In February 2024, the FCA announced a consultation on proposed changes to its Enforcement Guide aimed at bringing an increased focus, pace and transparency to its investigations.
The proposals included changes to the way the regulator publicises enforcement investigations. This would enable the FCA to publicly announce the opening of enforcement investigations and include in any announcement the identity of the firm under investigation if it considered this was in the public interest. The FCA believes the suggested approach will be more transparent and improve trust in the financial system.
The proposed changes were met with considerable opposition from the financial sector since the announcement of an investigation is likely to be reputationally detrimental to the firm in question. As c.65% of all FCA investigations ultimately lead to no further enforcement action, many felt that the early publication of the investigation would cause unjust detriment.
Furthermore, if the regulatory process moves slowly, a public investigation could be hanging over an organisation for quite some time before a potential exoneration. Additionally, the details of any investigation remain confidential so, while the public is aware that investigation is ongoing, the subject of the investigation has limited scope to respond publicly or provide further explanation. This hampers the firm's ability to manage the situation and mitigate damage to its reputation and business.
Trade body UK Finance described the proposal as being potentially "harmful to wider financial stability" and as "undermin[ing] our financial services industry". The then-Chancellor of the Exchequer, Jeremy Hunt, agreed, considering the proposals to be inconsistent with the regulator's secondary duty to promote growth and competitiveness within the UK's financial industry.
On 28 November 2024, the FCA, having "listened to a lot of the feedback … especially from the City", announced a new consultation which made "significant changes" to its original proposal, namely that:
- The impact of an announcement on the affected firm would form part of the consideration process (something notably omitted from the original proposal).
- Firms would be given 10 business days' notice to make representations to the FCA in response to the proposed announcement. The initial proposal provided for 1 day's notice.
- The impact on public confidence in the financial system would be considered when deciding on an announcement.
- Proactive announcements of investigations ongoing when the changes are effected will not be made, although investigations already in the public domain may be confirmed.
This clearly represents a 'watering-down' of the original proposal. It is aimed at placating the groundswell of objection to the original proposals. However, it does not change the core proposal to publicise the enforcement investigations at an early stage, and there remains concern that this might be nothing more than mere window dressing that does not change the FCA's intended approach in substance.
Although revised, the proposal nonetheless retains the potential to impact the D&O/FI insurance market. Policyholders and Insured Persons may seek indemnity under policies at an earlier stage resulting in the front-loading of associated costs. These are likely to include legal costs incurred in making initial representations to the FCA and public relations (PR) costs in response to any proposed announcement.
On the other hand, the publication of enforcement investigations may encourage the FCA to resolve matters more quickly. It does not reflect well on the regulator if issues are allowed to publicly stagnate and become protracted.
The potential impact of the proposals on D&O/FI insurance and the wider financial services industry remain to be fully seen. The FCA has asked for feedback on its revised proposals and the new consultation will run until 17 February 2025. The regulator plans to decide on the proposals in the first quarter of 2025.
