FCA Inquiry Announcements: Deterrent or Injustice

Article by Oscar Luck

Background

The Financial Conduct Authority, or FCA, regulates the UK’s financial services industry with the goals of protecting consumers, keeping the industry stable, and promoting healthy competition between firms. 

Along with the role of authorising financial service providers to act in the UK, the FCA monitors the market and has the power to investigate corporate malfeasance. Under the Financial Services and Markets Act 2000 (FSMA), the FCA has the investigative powers to:

• Require information and documents from firms
• Require reports by skilled persons
• Search premises and seize documents or information
• Gather information and appoint an investigator, occasionally without notice, to the company concerned.

On the 27th of February, the FCA declared in an announcement that they were planning to announce corporate investigations earlier, publish updates and close inquiries quicker. The primary stated reasoning for such changes is to enhance the deterrent effect of their powers to deter wider market misconduct. 

Evaluation

A core principle of our criminal justice system is ‘innocent until proven guilty’; although an announcement – even one from a respected government source – does not declare a company guilty legally, the social detriment to a company’s reputation and perceived integrity, and thus its ability to gain financing and attract investors, is argued by many, such as the organisation PIMFA, to be contrary to responsible practice. 

A study into the correlation between share price and the announcement of regulatory investigation was conducted in which it was demonstrated that, whereas share prices tend to fall around 2% when sanctions are announced, the fall due to the announcement of an investigation is often around 6%. This demonstrated the potential harm caused by the FCA’s new approach, which has been accused of putting the public perception of itself above the public perception of companies. This position was echoed by PIMFA, who claimed that a public announcement of an investigation before all evidence is assessed risks causing gross unfairness, questioning who the policy really aims to benefit. This is further supported due to the low threshold for initiating investigations into a company. Per the FCA’s own criteria, an investigation may be started if circumstances suggest a firm may have breached one or more rules or principles or, without specific circumstances, if the FCA has ‘good reason to be concerned’. Currently, 65% of FCA investigations close without further action, and although many of these would not be announced even under the new framework, there still seems to be clear cause for concern. 

However, the FCA would argue that for the information to remain private is harmful to the bona fide investors who purchase shares unaware of the reasonable belief of wrongdoing; under the current situation where investigations are closed ‘at the latest possible point’, the FCA can be argued to be neglecting its role in upholding market standards and honest, fair dealing, by omitting what may well be crucial information surrounding a business’s practices. Although many professional bodies argue that such announcements only have the purpose of ‘trumpeting its work rather than giving out useful information’, the constant reminder of the active work of the FCA may deter both firms and individuals within such firms from undertaking misconduct. Furthermore, the FCA has a vested interest in maintaining its own reputation and the reputation of UK markets as a whole, and thus, the potential harm is mitigated as the FCA is likely to take a selective approach to determining when announcements should be made. 

An interesting point to consider, however, is that, under the FSMA Act, the FCA is immune from any claim for damages unless the action can be proven to be in bad faith or unlawful. This may be used to question their integrity as an institution and demonstrates the lack of recourse for firms that may have their reputation and business damaged by such announcements. 

Concluding Thoughts

Overall, the FCA faces a difficult challenge in creating a regulatory framework and approach to enforcement that simultaneously promotes the UK as an efficient market while ensuring that honest and fair dealing is maintained. The proposed change to the FCA’s approach is one such attempt to reach this goal, and time will tell whether the fears of some firms are actualised. Beyond theoretical arguments over the validity of this approach, the most important takeaway going forward is for businesses to ensure that internal systems and safeguards are properly structured and implemented to provide external confidence in sound practices and proper business processes. Although these changes are unlikely to cause any significant alterations in the approach of financial service providers or their law firms, they rather reiterate the need for constant internal review to deal with issues and malfeasance before the FCA feels the need to get involved.