Cross-Border Implications Of The FCA’s Consultation Paper On Publishing Information About The Opening And Progress Of Investigations – Financial Services

Last month, the United Kingdom Financial Conduct Authority (FCA)
announced that it is considering new procedures under which it
would publicly identify firms that are under investigation as soon
as the investigation has been opened.¹ The consultation
period closes on April 30, 2024. (See our recent client alert here). The proposed new approach—which,
if adopted, would be a dramatic break from historical
practice—would result in public disclosure before any charges
have been filed and before the FCA has determined whether the firm
actually did anything wrong. In this article, we draw comparisons
between the investigation disclosure regimes in the U.K. and the
United States. We also provide commentary on the FCA’s
proposals.

U.K. Approach to Disclosure of Investigations

In the U.K., the FCA’s current approach is to publish
information about active investigations only in “exceptional
circumstances.” Accordingly, it is not generally until the
conclusion of an investigation, and upon a formal determination of
wrongdoing, that the FCA will publicize information about the
investigation and its findings. This information will typically be
contained in a Decision Notice on the FCA’s website and a
related press release.

Notwithstanding some recent instances of the FCA making
announcements about ongoing investigations, public communications
on investigations have been infrequent and uncontroversial. For
example, after a firm issued a public disclosure announcing that it
had been issued a draft Warning Notice, the FCA confirmed the same
in a press release.²

The new FCA proposal, contained in the Consultation Paper that
invites public comment, would mark a radical departure from current
practice. The FCA proposes to:

1. Make a public announcement that it has opened an investigation
   into a firm with details including the name of the firm, ordinarily
   with one business day’s notice to the firm.




2. Publish updates on the investigation, including closure.

In addition, the Consultation Paper includes proposed amendments
to the FCA’s Enforcement Guide to remove material that no
longer reflects current practice (e.g., references to private
warnings and preliminary findings letters).

In the Consultation Paper, the FCA asserted that these proposed
changes would have “significant benefits,” all of which
were articulated from the perspective of the FCA as
opposed to the firm under investigation. For example, the FCA
posited that early public disclosure of investigations would help
to build trust in the system, let the public know the FCA is
“on the case” and support the FCA’s accountability by
“shining a light on the efficiency and pace of [its]
investigations.” The agency also asserted that if it
identifies the types of potential misconduct that warrant a formal
investigation, other firms will “learn lessons, raise their
standards and think twice about doing the same at a much earlier
stage than currently.”³

As outlined in the Consultation Paper, in any particular case,
the FCA would evaluate a series of non-exhaustive factors before
making a public disclosure, including: (a) protecting the interests
of customers, consumers or investors; (b) encouraging
whistleblowers or witnesses to come forward; (c) addressing public
concern or speculation and providing reassurance that the FCA is
taking appropriate action; (d) deterring future breaches; and (e)
protecting and enhancing the integrity of the UK financial
system.⁴ Notably absent from this list of factors is any
balancing standard to take into account potential harm or
unfairness to the firm under investigation.

At least at present, the FCA is proposing to make public
disclosure only regarding firms that are under investigation, and
not regarding individuals.⁵

U.S. Approach to Disclosure of Investigations

In the U.S., there is a longstanding and widely-accepted
tradition of treating investigations as confidential until the time
at which a charge is filed in court. This approach includes both
criminal and civil enforcement proceedings, and it applies equally
to firms and individuals.

For example, under Rule 6(e) of the Federal Rules of Criminal
Procedure, the government is strictly prohibited from making any
public disclosure of matters occurring before a grand jury, except
in narrow circumstances and with prior judicial approval.
Consistent with this rule of law, the U.S. Department of Justice
(DOJ), which investigates criminal corporate misconduct, rigorously
protects the confidentiality of its investigations and work, which
involves “non-public, sensitive matters.”⁶ As
explained in the DOJ’s Justice Manual, “[d]isseminating
non-public, sensitive information about DOJ matters could violate
federal laws, employee non-disclosure agreements, and individual
privacy rights; put a witness or law enforcement officer in
danger; jeopardize an investigation or case; prejudice the rights
of a defendant; or unfairly damage the reputation of a
person.”⁷ Absent exceptional circumstances, the DOJ
does not disclose or even acknowledge a criminal investigation
unless and until it brings criminal charges.

The U.S. Securities and Exchange Commission (SEC) follows a
similar practice. The SEC’s Enforcement Manual mandates
confidentiality during the investigation process: “All
information obtained or generated by SEC staff during
investigations or examinations should be presumed confidential and
nonpublic unless disclosure has been specifically
authorized.”⁸ The SEC’s Division of Enforcement
undertakes hundreds of investigations each year, many of which are
closed without any finding of wrongdoing. In recognition of this
fact,”[i]t is the general policy of the SEC to conduct its
investigations on a confidential basis to preserve the integrity of
its investigative process as well as to protect persons against
whom unfounded charges may be made or where the SEC determines that
enforcement action is not necessary or
appropriate.”⁹ As with the DOJ, the SEC publicly
announces an investigation only after it has filed charges in a
court or in an administrative tribunal.

Discussion

The FCA’s Consultation Paper raises serious concerns and
threatens grave unfairness to firms that find themselves under
investigation. Furthermore, given the prevalence of cross-border
investigations in today’s global financial markets, the
consequences of the FCA’s proposed new rule would reverberate
in the U.S., Europe and elsewhere in the world. Issues with the
FCA’s proposal include:

• The severe risk of premature and unfair
  prejudice—including negative publicity, reputational harm and
  follow-on private litigation—for firms as to which no charges
  are ever brought. As recently cited by the FCA’s Joint
  Executive Director of Enforcement, around two-thirds of
  investigations opened by the FCA lead to no further regulatory
  action being taken.¹⁰ This scenario calls to mind former
  U.S. Secretary of Labor Raymond Donovan, who famously asked after
  being exonerated: “Which office do I go to to get my
  reputation back?”




• Potentially unintended consequences to market stability as a
  result of asset price movements. For example, asset management
  firms may receive significant redemption requests from investors
  and be required to divest assets to meet the redemptions; or
  issuers of listed securities that presently do not publicize
  investigations at an early stage may experience price fluctuation
  as the market reacts to news of a regulatory investigation.




• The lack of any practical means for a firm to fairly respond to
  a disclosure by the FCA, such as rebutting the investigation or
  putting it into context. An announcement that the FCA has opened an
  investigation would, in many cases, open the floodgates to
  questions from investors, business counterparties and the press,
  yet a firm under investigation would face significant constraints
  in offering any substantive response. These pressures would be
  exacerbated by the very short response period of only one business
  day, combined with the lack of any clear process or practical means
  for a firm to challenge an intended disclosure by the FCA.




• Potential conflict with the confidentiality requirements
  applicable to the FCA under the Financial Services and Markets Act
  2000 (FSMA), which requires the FCA to treat as confidential
  information it receives from firms.




• Although the FCA proposal excludes naming individuals under
  investigation, there may be situations where individuals are
  identifiable based on the description of the investigation. FSMA
  grants individuals “third party rights” under section 393
  by the time a Warning Notice is issued, but the FCA does not
  address these rights in its Consultation Paper.




• The tension between the FCA’s Principle 11—which
  requires firms to self-report to the FCA “anything relating to
  the firm of which that regulator would reasonably expect
  notice”—with the FCA’s new publication policy.
  Principle 11 is aimed at requiring firms to deal with their
  regulator in an “open and cooperative way,” but public
  disclosure of investigations would place strains on that very same
  relationship.

In the Consultation Paper, the FCA took the affirmative position
that it will not consider the detrimental effects
publication may have on the firm.¹¹ It is not clear how
this position aligns with investigation subjects’ reasonable
expectations of privacy (especially in criminal cases brought by
the FCA) or with rights protected by the Human Rights Act 1998, and
may be subject to legal challenge.

More fundamentally, it is unclear why the FCA considers that it
needs to name firms under investigation in order to achieve its
stated aims. The regulator could pursue alternatives such as more
timely and detailed reporting of the pace and efficiency of
investigations as well as subject matters under investigation,
“hot topics,” enforcement trends (similar to its Market
Watch publication) and—of course—detailed publication
of the alleged underlying facts and circumstances whenever a breach
of rules or regulations is found to have occurred. Leaders of the
SEC and DOJ regularly issue reports and make speeches on these
topics, and both agencies issue detailed and comprehensive press
releases once they have determined to file charges.¹² As
a result of these practices, both agencies generally have been able
to strike an appropriate balance between fairness and transparency
in their public communications about investigations. While the
Consultation Paper refers to the Monetary Authority of Singapore as
an example of a regulator that has adopted a similar disclosure
policy, a better benchmark would be the U.S., given the size and
significance of the U.K. as a financial center. The experience in
the U.S. suggests that the FCA can achieve its goals of increased
public awareness and transparency without compromising the
fundamental values of fairness and due process that underlie the
practice of investigative confidentiality.

Footnotes

1. FCA Consultation Paper, available at
https://www.fca.org.uk/publication/consultation/cp24-2.pdf.

2. https://www.fca.org.uk/news/statements/fca-statement-regarding-potential-enforcement-action-against-link-fund-solutions-ltd.

3. Consultation Paper at 2.

4. Id. at 13-14.

5. Id. at 2.

6. See DOJ, Justice Manual,
§§ 1-7.100-7.400, available at https://www.justice.gov/jm/jm-title-1-organization-and-functions
(“DOJ, Justice Manual”).

7. See DOJ, Justice Manual,
§ 1-7.100.

8. See SEC Enforcement Manual,
§5.1, available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf

9. https://www.sec.gov/complaint/info; see
also SEC Enforcement Manual, §5.1.

10. https://www.reuters.com/world/uk/uks-fca-plans-lift-veil-investigations-early-discourage-misconduct-2024-02-27/

11. Consultation Paper at 14.

12. See, e.g.,
Department of Justice Fraud Section’s 2023 Year In Review,
available at https://www.justice.gov/criminal/media/1339231/dl;
Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch.
Comm’n, Remarks at Ohio State Law Journal Symposium 2024 (Feb.
23, 2024), available at https://www.sec.gov/news/speech/grewal-ohs-022324?utm_medium=email&utm_source=govdelivery;
Deputy Attorney General Lisa Monaco Delivers Keynote Remarks at the
American Bar Association’s 39th National Institute on White
Collar Crime (Mar. 7, 2024), available at https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-keynote-remarks-american-bar-associations;
United States Attorney Announces Charges Against FTX Founder Samuel
Bankman-Fried (Dec. 13, 2022), available at https://www.justice.gov/usao-sdny/pr/united-states-attorney-announces-charges-against-ftx-founder-samuel-bankman-fried.

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