A joint committee made up of members of the House of Lords and the House of Commons has today published its report on the draft financial services bill. The bill sets out the legislation for the new regulatory framework under the FCA and the Prudential Regulation Authority.
The draft financial services bill sets out new powers for the FCA, including the ability to publish early warning notices against firms or individuals which notify the public of proposed disciplinary action. These can be issued before the regulator has completed its investigation.
Currently the draft text requires the FCA to consult the subject of the warning notice before issuing any publicity about the ongoing investigation. Money Marketing, Fundweb.co.uk’s sister publication, reported in September that the FSA was pushing for this requirement to be removed.
The FSA argued as most individuals and firms would contest the warning notices, it would lead to injunctions being sought through the courts to stop the regulator making the investigation public.
In evidence to the joint committee Consumer Focus noted that regulators of other sectors such as the Advertising Standards Authority and energy regulator Ofgem already announce where a complaint has been made or where firms are being investigated.
The Government argues the FCA will consider whether or not to publish on a case-by-case basis, rather than being required to publish.
In its report today, the joint committee agrees with the FSA that the new regulator should not be required to consult before publishing early warning notices.
The committee says: “Given the powers of regulators in other sectors, and indeed, the process in criminal and civil proceedings, we see no reason why financial services firms should be granted greater dispensation from public disclosure.
“Requiring the FCA to consult could seriously undermine the effectiveness of this new power. The fact that the FCA will not be publishing the warning notice itself, but only the fact that it has issued one, and the fact that it will need to take into account a number of considerations in deciding what to publish should provide sufficient safeguards.
“We recommend that the requirement to consult before disclosing the fact that a warning notice has been issued should be removed from the draft bill.”
However the committee has recommended the FCA publish guidance on how it will exercise its discretion in issuing early warning notices.
Financial services lawyers have already warned that early warning powers are dangerous as warning notices do not necessarily lead to enforcement action. Aifa believes the power marks a “worrying shift towards guilty until proven innocent”.
Stephen Gay, director general of Aifa, says: “While we can understand the desire to publish warning notices, we still have serious concerns about the potential reputational damage that this can cause, particularly for smaller firms.”
FSA figures obtained by Money Marketing reveal nearly a third of enforcement cases in 2009/10 did not result in disciplinary action.