as a factor in the public interest test, extending the notice period for firms from one to ten days (with an additional 48 hours if the announcement proceeds) and considering disruptions to public confidence in the financial system as a new criterion.
Investigations initiated before any policy changes will not be proactively announced under the new rules.
The FCA emphasises that any changes enacted would result in proactive announcements for only a small number of investigations.
The bigger picture
The FCA used its announcement of the new consultation to respond to criticism of its name-and-shame enforcement proposals, which were consulted on early last year, suggesting amendments in its latest call for feedback.
“We have heard the strength of feedback to our original proposals, and we are making changes as a result,” said Therese Chambers, joint executive director of enforcement and market oversight at the FCA.
“We hope the greater detail published today supports the further engagement we hope to have on the proposals, before we make any final decisions.”
In the feedback document, the FCA says that firms and industry groups felt strongly that its existing “exceptional circumstances” policy was “sufficiently broad to allow [it] to announce in more cases”.
The FCA also states that firms wanted greater detail about the proposed public interest test and that it was challenged on how much notice it would give before any announcement.
“We have re-drafted those proposals to try and address the concerns raised and give more clarity on how they would work in practice. We are also providing more data and case studies explaining how we could make announcement decisions,” the consultation says.
However, the FCA also says that consumer groups, whistleblower advocates and transparency campaigners were among those that favoured greater transparency about investigations, as did some of the regulator’s enforcement partners.
It points out that “firms benefit from having the badge of FCA authorisation, and their consumers and investors should be able to rely on it as reassurance that a firm will treat them fairly”.
“Where that firm is placed under investigation, it may not always serve consumers’ interests for us to withhold that information from them.”
Why you should care
The FCA has undoubtedly softened the blow for firms. However, that does not mean that plans for enforcement are finished. Rather, the FCA has simply filled in more of the blank spaces surrounding the previous consultation, so that firms can be assured that these sorts of announcements will largely only be used in extreme cases, and when there is a significant risk to customers.
The announcement also shows that the FCA is now bowing to pressure from either the government of the day or industry groups, and looks likely to be continuing on the path towards the name-and-shame proposals.
If the FCA's transparency proposals are enacted, payments and e-money firms face significant implications, particularly around reputation management.
Public announcements of investigations, even if no wrongdoing is ultimately found, could harm trust among customers, partners and investors. This reputational damage might drive client churn, with the investigations coming across to users as red flags, although safeguards like a ten-day notice period and considerations of public confidence may mitigate these risks.
Smaller or emerging fintech and e-money firms remain especially vulnerable, however, as maintaining public confidence is critical to their success, and investigations out in the open could disproportionately disrupt these firms. This is particularly true in cross-border transactions, where firms have come under more scrutiny previously from regulators such as the FCA and the Payment Systems Regulator (PSR).
These proposals may also reshape industry dynamics. Smaller firms could struggle to compete with established players that are better equipped to handle reputational shocks thanks to having more bandwidth to absorb both legal and public relations costs.
Yet, there are also possible benefits to the FCA’s potential new modus operandi.
Public announcements of investigations could act as a deterrent, encouraging firms to be more cautious about regulatory compliance, and transparency regarding the pace and outcomes of investigations may also pressure the FCA to resolve cases more efficiently — something that the regulator already acknowledges is desirable.
Increased transparency could also enhance consumer protection by raising awareness of firms under investigation, helping consumers avoid potential financial harm. It would promote a level playing field, ensuring that no firm gains an unfair advantage by concealing compliance failures, ultimately fostering greater trust and integrity within the financial sector.
The new normal for the financial services industry will no doubt have teething problems, and like previous regulatory changes, such as the Consumer Duty, will be unpopular with many.
However, it could ultimately lead to better outcomes for market participants, and more effectively root out bad actors who are undermining good governance and ethos in the rest of the industry.
