Summary of conclusions and recommendations
The enforcement proposals
1.The proposals contained in the FCA’s consultation document CP24/2, published in February 2024, represented a major change from the FCA’s previous approach to its enforcement work. The lack of engagement with stakeholders or of proper notification on the Regulatory Initiatives Grid was unacceptable. Furthermore, that the FCA was then surprised by the strength of reaction to its proposals suggests a worrying disconnect with industry on the part of senior FCA leadership. (Paragraph 29)
2.Had the FCA conducted adequate engagement in the development stage of these proposals, it could have avoided a lot of unnecessary controversy and damage to the sector’s confidence in the regulator. (Paragraph 30)
3.The FCA should ensure that consultations are properly registered on the Regulatory Initiatives Grid. It should also review its internal processes to ensure that earlier engagement with the sector is carried out when appropriate. (Paragraph 31)
4.We are still unclear why—if there is an immediate risk of consumer harm—it would not be considered an ‘exceptional circumstance’ which would demand disclosure of an investigation. (Paragraph 39)
5.In the context of its existing powers, the FCA’s explanation for how these proposals will further its objectives is unconvincing. It remains unclear why a broader interpretation of ‘exceptional circumstances’ could not be considered in place of the proposed public interest test, particularly where there is an immediate risk to consumers. The FCA have provided additional detail in the second consultation about other uses of the disclosure power. Following the closure of the second consultation, the FCA must be able to demonstrate that the additional detail it has provided to justify this shift in approach has reassured stakeholders that this change is both proportionate and necessary. (Paragraph 44)
6.The original proposal giving firms 24 hours’ notice of the announcement of an investigation was insufficient given the amount of activity required to prepare for such an announcement. The revised proposal, to give firms 10 business days to make representations, is a sensible change but we expect the FCA to consider carefully any consultation responses on whether the two days’ notice of publication of any announcement is sufficient for firms. (Paragraph 63)
7.We recognise that the proposals do not extend to naming individuals under investigation publicly. We believe, however that there is a serious risk inherent in the FCA’s proposals that senior managers and other key individuals involved in a firm under investigation can be readily identified through the FCA’s register (or otherwise). This potentially exposes those individuals to reputational damage regardless of the outcome of the investigation.(Paragraph 66)
8.It is clear that the FCA has modified its proposals on announcing its enforcement investigations significantly between its first and second consultations. The FCA’s revised proposals demonstrate a clearer commitment to safeguarding both market integrity and the legitimate interests of firms. This is a welcome development reflecting a more balanced approach, and goes some way to address stakeholders’ concerns. (Paragraph 71)
9.It remains unclear, however, what specific criteria would guide the FCA’s assessment of ‘public interest’ or how the FCA would evaluate the impact that it now recognises the announcements may have on firms and financial markets. Questions persist around the levels of discretion the public interest test affords the FCA, how consistency in decision making can be assured and how inconsistent outcomes would be avoided. Greater transparency in these processes is essential to ensure that firms and stakeholders have confidence in the fairness and consistency of the regulatory framework. (Paragraph 72)
10.Before any final decisions are taken to proceed with the proposals, the FCA must be able to demonstrate that its proposed new regime is underpinned by robust, fair and proportionate processes for the assessment of ‘public interest’. Further guidance on how the factors contained in the public interest framework will work in practice should be published, before any final decisions are taken. (Paragraph 73)
11.We remained unconvinced by the explanation offered by the FCA on how the proposals align with its secondary international competitiveness and growth objective. The FCA should carefully consider the ways in which its proposals might adversely impact its secondary objective before it proceeds with implementing any changes to its enforcement regime.(Paragraph 78)
12.The FCA’s assertion in its first consultation that its proposals would be consistent with approaches taken by other international regulators was misplaced and misleading. It is notable that it has changed the narrative on this, from emphasising commonality with other regulators in its first consultation, to highlighting the uniqueness of their remit in the second. Concerns that announcing investigations at the outset will impact on the UK’s competitiveness and risk positioning the UK as an outlier are warranted, and the FCA must be transparent about the further feedback it receives on these issues. (Paragraph 88)
13.The lack of a cost benefit analysis has contributed to industry concern that the full impact of the proposals on firms and markets was not being suitably considered. Although there is no obligation for the FCA to provide cost benefit analysis on these proposals, the significance of the changes warrants one. Assessment of these proposals cannot simply be a case of ‘articulating the benefits’—it is incumbent on the FCA to demonstrate that a robust and detailed analysis of the costs form part of its evidence base for these proposals.(Paragraph 106)
14.Given that the enforcement investigation proposals represent a significant departure from the FCA’s previous approach, it remains our firm view that proposed changes of this extent necessitate a robust and detailed analysis of the direct costs to the sector. Wider factors in the UK’s growth and competitiveness should form part of this analysis. The need for such an assessment will be underscored if, as happened following the publication of the first consultation, the feedback the FCA receives on its second consultation reiterates the call for a cost benefit analysis—the FCA must be transparent about the views expressed on this issue. (Paragraph 107)
15.In light of the questions raised over the absence of a cost benefit analysis for the enforcement investigation proposals, and following the recommendations made in the Financial Conduct Authority Cost Benefit Analysis Panel’s report, the FCA should change its policy of producing a cost benefit analysis only for rules and guidance on rules. (Paragraph 108)
Next steps
16.Our key concern following the publication of the first consultation was that the FCA had not found an acceptable balance between realising the potential benefits of increasing transparency to help prevent consumer harm, and managing the potential risks to firms, individuals and market stability. The revised proposals contained in CP24/2 Part 2, in particular the inclusion of a consideration of the ramifications of an announcement on firms and the markets, and the improved mechanisms for allowing firms more time to make representations to the FCA, correct some significant gaps in the original consultation. (Paragraph 114)
17.The revised proposals, however, do not resolve the fundamental issue that by broadening the justification for proactively announcing investigations, it could increase the risk that investigations could be announced, reputational damage to firms could occur, media speculation could arise, but no regulatory action is ultimately taken. We remain unconvinced that the proposed public interest framework will allow for proportionate and consistent decision making over whether to announce an enforcement investigation early. (Paragraph 115)
18.These proposals should only be taken forward if the FCA can demonstrate that it has taken stakeholders’ concerns into consideration. We agree with Mr Rathi that the FCA should ensure that something like this is not repeated. The FCA should respond to the recommendations for further clarifications made in this report, and to the list of recommendations set out below. (Paragraph 117)
19.Regardless of the extensive changes which have now been published in CP24/2 Part 2, the initial failures in communication and engagement remain a concern. The FCA should review its internal processes and communication strategies employed throughout this process, including a review of how appropriate its internal processes were for consulting on a change of this scale. The FCA should publish a ‘lessons learnt’ document from this process, setting out where it went wrong and how it will prevent similar mistakes from occurring in the future. (Paragraph 118)
20.Efforts to reduce the time taken to complete investigations are clearly working and are welcome. The FCA should consider whether it should focus its efforts on expediting its investigative processes to increase transparency before making substantial changes to the wider enforcement framework. (Paragraph 119)
21.Following its second consultation, on CP24/2 Part 2, the FCA needs to be able to demonstrate that stakeholders’ concerns have been addressed by these new proposals and that the motivations behind the proposals have been clearly articulated and understood. This should include setting out the evidence to support this and, if necessary, additional amendments to its proposals to address any further concerns raised. We ask the FCA to report back to this Committee with its findings before the changes are implemented. (Paragraph 120)
22.If it is evident after the current consultation that the FCA has not found an acceptable balance between realising the potential benefits for consumer protection, and managing the potential risks to firms, individuals, and to market stability, it should not proceed with these proposed changes. (Paragraph 121)
23.We remain unconvinced that the FCA has adequately demonstrated how the proposals contained in CP24/2 Part 2 align with its secondary international competitiveness and growth objective. The FCA would have been wise to have consulted with the Government on the initial development of these proposals—that the previous Chancellor had to question whether the proposals were consistent with the secondary objective was deeply concerning. (Paragraph 122)
24.The FCA should engage with the Treasury over any future developments relating to its enforcement investigations proposals to ensure that they are aligned with the Government’s view of the secondary international competitiveness and growth objective. (Paragraph 123)