The FCA's controversial new power to publish information at the warning notice stage of enforcement action is taking shape. A consultation paper published by the outgoing FSA has outlined the proposals for this new power, which will allow the FCA to publish information at a much earlier stage than has previously been permitted and, crucially, before the subject of that investigation has had an opportunity to challenge the FCA’s case against it.

Background

The FCA publishes details of statutory notices in enforcement actions to ensure the transparency of their decision-making and to maximise the deterrent effect of enforcement action. Until 2010, the earliest that the regulator could publish details of a statutory notice was when it issued a final notice at the conclusion of a case. In 2010 the publication stage was brought forward to when the Regulatory Decisions Committee ("RDC") issues a decision notice: that is, after the individual or firm concerned has made representations to the RDC in response to a warning notice, but before a final decision has been made.

Under new powers granted to the regulator by the Financial Services Act 2012, this publication stage is to be brought forward once again. The FCA will be able to publish certain information at the warning notice stage, before the individual or firm concerned has had the opportunity to make any representations about the case brought against them to the RDC. This new power will only apply in respect of enforcement action where a regulator is proposing to censure, fine or suspend a firm or individual.

The proposal

This new power will enable the FCA to make public the fact that it has begun formal disciplinary proceedings against a firm or individual. The information published will be on a more restricted basis compared with final and decision notices, which are published in their entirety, and will not normally include details of the sanctions proposed. The FCA will also make it clear that the warning notice is not the final decision, and that the subject has the right to make representations to the RDC. However, the published statement will contain sufficient information to identify the firm or individual and to enable consumers, firms and market users to understand the nature of the FCA's concerns.

The recipient of a warning notice will have the right to make representations to the RDC about the publication of the statement; this period is proposed to run for 14 days from receipt of the warning notice. The RDC will then decide on behalf of the FCA whether to publish the information, although it will not do so if it considers that publication would be:

  • unfair to the person with respect to whom the action is proposed to be taken;
  • prejudicial to the interests of consumers; or
  • detrimental to the stability of the UK financial system.

The consultation paper sets out a number of scenarios as examples of when the regulator will and will not publish information at the warning stage. However, the paper makes clear that the regulator will normally not decide against publishing a warning notice statement on grounds of unfairness solely because it is claimed that publication could have a negative impact on a person's reputation (as this is an inevitable consequence of publication). Anyone relying on the "unfairness" exception must provide clear and convincing evidence of how unfairness will arise or how they will suffer a disproportionate level of damage. The paper suggests that to satisfy the unfairness exception, an individual would need to demonstrate that publication at this stage could materially affect their health, result in a disproportionate loss of income or livelihood, prejudice criminal proceedings to which they are a party or give rise to some other equal degree of harm.

Scenarios where the regulator will probably not publish information include where:

  • the subject's physical or mental health would seriously deteriorate;
  • the physical or mental health of a close family member would be adversely affected (although this decision is less straightforward); and
  • publication would cause a loss of custom which in turn would lead to bankruptcy or insolvency and staff redundancies.

Scenarios where the regulator probably would publish information include where:

  • the subject or their family are distressed by media intrusion;
  • a subject's career prospects would be irrevocably damaged; and
  • the subject argues that is unfair to publish information at this point in the enforcement process.

The paper indicates that, while the FCA will consider the circumstances of each case, it expects normally to publish information about the warning notice subject to the three exceptions mentioned above.

Comment

Responses to the consultation paper are due by 18 June 2013, following which the FCA will review the comments and issue final rules and a Policy Statement. The proposals are likely to have a significant impact on the financial services industry should they be adopted in their current form:

  • by providing minimal information about the nature of the allegations and the proposed sanctions, the FCA will create unnecessary uncertainty and speculation in the market, thus increasing the potential for reputational damage.
  • this potential for reputational damage is likely to place further pressure on firms to settle at the earliest possible stage before the matter is referred to the RDC.
  • if the matter does progress to the RDC, it will mean more work for lawyers seeking to argue that their client falls within one of the relevant exceptions, and will require more defensive public relations work at an earlier stage.

There is no redress for subjects of the significant minority of warning notices that do not result in a decision notice. In such cases the FCA has stated that it will make it clear on its website that the warning notice no longer applies; this is likely to do little to alleviate the reputational damage already suffered.