Lords report concludes that naming and shaming is not the way to regulate

The cross-party House of Lords Financial Services Regulation Committee is calling on the Financial Conduct Authority (FCA) to not proceed with its plans to routinely announce enforcement investigations early if, after the FCA’s second consultation closes, concerns have still not been addressed.
 
Following its inquiry on the FCA’s consultation paper on publicising enforcement investigations, the Committee, which was established last year, has today published its first report, Naming and shaming: how not to regulate.
 
The Committee concluded that the FCA has not made a convincing case for a change to its existing powers, which already allow it to announce an enforcement investigation early in exceptional circumstances. Respondents to the Committee’s Call for Evidence pointed to the lack of evidence provided by the FCA to justify the shift.
 
If the FCA presses ahead with these changes, it could increase the risk that investigations could be announced, reputational damage to firms and individuals could occur, media speculation could arise, but no regulatory action is ultimately taken. The Committee remained unconvinced that the proposed public interest framework will allow for proportionate and consistent decision making over whether to announce an enforcement investigation early.
 
The FCA process has been singled out by the Committee for criticism, particularly the lack of engagement with financial services firms beforehand and the failure to give any prior warning to industry that the consultation was forthcoming.
 
Lord Forsyth of Drumlean, Chairman of the House of Lords Financial Services Regulation Committee, said:
 
“It was incumbent on the FCA to make a strong and unequivocal case for why such a fundamental change was needed and it has failed to do that. Its consultation on the changes has been an abject failure and even the FCA Chairman acknowledged this has not been the FCA’s "finest hour".
 
“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.
 
“The FCA told us that the average duration of investigations is around three to four years and in 56 per cent of cases no further action was taken. If it presses ahead with its proposals on past performance it could mean that half of the firms it investigates, and the people involved in them, will have their reputations unnecessarily and unfairly damaged. This is not acceptable.”
 
The Committee’s other findings and conclusions include:
 

• The FCA’s consultation prompted an immediate and widespread backlash from across the financial services sector and from legal firms, and even drew criticism from the previous Chancellor of the Exchequer. The Committee was concerned at how surprised the FCA was to the reaction its consultation generated and how it demonstrated a disconnect between the FCA’s senior leadership and the sector it regulated.
• Witnesses were worried that the UK was at risk of becoming an international outlier as no other jurisdiction routinely publicise investigations in the way the FCA is proposing. The Committee were warned about the potential negative impact of the proposals on the FCA’s secondary growth and competitiveness objective. Fears were expressed that they could undermine the UK’s attractiveness as a place to invest and position the UK as an international outlier.
• Despite being asked to carry out and publish a cost benefit analysis (CBA), the FCA has thus far refused to do so on the basis that it only does CBAs for rules and guidance on rules. The Committee recommends that the FCA changes this policy and practice.