FCA Naming Firms under Probe May “Cause Circumstances to Spiral out of Control”

The United Kingdom’s Financial Conduct Authority (FCA) recently revealed its plans to name companies under investigation once it opens a formal probe. I must say that this intended move by the regulator is troubling. The FCA claims that this will enhance deterrence and will “enable firms to…[put] their houses in order… at an earlier date,” but I find both rationales unconvincing.

A Counter View to FCA’s Plan

Deterrence is a key factor in enforcement, but it is not a goal that stands alone. I am sure that most people would agree with me that setting a mandatory heavy jail sentence for anyone who operates a trading platform without a license will probably create significant deterrence. So, why aren’t there any jurisdictions that impose such a sanction under these circumstances? The answer is that such a sentence is unreasonable and problematic in many aspects, and therefore, we decide to “pay a price” on the deterrence side, in favor of other legitimate considerations.

With regard to the FCA’s initiative, deterrence will probably grow, but it comes with a price. It is currently understood that approximately 65% of FCA investigations close without penalties or charges. This figure may seem very high at first, but in fact, it reflects the real nature of enforcement proceedings.

We’ve issued 22 new #FCAwarnings to unauthorised and clone firms in the last week.

Protect yourself and find all recent warnings https://t.co/0qLeqfKYJ0 pic.twitter.com/7bPv5BbPn1

— Financial Conduct Authority (@TheFCA) February 23, 2024

The Process of Initiating a Formal Investigation

The regulator starts off by receiving a complaint, a tip, or a piece of information that may indicate wrongdoing and commences an inquiry. Typically, if the inquiry points to more suspicious or otherwise unexplainable circumstances, a formal probe will be announced. Only then will the main suspects be questioned, additional evidence will be collected, and in many cases, good and innocent explanations might be provided.

It’s a lot like putting together a puzzle with 1,000 small pieces, except that you don’t have the picture you are trying to put together in front of you, so the exercise is a lot harder.

Therefore, by definition, you will have a lot of inquiries and probes that start off based on certain assumptions but end without claims or charges because it turns out that those assumptions were wrong.

Publishing the names of companies being investigated is, in effect, the public shaming of businesses that may very well not be charged at all because they did nothing wrong. This is unjust, but it is also wrong from a public policy perspective.

The FCA has spoken of enhancing transparency, but the only thing they will be doing is enhancing confusion. The public doesn’t need to know everything that the regulator knows simultaneously. The public will always have to assume the worst, so it will view each company being investigated as guilty and will always assume that that company’s conduct was the worst that can be imagined.

We already know that actually, most of these companies will not be sanctioned or charged at all. But, more importantly, what will the public do with the assumption that companies on the “opened investigations list” are all guilty under the worst circumstances? They will stop doing business with these companies, causing these companies to suffer losses and sometimes drive them to liquidation. In many cases, by doing this, companies lose the ability to compensate harmed clients or put together a repayment and restoration plan.

Putting Houses in Order

This brings me to the second reason for the FCA’s disclosure initiative, enabling companies under investigation to put “their house in order.” Indeed, this is an important goal, but achieving it doesn’t require public announcements of investigations.

In many cases, companies being investigated know about the investigation, and the responsible reaction of boards of directors to such a case will always consist of “putting their house in order.” Companies under investigation are always advised to revisit their practices and take remedial action in order to ensure that all lessons from the unfortunate circumstances that caused the investigation are learned and that wrongdoing won’t happen again. Companies don’t need their names published in this context in order to take such remedial action.

In fact, publication can often cause circumstances to spiral out of control, causing directors and key good actors within the company to leave and clients to abandon ship abruptly, sometimes even leading to the liquidation of the company, hurting its creditors and shareholders.

In short, I believe that regulators shouldn’t publish information just to demonstrate to the public that they are working. We all want to believe that regulators are constantly monitoring the markets and looking out for the bad actors.

There is a reason for the presumption of innocence, and current statistics show that the majority of investigations will end without any sanction or charge, so this presumption is not merely a theory. It is real. On the other hand, publication has a lot of ramifications, some of which are harmful to the public. I hope the FCA revisits its initiative.