Sara George, commercial litigation partner, Stephenson Harwood
Opinion: Financial regulator’s transparency policy is double-edged
21 March 2011
11 February 2014
17 June 2014
19 February 2014
7 August 2014
2 June 2014
The Government intends to give the new Financial Conduct Authority (FCA) power to publicise the fact that it intends to take enforcement action before the firm or individual concerned has had an opportunity to put its case.
The FCA will take over the investigation and enforcement powers currently exercised by the FSA. Most of the current FSA enforement investigators and lawyers will move over into the new organisation. New legislation will allow for the publication of a summary of the fact that a warning notice has been issued.
A warning notice is a statement of the alleged misconduct, the proposed penalty that the investigators are seeking to impose and marks the initiation of formal enforcement action. Many commentators point to the injustice of the proposals, which would mean individuals would be tarred in the court of public opinion, even if they were later acquitted of all charges. The FSA’s initial view is often not upheld in its entirety in fully contested cases.
However, in the current climate, we expect these proposals will become law. Consumer groups welcome increased transparency, while protests of injustice by financial services companies and those who represent them are regarded as self-interested and cynical.
UK regulators are seeking to emulate the approach of the US Securities & Exchange Commission (SEC), which publicises enforcement actions at an early stage, with companies coerced into an early settlement to limit the ongoing damage to their business, irrespective of the merits of the case against them. Publication is a litigation tactic as much as a policy, although the timing of such announcements by the SEC has been widely criticised as being motivated more by political expediency than by the merits of cases.
The new FCA may hope for more settlements and fewer contested cases, but this is unrealistic if it intends to bring cases against senior executives - major financial institutions may settle, but senior individuals facing loss of career and livelihood invariably fight. Companies may ultimately come to the conclusion that there is little point in paying substantial fines and negotiating a carefully worded notice of censure if all the material negotiated is then published by the FCA when commencing action against their directors and employees.
It is ironic that it is the same regulators now championing transparency who sought to ensure as little of their internal workings were open to scrutiny as possible. The FSA learnt to be a high political regulator. It interpreted the obligation to promote confidence in the UK financial services industry as including a duty to promote confidence in the FSA. Its senior management hired an extensive press relations team (located in the chief executive’s office). The FSA repeatedly challenged the rulings on disclosure made against it by the information commissioner and engaged in enthusiastic and exculpatory spinning of lost cases, poor supervisory decisions and Treasury Select Committee criticism.
Transparency will force people under investigation to operate on the presumption of adverse publicity. They will prefer this to be at a time and manner of their choosing. While the FCA will be unable to make any public statement until it has decided to issue a warning notice, a company has no such restrictions. In circumstances where it faces trial by media before it has a chance to put its case, it may wish to stimulate public debate and brief journalists, MPs and lobby groups. By the time the FCA is able to publish, the market could have been aware of the issue for more than a year.
The FCA may ask for investigations to be treated as confidential, but businesses may take a different view. Under the new regime, defendants may seek to embarrass the FCA by publishing information about the investigation that portrays the regulator as vindictive or incompetent. The market will draw its own conclusions on the merits of a case if regulators appear to be doing very little for extended periods of time. Transparency works both ways.