Is there an ethical flaw in the FCA’s position on enforcement warning notices?

The UK’s Financial Conduct Authority (FCA) now has the power to issue ‘enforcement warning notices’ when investigating regulated firms and individuals. Commentators are calling it a ‘name and shame’ policy and question the fairness of identifying a firm or individual ahead of any final enforcement decision. In return, the FCA has justified it on the grounds of early transparency reducing consumer detriment. Their case is pretty strong, but not without an ethical flaw.

The FCA’s case relies heavily on an obvious comparison with the wider legal process. If individuals and firms are identified when under investigation for potential criminal or civil wrongdoing,  why should those regulated under the Financial Services and Markets Act deserve anything different?

Their case is undermined by another obvious comparison. Individuals and firms proceed through the UK’s civil and criminal justice systems in a series of discreet stages, each handled by a separate agency (Parliament, the police, the courts, etc.). There is no such separation in the regulation of financial services. The FCA is the driving force behind incremental extensions of its powers like this; it decides who is to be investigated and for what, and it undertakes the investigation and reaches the enforcement decision.

There’s clearly some sense to such concentration of specialised knowledge and power – it’s a model Parliament has used in several markets and the FCA has internal arrangements to put some distance between its different functions. We do of course have to trust in the efficacy of those internal arrangement, but this new power on enforcement warning notices seems to put that trust under an uncomfortable level of strain.

Are those internal arrangements strong enough to contain the significant conflicts of interest that such warning notices will create? For example, having published a notice, how is the FCA going to manage the obvious pressures (internal and external) to deliver on their interim judgements? Just as a warning notice will be read as ‘we have pretty big suspicions’, a discontinuation notice will be read as ‘our pretty big suspicions turned out to be wrong’. The FCA’s investigators will be under pressure to deliver on their earlier judgement and such pressures have a tendency to cloud judgements (especially in complicated or marginal cases). The FCA comes across exactly the same pressures operating inside regulated firms and casts a critical eye over how firms manage them. Is an equally  critical eye being cast over the FCA?

Society tolerates concentrations of power when there are reliable checks and balances in place to stop abuses – history continues to teach us their necessity. We accept a concentration in power in the FCA, but I believe that this extension in power needs to be matched by further checks and balances on the FCA, for it is an extension of quite distinct character. Not only should further checks and balances be introduced, but the FCA should be transparent about what they are and how well they are being managed. Perceived conflicts of interest can be just as powerful in setting opinions as potential or actual conflicts of interest.

I think the FCA will come to regret going down the route of enforcement warning notices. They are likely to engrain a loss of faith in the regulator at just the wrong time.

About the Author Duncan Minty

Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.

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