Last month the U.K.’s Financial Conduct Authority (FCA) issued Consultation Paper CP24/2, suggesting a new approach to disclosure of enforcement investigations. This proposal, a notable departure from current practice, would permit the FCA to publicly identify firms and individuals at the initiation of any investigation. This represents a significant policy shift, introducing considerable risk for investment management firms worldwide. The FCA is inviting feedback on this proposal until April 30th, highlighting the potential for substantial changes in regulatory practices.
Why is this an unwise idea? Because the FCA publicizing investigations at their initiation could result in immediate reputational damage to firms and individuals, with severe damage to investors occurring well before any conclusions are reached.
An estimated 65 percent of FCA enforcement cases result in no action, underscoring the potential for unjust damage to those investigated. Reports by Akin Gump further detail that the FCA typically has between 100-200 open investigations annually, suggesting a broad impact if the proposal is implemented.
As James Hopegood, Director of Asset Management Regulation for the Alternative Investment Management Association (AIMA), notes “this is a departure from the FCA’s long standing stance of publicizing enforcement at its conclusion. It is a surprise there is no cost-benefit analysis to support it.”
The rationale behind the FCA’s proposed strategy is to amplify the deterrent effect of its enforcement activities by making them more visible via public announcements. However, this approach carries the risk of significant unintended consequences, first to named firms and individuals—and ultimately to investors. For example, premature disclosure may lead to competitive disadvantages, with rivals potentially acting against the interests of the named firms. Employee morale and recruitment could suffer, consulting firms might caution against involvement with the implicated entities, and immediate investor withdrawals could introduce undue financial strains.
Furthermore, even if an investigation concludes without finding any wrongdoing, the initial damage caused by public disclosure is difficult to reverse. Media coverage, FCA’s press release and Google search will forever show the initiation of an investigation. The impact on smaller firms could be particularly devastating, potentially driving them out of business due to the resource-intensive nature of navigating the scrutiny of an FCA investigation.
Despite the FCA’s best intentions, there are concerns about its grasp of the proposal’s broader implications, particularly in light of past critiques. One such example stems from the independent Davis Inquiry, which highlighted specific FCA actions as “high risk, poorly supervised, and inadequately controlled.” This history of oversight challenges amplifies worries about the tenability of the proposed enforcement disclosure strategy.
Critics suggest that the FCA consider alternative methods to signal regulatory concerns without compromising firm confidentiality or endangering investors. For instance, the FCA currently issues newsletters with topics of concern and the U.S. Securities and Exchange Commission (SEC) issues risk alerts to effectively communicate issues of public interest without identifying specific firms or individuals prematurely.
Communications professionals, including private capital industry expert Steve Bruce from ASC Advisors, which represents over 50 alternative investment management firms, expresses apprehension over the proposal – “While enforcement is important for the strength of our industry, this new approach is destabilizing to investment firms and detrimental to investors.”
We all acknowledge the importance of regulatory enforcement for industry integrity, but the FCA’s publicity proposal, as it stands, may do more harm than good, adversely affecting both firms and investors without necessarily enhancing regulatory outcomes.
