As part of the new financial services regulatory framework introduced in April 2013, the Financial Conduct Authority – successor to the Financial Services Authority – has the power to issue warning notices. Whilst the FSA had a similar power, what is significant about the new regime is when the notices can be issued: it is now proposed that individuals under investigation may be identified before the FCA’s investigation has been concluded, i.e. before any decision that there has in fact been any wrongdoing.
The driver behind these enhanced powers is said to be the wish to promote greater transparency in enforcement proceedings, something the policy makers believe will strengthen the FCA’s strategy of credible deterrence. But at what cost?
The FCA is required to consult those to whom the warning notice is to be given/copied before its publication and must not publish a notice if it believes that doing so would (amongst other things) be “unfair to the person with respect to whom the action was proposed to be taken”. Since it is difficult to see how it could ever be said to be fair to publicly name and shame an individual and/or their employer before an investigation has been concluded and a final determination of guilt made, it is equally difficult to see how the FCA will approach this question in practice. Its consultation paper makes it clear that publication will not be considered unfair merely because it could have a negative impact on a person’s reputation, and even goes so far as to admit that such damage “is an inevitable consequence of publication”. Paragraph 2.17 of the consultation paper suggests that you would not get to “unfairness” for these purposes without material impact on health or disproportionate loss of income or livelihood. In other words, it is proposing the right to do serious and potentially irremediable harm to a person’s reputation and hence career without there having been any finding of culpable conduct on his part. Quite what a proportionate loss of income or livelihood would be in those circumstances is not explained, and so hard to understand.
The information to be set out in a warning notice includes the name of the individual and/or firm under investigation and the nature of the FCA’s concerns. Given that the purpose of the notice is to inform consumers, firms and market users, the need to ensure those concerns are clearly understood is likely to mean that they appear quite stark and, necessarily, serious. The specimen warning notices in the Consultation document confirm this to be the case. The risk of reputational damage – both for individuals and their employers – is clearly huge and could in many cases prove career-ending for individuals and/or have a catastrophic impact on businesses. The idea that in those cases where it decides against imposing a sanction following completion of its investigation, the FCA can rectify any such damage simply by publishing its eventual findings is, with respect, naïve in the extreme. The individual’s clients (and hence livelihood) would be long gone by then. The “no smoke without fire” principle is alive and well in small markets like the financial services world.
Similarly, the FCA also appears to assume that a firm whose employee is suspected of wrongdoing will stand by him. This of course, ignores the fact that the firm may itself have concerns about the employee’s conduct and may have already started its own internal investigation/disciplinary proceedings. It also ignores the probability that if the individual loses his clients or market reputation as a result of such a notice, the employer may well dismiss on those grounds regardless of its belief or otherwise in his underlying culpability.
Employers already face a difficult balancing exercise where third parties such as the Police are investigating individuals, and are often forced either to postpone their internal proceedings or to impose disciplinary sanctions on the basis of the information then available to them, something which risks making any dismissal unfair. Unless the FCA is prepared to consider this as part of its approach before issuing a warning notice, for employers in the financial services sector, this balancing exercise looks set to become more difficult still. How are they supposed to act when the FCA says publically both that it believes Mr X to have breached one or more important rules and at the same time that this is not necessarily its final position?