The FCA should think twice – but so should companies calling for political intervention
The Financial Conduct Authority (FCA) has proposed changing its approach to naming companies that are subject to its enforcement investigations. At the moment the FCA only announces the names of firms under investigation in exceptional circumstances. Under its new proposals it would name the companies whenever it judges it to be in the public interest to do so. This could make ‘naming and shaming’ much more common and – because it could take place at the beginning, rather than the conclusion, of an investigation – it could mean companies being named even before the FCA has reached a decision on whether any misconduct has actually occurred.
It is fair to say the plans have prompted strong opposition across the City. Over the past week the Chancellor has weighed in too, saying, “I hope the FCA re-look at their decision.”
Who’s right?
In the FCA’s defence, its current proposals would align its practice with the approach already followed by a range of other regulators. When I was at the Competition and Markets Authority we made a similar change in 2021, partly on the basis that public bodies should be more transparent about their work; partly because the greater publicity can have a deterrent effect on companies who might otherwise engage in misconduct; and partly because it can encourage more people and businesses to come forward with evidence to help the investigation.
It is also worth noting that the FCA is in a bit of a bind. I remember going to a meeting of the regulators at Number Ten where we were all (politely) reminded of the importance of being pro-business. One of the group of regulators (equally politely) reminded the Number Ten advisers that the same politicians who called on us to avoid unnecessary regulation on business also complained that we weren’t being fast enough or tough enough in taking action on businesses that rip off consumers. Regulators cannot keep politicians happy all the time.
On the other side of the ledger, though, are the arguments of the FCA’s critics. Of course businesses who are guilty of misconduct are not going to want to see an investigation publicised – but what about businesses who turn out to have done nothing wrong? They are hardly going to welcome having their reputation unfairly maligned by an announcement that could lead to investors deciding to sell their stock and customers to stop buying their products.
In addition, businesses and investors in financial services are unlikely to compare the FCA’s approach with that of Ofwat and Ofgem. Rather, they will look at other financial services regulators internationally, such as the US Securities and Exchange Commission and the German financial regulator, BaFin, neither of which routinely names companies at the start of an enforcement investigation. They could therefore draw a negative conclusion about what the new policy says about how welcoming the UK is as a destination for investment. This is why Mr Hunt has queried whether the FCA’s proposed change is really in line with its new secondary objective to facilitate the international competitiveness of the UK economy including, in particular, the financial services sector.
As the FCA and other regulators try to balance these considerations, I think a good starting point is to remember that their decisions have two effects: there is a direct effect on the companies concerned and there is an indirect on other companies who take signals from what they see the regulator doing. Since leaving the regulatory world, I have often been struck in my conversations with business leaders about how widespread those indirect effects can be.
Sometimes those indirect effects come via signals which are clear and simple and work as the regulator intended. For example, when an antitrust authority enforces against a cartel, it wants to send a message of deterrence against cartels generally. CEOs do not have to spend much time worrying about whether a particular cartel would be procompetitive or anticompetitive.
In other areas, the signals work in muddier ways and not always as the regulator intended. If, for example, the CMA blocks a merger, doing so will help deter some anticompetitive mergers but will also deter some unproblematic mergers, as CEOs grapple with what a decision in another merger case might suggest about the CMA’s likely approach to ‘their’ deal; and Boards may take a cautious approach to a deal if their advisers cannot give a confident enough prediction of the likelihood of clearance.
When a regulator is making a decision in an individual case, there may be a limit to what it can do about this problem. For example, in Phase 2 merger case, the CMA Inquiry Group must make its decision and explain it solely on the basis of the facts in that case. It cannot change its decision because it is worried that some companies might draw inaccurate parallels, and it cannot use its report on the case to offer guidance on the wider implications of its decision (or lack of them).
But that is why a regulator’s statements of strategy, policy and guidance are so important. These are where it has more discretion on its approach and more of an opportunity to send clearer signals to the outside world about how it will behave. This consultation seems like the kind of area where the FCA could have taken a different approach in order to help meet its secondary objective of facilitating the international competitiveness of the UK’s financial services sector.
The other area that I think is worth exploring is how the opposition to the FCA has manifested itself. Trade bodies and firms have complained publicly and have encouraged ministers to intervene in the issue. In turn, Mr Hunt has faced criticism for appearing to fail to respect the regulator’s independence.
To be fair to the Chancellor, the good thing about him telegraphing his position on the front page of the FT is that it is transparent. This is not a secret attempt to nobble the FCA behind the scenes. And arguably it is much less of a problem for ministers to express a view on a broad policy matter on which the FCA has publicly asked for views, than on an individual case where a regulator is acting in a quasi-judicial role in respect of an individual business.
Nonetheless, those in the City who were keen for the Chancellor to step in may find they are playing with fire. When the independent regulators in the UK were created in the 1980s and 1990s, it was not because of worries that elected politicians would be too friendly to investors and corporate lobbying. It was the opposite. At the time of privatization, investors worried that if politicians were allowed to intervene in the newly privatized businesses, public pressure would lead them to expropriate the profits for their own ends. Regulatory independence was a safeguard to protect investors from short-termist political interference.
If investors seek political intervention in a situation where it suits their interests, they may find it sets a precedent for decidedly less helpful political intervention in future.
