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The FCA confirms its approach to publishing information about enforcement warning notices

 

23 October 2013

The FCA has confirmed that it will start to publish information about warning notices it issues in enforcement cases on or after 15 October 2013.  

When deciding whether to publish information relating to warning notices, the FCA will start from the presumption that it will normally be appropriate to publish on its website a summary of the allegations made against a firm or an individual in an enforcement warning notice.

If the subject of the warning notice is a firm, it is also likely that the FCA will identify that firm in the information it publishes. However, if the subject of the warning notice is an individual, the FCA will only identify that individual in exceptional circumstances, for example, if it is necessary to do so in order to prevent or dispel market rumours as to the identity of the subject of the warning notice. Even if the FCA decides not to identify an individual who is the subject of a warning notice, it may still publish the identity of the firm that they are employed by even if that firm is not the subject of an FCA enforcement investigation.

In the event that the FCA thinks that it is appropriate to publish information relating to a warning notice, the subject of the warning notice and any parties it is copied to will be notified of this. They will also be given 14 days to make representations to the FCA if they wish to oppose the FCA’s decision to publish this information. It is likely that such representations will focus on whether it is fair or otherwise appropriate for the FCA to publish information about a warning notice.

If, having taken into account any representations received on the subject, the FCA still thinks that it is appropriate to publish information about a warning notice, this information will be published on its website. In the event that an enforcement case about which information has been published at the warning notice stage is subsequently discontinued, the FCA has stated that it will not remove this information from its website. Instead, the FCA will take steps to make it clear that the action has been discontinued but will not give reasons for the discontinuance.

Background

Until 2010, the Financial Services Authority (the FSA) could only publish details about enforcement action against a firm or an individual when a final notice was published at the conclusion of a case. In 2010, the point at which the FSA could publish information about its enforcement cases was brought forward to the stage at which the FSA’s Regulatory Decisions Committee (the RDC) issued a decision notice (i.e. after the firm or individual had made representations to the RDC in response to a warning notice but before the Upper Tribunal had made a decision).

The Financial Services Act 2012 gave the FCA the power to publish information about a matter in relation to which a warning notice has been issued. This power allows the FCA to publish details about an enforcement action against a firm or an individual at a much earlier stage than was previously permitted and notably before a firm or an individual under investigation has had an opportunity to formally challenge the FCA’s case against them.

In March 2013, the FSA published a consultation paper (CP13/8) in which it set out its proposals as to how the FCA would exercise its new power to publish information about a matter in relation to which a warning note has been issued. The consultation paper expressly stated that the FCA would not start to use its new power until it had confirmed how it would go about exercising it.

FCA Policy Statement PS13/9

On 15 October 2013, the FCA published a policy statement (PS13/9) which confirmed the FCA’s policy for publishing information about enforcement warning notices. The approach to publishing such information includes some significant changes from the FCA’s original proposals which were set out in the Consultation Paper.

The FCA has stated that it will start to publish information about enforcement notices in accordance with the approach set out in the Policy Statement from 15 October 2013.

The FCA’s new power to publish warning notices

Under section 391(1) of the Financial Services and Markets Act 2000 (FSMA) (as amended by the Financial Services Act 2012), the FCA has the power to publish information about a matter in relation to which a warning notice has been issued, provided that:

  • the person(s) to whom the warning notice has been issued or copied are consulted prior to publication (section 391(1)(c) FSMA); and
  • publication of information about the warning notice would not be unfair to the subject of the warning notice, prejudicial to the interests of consumers or detrimental to the stability of the UK financial system (section 391(6) FSMA).

The FCA’s power to publish information in relation to warning notices only applies to warning notices which include a disciplinary outcome (i.e. an intention on the part of the FCA to censure, fine or suspend a firm or an individual – section 391(1ZB) FSMA).

The FCA explained in the Policy Statement that its new power to publish information about enforcement warning notices is intended to create a more transparent enforcement process and to inform consumers, firms approved persons and the market at an earlier stage about types of conduct that the FCA finds unacceptable.

When will the FCA publish warning notices?

In its Policy Statement, the FCA has outlined the steps it will go through before making the final decision as to whether to publish information relating to a warning notice. The approach outlined in the Policy Statement is also replicated as guidance in the FCA’s Enforcement Guide (paragraph 6.7 onwards).

  1. Initial decision as to whether it may be appropriate to publish information relating to a warning notice
  2. When the FCA decides to issue a warning notice in an enforcement matter, as a first step it will consider whether it should publish information relating to the warning notice. The FCA has stated that it will start from the presumption that it is appropriate to publish information relating to a warning notice so as to enable consumers, firms and market users to understand the nature of the FCA’s concerns in a particular case. However, the FCA has also said that it will consider the circumstances of each case.

  3. Identifying the subject of a warning notice
  4. If the FCA considers that it is appropriate to publish information about a warning notice, it will consider whether it is also appropriate to identify the subject of the warning notice (i.e. the firm or individual against whom the FCA proposes to take action). When making this decision, the FCA has noted that it intends to take different approaches to firms and individuals:

    • Individuals: The FCA has stated that in most cases it will not be appropriate to identify an individual who is the subject of a warning notice.
    This approach is noticeably different to the FCA’s original proposal outlined in the Consultation Paper which indicated that an individual who was the subject of a warning notice would be identified, except in exceptional circumstances.


    The FCA cites comments received in response to the Consultation Paper as the reason for the change in approach towards identifying individuals who are the subject of warning notices. In the Policy Statement, the FCA accepts that in most cases the harm that an individual may suffer by being identified in information published about a warning notice will outweigh the benefits that publishing this information may have in terms of improving the transparency of the FCA’s enforcement process.

     

    However, the FCA notes some situations in the Policy Statement where it would still consider identifying the subject of a warning notice. These situations include where it is necessary to identify an individual in order to:

    - adequately describe the nature of the FCA’s concerns;
    - avoid other individuals being mistakenly believed to be the subject of the warning notice or to otherwise dispel rumours in the market (the FCA has indicated that this factor may be of particular relevance where a prominent member of a firm’s senior management is the subject of a warning notice, due to the heightened risk that others may be mistakenly believed to be the subject of the warning notice);
    - help protect consumers; and/or
    - maintain public confidence in the financial system or market.

     

    • Firms: The FCA has stated that it expects that it will be appropriate in most cases to identify a firm which is the subject of a warning notice.
  5. Consultation with the subject of a warning notice
  6. Before publishing information relating to a warning notice, the FCA has said that it will notify the subject of the warning notice and any parties copied to it of its intention to do so. The FCA will also provide a copy of the information that the FCA intends to publish about the matter. These parties will then have 14 days to make representations if they oppose the FCA’s decision to publish information relating to the warning notice in question.

    Respondents to the Consultation Paper raised concerns that 14 days may be too short a period to prepare and submit representations as to why the FCA should not publish information relating to a warning notice. With this in mind, if the subject of a warning notice or a party to whom it is copied thinks that there is a possibility that they may wish to challenge the publication of information relating to the warning notice, it would be advisable for them to consider the representations they may make and evidence they may use to support these representations in advance of the FCA issuing a warning notice.

    The FCA has stated in the Policy Statement that it expects representations to focus on the issue of whether it would be unfair to the subject of the warning notice to publish information relating to the warning notice (see (4) below) but the FCA has said that it will also take into account representations that provide other reasons as to why it would be inappropriate for the FCA to publish information about a warning notice.

    Even if the FCA has indicated that they do not intend to publish the identity of an individual who is the subject of a warning notice, the individual concerned may still wish to make representations at this stage. For example, they may wish to make representations relating to the way in which they will be anonymously referred to in the information published or whether the FCA should publish any information about their case at all.

  7. Consideration of grounds that may prohibit publication of information relating to a warning notice
  8. Once the FCA has received any representations from the subject and/or third parties, it will consider whether there are any factors which would prohibit the FCA from publishing information relating to a warning notice.

    There are three grounds which, if applicable, would prohibit the FCA from publishing information relating to a warning notice (section 391(6) FSMA). These grounds are if publication of information relating to a warning notice would be:

    i. Unfair to the subject of the warning notice: In the Policy Statement, the FCA has stated that in order to demonstrate that publication of information relating to a warning notice would be unfair, a firm or individual must provide ‘clear and convincing evidence of how that unfairness may arise and how they could suffer a disproportionate level of damage’. The FCA has indicated that the following factors may be relevant to the issue of whether publication of information about a warning notice would be unfair to the subject of the warning notice:

    • Firm or individual: Whether the subject of the warning notice is an individual or a firm. The FCA has indicated that it is likely to be more difficult for a firm to establish that it would be unfair for the FCA to publish information relating to it than it would be for an individual. This is because the FCA acknowledges that the relative harm from publishing such information is likely to be greater for individuals than for firms.
    • Size of a firm: If the subject of a warning notice is a firm, the size of the firm will be a relevant consideration for the FCA when it is considering the issue of fairness. The FCA has indicated that larger firms may find it harder than smaller firms to show that publishing information relating to a warning notice would be unfair. This is because the FCA recognises that in some cases smaller firms may suffer a similar level of harm from publishing such information as individuals.
    • Risk of reputational damage: The FCA has not ruled out the possibility that the risk of reputational damage to the subject of a warning notice by itself may be enough to prevent publication of information relating to it. The FCA has also stated that it is likely to find arguments along these lines more compelling if a person is able to provide evidence of the harm that they would suffer as a consequence of the damage to their reputation. However, it remains to be seen how easy it will be in practice for persons to evidence the risk of reputational damage that they may suffer as a result of publication.
    • Personal circumstances: If publishing information about a warning notice could materially affect the subject’s health, result in bankruptcy or insolvency, a loss of livelihood or a significant loss of income.
    • The subject’s awareness of the case: The extent to which the subject of the warning notice has been made aware of the FCA’s case against them, for example via a preliminary findings letter.
    • Criminal proceedings: If there are on-going criminal proceedings to which the subject of the warning notice is a party and these proceedings may be prejudiced if information relating to the warning notice is published.
    The FCA has made it clear that arguments relating to the fairness of FCA’s power to publish information relating to warning notices or the merits of the warning notice itself will not be material to the FCA’s decision as to whether such information should be published.

    ii. Prejudicial to the interests of consumers.

    iii. Detrimental to the stability of the UK financial system.

    The FCA expects that circumstances which may give rise to grounds ii) and iii) above will rarely arise when it is considering whether to publish information in relation to a warning notice. For this reason, the FCA has not provided any guidance or examples as to when publication of information relating to a warning notice may be prejudicial to the interests of consumers or detrimental to the stability of the UK financial system.

  1. Publication of information relating to a warning notice
  2. If, having gone through the steps outlined above, the FCA still considers that it is appropriate to publish information relating to a warning notice, it will publish this information on its website.

What information about enforcement warning notices will the FCA publish?

The FCA does not have the power to publish warning notices in their entirety. Rather, the FCA may only publish such information about a matter to which a warning notice relates. The FCA has stated that it intends to exercise this power by publishing the following information:

  • Summary of the alleged misconduct and breaches: A brief summary of the alleged misconduct which forms the basis of the warning notice, including the rules and/or Principles for Business or Approved Persons which the FCA allege have been breached.
  • The identity of the subject: If it is considered appropriate (see (2) above), the FCA will publish the identity of the subject of a warning notice. If the FCA decides not to identify the subject, they will be referred to as ‘a firm’ or ‘an individual’ or, where appropriate, the type of person, for example, ‘a bank’ or ‘a trader’. Even if the FCA decides not to identify an individual who is the subject of a warning notice, it may still consider whether to publish the identity of the individual’s employer, even if the employer is not the subject of an FCA investigation in relation to the matter.
  • Status of the matter: The FCA has stated that each time it publishes information relating to a warning notice, it will include a prominent statement which makes clear that: (a) a warning notice does not represent a final decision made by the FCA and there is a possibility that the matter may be discontinued, (b) the subject of the warning notice has not yet had the opportunity to make representations to the RDC in relation to the matter, and (c) at a later stage, the subject of the warning notice may refer the matter to the Upper Tribunal.

The Policy Statement states that the FCA does not intend to publish any details about the sanction it is intending to impose upon the subject of a warning notice.

Subsequent discontinuance of an enforcement action

In the event that the enforcement case to which a warning notice relates is discontinued at a later date, the FCA has explained that it will not remove the information about the warning notice from its website. Rather, the FCA will add a note to the information published about the warning notice to say that the enforcement action has been discontinued and, if the subject of the warning notice consents, also publish the notice of discontinuance on its website, along with an accompanying press release. This means that even if the FCA decides not to proceed with a case or the Upper Tribunal directs the FCA to take no action, the allegations made in the summary of the warning notice published on the FCA’s website will continue to be publicly available.

Furthermore, the FCA has made it clear that in the event that it does discontinue a case in relation to which information about the warning notice has been published, it will not publish the reasons for the discontinuance. Not only does this approach seem at odds with the FCA’s underlying objective for publishing information relating to warning notices in the first place (to improve the transparency of its enforcement process), but it may also give rise to confusion amongst consumers, firms and approved persons. This is because it may not be clear why the FCA had concerns about the conduct of a firm or an individual when it issued a warning notice but eventually decided not to take any enforcement action in relation to the matter.

Comment

The FCA’s decision to publish information relating to warning notices constitutes a significant change to its enforcement process and the stage at which the FCA may publish information in relation to its on-going enforcement cases.

The approach now adopted by the FCA in the Policy Statement is also quite different to the original proposals outlined in the Consultation Paper, in particular, relating to the identification of individuals who are the subjects of warning notices. This change in approach may be beneficial to some individuals who, under the FCA’s new policy, may not be identified if information relating to a warning notice is published. However, there is still a risk that senior individuals will be identified in information published relating to warning notices in order to help avoid confusion or market rumour regarding the identity of the subject of a warning notice.

The FCA’s ability to publish information about an on-going enforcement case before the subject has an opportunity to formally challenge the FCA’s findings will, in turn, also impact the strategy employed by the subject of an FCA investigation and their advisers. For example, it will be more important for the subject of an FCA investigation and their advisers to engage with the FCA as to the merits of their case at an earlier stage instead of waiting until the FCA issues a warning notice before doing so. Doing so may help to ensure that representations made to the FCA before the warning notice stage are taken into account in the information published about the warning notice.

The FCA may also use their ability to publish information about on-going enforcement cases at the point at which a warning notice is issued as a negotiating tool in order to encourage the subject of an FCA investigation to settle their case at an earlier stage. This is because if a firm or an individual shows willingness to settle a matter at the warning notice stage, the FCA may decide not to publish information relating to the warning notice and instead wait until the final notice can be published.

Looking more broadly, the FCA’s power to publish information relating to warning notices may also lead to an increased and earlier litigation risk for firms and/or individuals who are connected to a warning notice. For example, a claimant may base their claim against a firm on the basis of allegations included in the summary of the warning notice published by the FCA. Even if the allegations made by FCA are changed or dropped at a later date, the firm may still have to expend significant sums to defend or apply for a stay of the litigation in the meantime.

Summary of steps that the FCA may take when deciding whether to publish information relating to a warning notice.

 

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