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Business Crime Solicitor Stine Dulong on the new Financial Conduct Authority and Warning Notices

On 1st April 2013, the Financial Services Act 2012 will come into force. This legislation is intended to transform the regulatory landscape by reorganising the division of responsibility for financial stability in the UK between the Treasury, the Bank of England, and two new bodies, the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority.

The FCA largely takes over the role of the Financial Services Authority, which it replaces, but it will also be given new powers, of which one of the more controversial is the power to publish warning notices.
The FSA has since 2010 been able to publish decision notices. Critics have pointed to the gross unfairness of making decisions public before individuals have had the opportunity to exhaust all appeal remedies available to them. In the case of Ian Hannam, the FSA published its decision notice which arguably led to his resignation. Mr Hannam has referred his case to the Upper Tribunal and it is due to be heard in July 2013. However, regardless of the outcome of his appeal and the final findings of the FSA, the reputational damage suffered by Mr Hannam as a result of the publication of the decision notice cannot be undone.

The Government states in its consultation paper published in February 2011, “A new approach to financial regulation: building a stronger system”, that the power to publish warning notices will provide greater transparency to the public about enforcement action that is underway, highlight potential issues to consumers at an early stage and signal to firms what behaviours the regulator considers to be unacceptable. This, they state, “is an important feature of a transparent and effective regulatory system.”

There has, however, also been much criticism of the proposals. The House of Commons Treasury Committee said that “we are concerned that a general rule permitting the FCA to publish early warning notices in respect of specific firms, which in some cases could subsequently prove to be unfounded, risks unreasonable reputational damage to which there may be inadequate redress. We are also mindful of the risk to natural justice, given that in such a case the regulator may be investigator, judge and jury.” It advised the government to consult further about the proposals.

Some safeguards have since been introduced and the FCA has produced a draft statement setting out the procedure that it will follow when publishing information about a warning notice. For example, it will have to consult with firms and individuals before making a warning notice public, with recipients being given seven days to respond and it will not publish if it believed that to do so to would be unfair to the person in respect of whom action has been taken, prejudicial to the interests of consumers or detrimental to the stability of the UK financial system.

The power would only apply to disciplinary outcomes where the FCA is proposing to censure, fine or suspend a firm or individual. The FCA has indicated that they do not propose to publish the level of penalty in any particular case as they imagine that it could lead to speculation or comment about the seriousness of the failings which, without context, may be seen to be unfair. Arguably, the very fact that they are publishing their intention to fine a company or an individual, without context, would lead to the very same speculation.  

The Treasury has reserved to itself a power to scrap warning notice publication altogether if the FCA acts in a way that is contrary to the public interest. Nevertheless, it seems that the proposals are here to stay and, during the House of Lords debate in which the amendment was introduced, Lord Sassoon confirmed that the government remains committed to amending the law in this area. Not everyone is entirely reassured and the proposed changes are likely to continue to generate controversy.

By Business Crime Solicitor Stine Dulong