Unnecessary and Unclear - The shift from “exceptional circumstances” to a “public interest framework”
The proposed shift from announcing only in “exceptional circumstances” to announcing pursuant to the proposed new “public interest framework” is unnecessary.
We agree with the view expressed by the House of Lords Financial Services Regulation Committee in their recent report (the “FSRC Report”) that the existing “exceptional circumstances” test for making announcements set out at EG6.1.3 has been misinterpreted. It appears to us that the FCA has misconstrued its existing test as requiring that an investigation is exceptional in type compared to other types of investigations in their portfolio. However, this requirement does not exist. Rather, the test at EG6.1.3 permits an announcement if, when construed in the round, “exceptional circumstances” exist after having conducted a balancing exercise between the “potential prejudice” to the investigation subject(s) and one or more of the following factors in favour of disclosure:
- maintaining public confidence in the financial system or the market;
- protecting consumers or investors;
- preventing widespread malpractice;
- helping the investigation itself, for example by bringing forward witnesses; or
- maintaining the smooth operation of the market.
Our view is that the existing “exceptional circumstances” test, therefore, already enables the FCA to promote the stated objectives of its early announcement proposals – those being to protect consumers and preserve the integrity of financial markets. Crucially, it also does so with appropriate safeguards for investigation subjects. Any departure from the “exceptional circumstances test” is not necessary.
Further, we are concerned by the proposed framework for the new “public interest” test. The reformulated proposals in CP24/2, Part 2, include provisions to account for impact on (a) the firm involved and (b) public confidence in the market or financial system, but it remains unclear how the respective factors within the new framework will be weighted and whether some factors will be granted more weight than others. For example, at paragraph 4.10 of CP24/2, Part 2, the factors supporting publication appear to have a lower threshold for satisfaction than those against publication.
Of greatest concern to us, however, is the overarching shift in language from “exceptional circumstances” to “public interest”. Applying the overarching concept of “public interest” will provide firms with little protection when the FCA is weighing-up the nebulous list of factors in its “public interest” test. Indeed, our concern is that any instance involving press coverage or Parliamentary discussion will almost inevitably lead to a proactive announcement.
Unclear and Unfair – Notice mechanism and safeguards
We were pleased by the clarification in CP24/2, Part 2, that firms will “generally” be provided with a copy of a draft announcement and 10 business days’ notice to make representations, plus a further 2 business days’ notice of the decision to publish. There was deserved outrage in response to the original proposal to give firms no more than one business day’s notice of the decision to announce, so this is a marked improvement. However, we continue to have significant questions regarding the specifics of the proposed notice provisions and concerns regarding the lack of a credible and fair mechanism for firms and any identifiable third parties to make representations prior to the FCA making any announcement.
On the latter point, our understanding is that the current proposal is for the decision to announce to be made by the FCA’s Executive Director of Enforcement and Market Oversight, which by its very nature will not be independent or impartial. We continue to believe that a process similar to that of the RDC in relation to Warning Notice statements is needed.
Unfair – Risks to individuals
We are extremely concerned that individuals connected with investigations that are announced will become identifiable and, in due course, will be identified. We acknowledge the FCA’s confirmation that individuals will not “generally” be named in announcements, but fear that senior managers and other individuals within, and connected to, a firm under investigation will be identified through the Senior Managers and Certification Regime or otherwise. Our Response highlights specific risks pursuant to the ECHR and UK GDPR, as well as individuals “third party rights” under section 393 FSMA.
We remain highly concerned about the impact that these announcements will have on individuals caught-up in investigations that (history tells us) may go on for years. This may impact their ability to stay in post, employment prospects, and not least their mental health.
