According to a report from the House of Lords Financial Services Regulation Committee, the FCA has “not made a convincing case for a change to its existing powers”, which allows it to announce enforcement investigation early in “exceptional circumstances”.
In 2024, the FCA said it was opening a consultation about how it communicated enforcement action, saying that increased transparency would build trust in the system, benefit firms and markets with clarity on what misconduct warrants an investigation, and support accountability.
The regulator opened a second consultation following feedback, which is due to close on 17 February.
The committee said the consultation had “prompted an immediate and widespread backlash” across financial services and legal firms, and it was “concerned at how surprised the FCA was to the reaction”, noting that it showed a “disconnect” between FCA’s senior leadership and the sector.
“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.
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“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,” it said.
The committee said it had singled out the FCA as there had been a “lack of engagement” with firms beforehand and “failure to give any prior warning to [the] industry that the consultation was forthcoming”.
There were also concerns from firms that the UK would become an “international outlier”, as other countries did not routinely publicise investigations, and it could have a negative impact on the FCA’s secondary growth and competitiveness.
The committee also said the FCA has refused to carry out a cost-benefit analysis, as this is only done for rules and guidance on rules.
The committee urged that the FCA should change this policy and practice.
Lord Forsyth of Drumlean, chair 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’.
“[Fewer] 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% 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.”
