“Exceptional circumstances”: English court upholds the FCA’s decision to announce an investigation into a named firm

What has happened

In this case¹, the FCA decided to start an investigation into CIT (not its real name or initials) under section 168 of the Financial Services and Markets Act 2000, which gives the FCA the power to investigate various specific offences and breaches.

The FCA determined that it wished to make public the fact of its investigation at an early stage, including the name of the firm which was the subject of the investigation – being the claimant in this case.

The claimant resisted the FCA’s decision to publicly name it, saying it was unlawful and unreasonable. It commenced judicial review proceedings against the FCA to prevent this happening. It was given 24 hours by the FCA in which to do this. The FCA agreed to defer any announcement until a decision from the court.

The FCA’s Enforcement Guide

Section 4.1 of the FCA’s Enforcement Guide (“ENFG”) deals with publicity during FCA investigations:

• As its starting point, the FCA will not normally make public the fact that it is, or is not, investigating a particular matter (ENFG 4.1.1G).
• However, in “exceptional circumstances” the FCA may depart from this, and may announce an investigation naming a firm (a “named announcement”), where it is “desirable” to: (i) maintain public confidence in the UK financial system or market; (ii) protect consumers or investors; (iii) prevent widespread malpractice; (iv) help the investigation itself, including by bringing forward witnesses; or (v) maintain the smooth operation of the market. The guidance is also clear that these considerations are to be balanced against the potential prejudice that may be caused to the subject of the investigation (ENFG 4.1.4G).
• The FCA may, in the alternative, make an anonymous announcement of an investigation where it is desirable for the purpose of educating persons generally as to the types of conduct the FCA is investigating or to encourage compliance with the FCA’s rules (ENFG 4.1.8G).

The court’s decision

In this case the FCA wished to use its power to make an announcement of an investigation naming the claimant on the basis that this was an “exceptional circumstance” under ENFG 4.1.4G. The claimant challenged the decision-making of the FCA which determined that the case fell within this category.

The Administrative Court (Fordham J) rejected the challenge by the claimant and upheld the FCA’s decision.

Although the judgment is scant on detail, given the confidentiality concerns at this stage, it nevertheless gives a clear indication of the way the courts, on judicial review of the FCA’s decision-making in this area, are likely to approach such cases. Key points are:

1. The court confirmed that “exceptional” in this context means exceptional “relative to investigated-situations”. It does not mean exceptional relative to regulatory situations in general. Investigations are in themselves exceptional in the wider world of regulatory situations but the judgment makes clear that “it would be a mistake to say: this is exceptional because it is so serious as to warrant investigation. [This] would not be an exceptional investigated-situation”.
2. Given the explicit option in ENFG 4.1.8G in relation to the possibility of an anonymised announcement, in the event the FCA determines an announcement of an investigation is required, the FCA is then required to consider specifically the choice it faces between making a named announcement and an anonymised announcement. To justify the exceptionality and desirability of a named announcement, the decision must be judged against the option of an anonymised announcement, not just the option of no announcement at all.
3. In this case, the FCA had determined that that a named announcement was desirable for the customers of the claimant, to alert them of the facts of the case and because “they may wish to consider their options by reference to aspects of the way in which they may have come to be the claimant’s customers” - and the need to do this sooner rather than later. Whilst cryptic, this clearly refers to the objective of protecting consumers in ENFG 4.1.4G. By contrast, an anonymised announcement would not meet the objective of consumer protection as the claimant’s customers would be none the wiser as to their position.
4. As a wider point, in his judgment, the judge makes clear the “division of responsibility” from a constitutional perspective between the courts and the FCA arising from the separation of powers. The court’s role is to ask “secondary, supervisory questions” about whether the FCA’s application of its guidance was reasonable. However, questions of “application” (e.g. whether the circumstances are indeed “exceptional” or whether certain things are “desirable”) are matters for the FCA as the primary decision-maker for such issues. The judge recognised the institutional advantages that the FCA has as the regulator entrusted with these public interest responsibilities.
5. Ultimately, on examining the internal memoranda produced as part of the FCA’s decision-making process, the court concluded that the FCA had not misinterpreted its own guidance. It had adequately considered all the relevant options open to it, and considered all of the relevant factors, bearing in mind the division of responsibilities between the court and the FCA in this regard. Whilst there were criticisms to be made of the details of the FCA case team’s reasoning at places, the judge held that none of these were sufficient to undermine the decision, and the key points which the case team focused on in the decision-making process all went to the regulatory merits and choices. Further, the FCA had properly taken into account the potential prejudice to the claimant and not understated this: this was an evaluative decision, weighing such prejudice against the regulatory objectives of a named announcement. The judge was not persuaded that the evaluation taken was unlawful or unreasonable.

We understand that the claimant is seeking permission to appeal the Administrative Court’s decision from the Court of Appeal.

Commentary

The judgment illustrates some of the hurdles that firms will face in challenging the FCA by way of judicial review, and the high bar which needs to be crossed before the court will intervene. The case is a useful reiteration of the division of responsibilities between the courts and the regulator and illustrates the wide band of expert discretion the court will allow the FCA in respect of decisions such as this.

Earlier this year readers may recall that the FCA abandoned its proposals to change the test for making a named announcement from “exceptional circumstances” to a looser “public interest” test, after opposition to the FCA’s plans from the financial services industry and the government.

Whist financial services firms breathed a sigh of relief when the FCA walked away from its proposals for reform, this judgment nonetheless demonstrates the remaining breadth of discretion the FCA still has when considering whether or not to name firms when starting an investigation. Provided the FCA can show it has adequately considered (and documented) its thinking and regulatory concerns, and has taken into account all the relevant options open to it, the courts would seem unlikely to be willing to intervene or interfere with such decision-making.

Against this background, and emboldened by this decision, the FCA may seek to deploy its “exceptional circumstances” test more often. Firms who may be facing a FCA investigation should therefore use the judgment to assess, as best they can, whether or not they are likely to be the subject of a named announcement, and to prepare themselves to challenge a FCA decision to name them at short notice (should they want to). This means being ready to rapidly mobilise a legal team, together with a PR team to deal with any reputational aspects should any challenge fail.

Authored by Philip Parish and Daniela Vella.