By David Postings
Improving transparency is well and good, but FCA plans to name firms under investigation will do damage to innocent firms, writes UK Finance chief executive David Postings
The principle of being innocent until proven guilty is a cornerstone of our approach to justice, which is why the FCA’s proposals on naming and shaming firms before fully investigating have sent shockwaves around the financial services industry.
This is part of the FCA’s plans to radically change the way they would carry out enforcement activity, saying they want to be more transparent.
The issue has galvanised the financial services sector in opposition and our response to the consultation is one of the most robust in my time at UK Finance. The House of Lords Financial Services Regulation Committee has also raised concerns directly with the FCA.
On the face of it, it’s hard to argue with transparency – if someone has done nothing wrong, why should they be concerned? We also agree with the FCA’s desire to protect consumers from harm and the approach of aiming to prevent harm before, rather than enforce after.
However, the issue is the majority of FCA investigations conclude without any enforcement activity – currently, around 65 per cent are closed with no further action. In many cases, this decision takes years to reach.
Within the FCA’s plans, therefore, is a fundamental disconnect between the stated aims and how these things would operate in practice.
While the FCA says the fact they might announce an investigation doesn’t mean they will have actually decided whether there has been misconduct, that’s not how it will be heard and reported on. Indeed, announcing a firm is under investigation will significantly and immediately impact reputation and value. Listed firms in particular will see their share price take a hit.
At the point of announcement, real reputational damage may be done before any meaningful evidence has been gathered. Relations with investors, customers, employees and other stakeholders are also likely to be impacted.
Many people will simply look at the fact an investigation has been opened and conclude: there’s no smoke without fire.
The problem is compounded by the speed by which information now travels and how quickly people react. Short headlines or comments on social media are unlikely to convey the full story or make clear that no action may ultimately be taken. Regardless of the investigation’s eventual result, damage will be done.
All of this could ultimately undermine market confidence in a firm or a group of firms operating in the same industry through contagion risk. At its most serious, this could also be harmful to wider financial stability.
Given the significant number of investigations which are closed with no further action, the potential harm is, I believe, wholly disproportionate to the FCA’s objective of increasing the transparency of its enforcement function. The fact that these proposals were announced without an accompanying cost-benefit analysis leaves the sector without any evidence that the FCA has taken this significant risk into account.
The FCA already has extensive powers, and they rightly investigate and take action against firms and individuals where they find evidence of misconduct.
There is a world of difference between a regulator saying it has thoroughly investigated an issue and then taken enforcement action as a result, versus an announcement saying a regulator is starting the process of investigating and that may or may not result in enforcement action at the end.
Much of what the FCA is seeking to achieve in terms of transparency could be achieved by publishing information anonymously through some other more generic and less intrusive mechanisms.
Last year, the government gave the FCA a new secondary competitiveness objective, which the regulator has stated it will embrace. In the consultation paper, the FCA say they believe these proposals are compatible with this new secondary objective. I disagree.
I believe these proposals do not advance the secondary competitiveness objective and instead risk actively harming the UK’s competitiveness and overall attractiveness as a global financial centre. There is no other G7 country that currently takes the approach on enforcement that the FCA is proposing.
I hope these arguments will result in the FCA changing tack. If not, this action will undermine our financial services industry and leave us as an outlier internationally.
