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Plans by the UK financial regulator to "name and shame" companies under investigation could cause reputational damage and a loss of business for companies that are later found to be innocent, people in the industry have warned.

The Financial Conduct Authority (FCA) in February began to consult on plans to name companies under investigation, both to give clearer enforcement signals to the industry at large and to encourage whistleblowers to come forward from suspected companies.

The plans have prompted widespread concerns, including from Jeremy Hunt, the country’s finance minister, who last week made an extraordinary public intervention to warn the FCA off the plan. The week before that, the FCA had been forced to produce a defence of its plans in an exchange of letters with the House of Lords financial services committee in parliament.

“It is an unprecedented standoff,” said Jake Green, head of global financial regulatory affairs at Ashurst. “And, unless they quickly agree to kick the can down the road, someone is going to lose face."

In conversations with ����žž, business people and lawyers said the policy could have unpredictable effects on the UK’s financial services industry and cause a breakdown in trust with the regulator.

“If trust goes in a sector like payments, then it is game over," said Gary Prince, CEO at The Payment Firm Limited, an e-money issuer. "The FCA is focusing on consumer protection and trying to go down a route where they are telling consumers that they're looking at an organisation. The problem is, when should this happen?”

“If you're innocent until proven guilty, and then there is no case to answer, then the reputational damage could be horrendous,” said Prince. “Mud sticks in instances like this."

Silvija Krupena, director of the Financial Intelligence Unit at RedCompass Labs, a payment services consultancy, warned about a lack of resources at the regulator, which could result in negative consequences. 

“By naming and shaming without having the power and resources to follow up with investigation and enforcement actions at scale, there is a real danger the FCA becomes a watchdog which is seen as being all bark and no bite,” said Krupena. “Instead, the focus should be on giving the regulator teeth by providing more powers and resources to do its job better.”

Krupena suggested, for example, that the regulator could carry out annual bank exams rather than relying on S166 reports to increase accountability, undertake more and deeper investigations, and invest more in building strong, detailed guidance.

But John Binns, a partner at BCL Solicitors, expressed concern about the independence of the FCA if it did back away from the proposals due to the backlash. 

“While it's crucial to acknowledge the positive economic impact of taxes from the financial services sector, we must also guard against any compromises in industry integrity due to malpractice,” he said. “The effectiveness and success of our financial services industry stem from its well-regulated environment, which ensures safety and security."

Reputational risk

Max Savoie, a partner at law firm Sidley Austin, said that parts of the rationale behind the FCA’s idea were sound, but may be outweighed by the risks.

“The most significant downside is the risk of reputational damage, as there may be numerous reasons for initiating an investigation and the threshold conditions for opening an investigation are not particularly high, he said.

“Many investigations are resolved without enforcement action being taken against a firm," he continued. "If an investigation takes a long time to complete, then a firm may endure sustained reputational damage.” 

This, he said, is particularly concerning for businesses that rely heavily on their brand and reputation, as a lengthy investigation could significantly impact the confidence of customers, suppliers and investors. 

“Moreover, it might attract scrutiny from regulators outside the UK,” he warned. 

Subjecting a firm to prolonged scrutiny without finding any breaches of regulatory requirements, or if any breaches were deemed more technical than substantive, could expose the FCA to allegations of unfairness, Savoie said.

“It could prompt defensive practices, and firms might even halt some of their legitimate and compliant activities due to fears of being investigated in relation to areas the FCA considers to be higher risk,” he said, adding that the policy might also deter firms from pursuing open and communicative relationships with the FCA.

What happens now?

The consultation closed on April 16 and now the FCA will need to assess feedback and decide whether to bow to the pressure or stay on track. 

In recent years, the regulator has become more interventionist and has also doubled down at times, such as it did with the Consumer Duty last year. 

Nathan Willmott, a partner at law firm Ashurst, said the UK’s financial services industry is united in opposition to the proposals and that the government is worried about the impact on the competitiveness of the financial services sector. “I suspect that even the FCA's own enforcement staff feel that the proposals are an unnecessary distraction from getting on with the day job.

"It is the sign of a strong regulator to absorb the feedback it receives and change its plans accordingly,” he said. “If it does so quickly then it will be applauded for doing so and it will enable the FCA to focus on speeding up the pace of its enforcement investigations."