Publication of enforcement action: only after Warning Notice but still a bad idea

25 February 2011

On Thursday morning last week, I caused a stir with my reaction to the leaked news (in an FT interview) about the new FCA's planned approach to publication of enforcement cases.

Although criticised by some consumer-focussed editors, my comments were consistent with subsequent statements from other City law firms, industry figures and AIFA.

I have since read the details in the Treasury's consultation paper that was subsequently published on Thursday afternoon.  I am somewhat relieved to note that the proposal is limited to making public enforcement action only once a Warning Notice has been issued by the RDC and only then in circumstances where it serves the FSA's consumer protection objective.  This does at least mean that a quasi-independent body will have made an evidence-based assessment of the case before publication.

However, I am still troubled.  We are, after all, talking about firms or individuals (targets) who have, hitherto, been authorised by the FSA and considered fit and proper, approved persons.  I do not accept the analogy with announcements about criminal charges laid by the Police: many regulatory 'crimes' and breaches occur by omission and, given the FSA's fixation on senior management, that omission can often be mere failures in oversight by otherwise competent and decent personnel.

I can see the reasons for the FSA's tough-talk agenda, but proposals must be rooted in fairness and the need to do justice in individual cases.  It is implicit in the idea that publication of enforcement action is in the interests of consumer protection that the target has done something from which consumers require protection.  In circumstances where the FSA admits that cases are discontinued after the Warning Notice stage (and the proposal is to require publication of the 'notice of discontinuance' if the Warning Notice has previously been made public), it goes without saying that innocent people may suffer irreparable reputational damage and, with that, catastrophic financial loss. I note a report in yesterday's Money Marketing that of 114 enforcement cases in 09/10, 79 resulted in public disciplinary action and 35 were dropped after the Warning Notice stage.

Although the FSA has a complaints process (COAF) with limited compensatory powers, as the Government appointed regulator it benefits from statutory immunity and so any firm damaged by wrongful publication would have little prospect of recovering its losses.

Furthermore, the plan to publish in certain circumstances will require a written policy as to when publicity is likely.  This will inevitably spawn satellite litigation in many enforcement cases because the main concern for both regulator and target is often, respectively, the deterrent effect and the reputational damage of publicity.

The FSA would also need to revisit the confidentiality obligations surrounding enforcement action.  Statute prevents targets from revealing information received from the FSA during the enforcement process and the FSA usually also requires them to keep the fact of the enforcement confidential.  Surely targets must be allowed to prepare their response or pre-empt negative publicity with their own PR?

Faced with the threat of adverse publicity, many firms prefer to settle the enforcement action and agree a more favourable Final Notice.  Although the FSA will not admit such a motive, these proposals will only increase the incentives to settle.  Targets may have little option but to settle or consider a voluntary variation of permission (VoP) by which they agree not to carry on the business activity under investigation.  On Monday, the FSA heralded its use of the VoP in agreeing a consumer redress scheme with Lloyds HBOS (the details of the VoP were published yesterday).  That was published in accordance with guidance on s.404 consumer redress schemes but a VoP could be private.

When the FSA's Enforcement process was (re-)designed a huge amount of care was taken to achieve the correct balances - between speed and rigour, between protections for those under investigation and the need to achieve outcomes quickly, between the need to maintain market and consumer confidence and the desire to protect the reputations of individuals and firms against whom allegations have not even been made.

These latest proposals, in my view, cross the line, look over-hasty and ill thought-out and will promote the impression that the City is not a business-friendly environment in which to ply one's trade.

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