The cross-party House of Lords Financial Services Regulation Committee is calling on the FCA to not proceed with its 'name and shame' proposals if concerns have still not been adequately addressed.
First announced last year, the regulator has proposed identifying firms at the outset of an investigation, using a 'public interest' framework, providing the firm with 24 hours’ notice that it is doing so.
However, 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.
The Committee says the changes "may expose firms to significant reputational damage before the facts of the case have been established", adding that the proposals also risk "positioning the UK as an international outlier in a manner that appears misaligned with the FCA’s secondary competitiveness and growth objective".
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.
The Committee noted that the initial 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 says it "demonstrated a disconnect between the FCA’s senior leadership and the sector it regulated".
It is now asking the FCA to withdraw the proposals "if it has not found an acceptable balance between realising the potential benefits for consumer protection and managing the potential risks to firms, individuals, and market stability".
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.”
