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Can there be too much transparency? The UK’s Financial Conduct Authority is under pressure to pause plans to name companies when it opens investigations. At present, it only does this in exceptional cases.
Unsurprisingly, the City of London has kicked off at the prospect of being publicly shamed before innocence or guilt is established. City bleating is the norm for regulatory changes of any magnitude. In this case, though, the proposals need further examination.
The FCA intends to identify the companies it is investigating at an early stage if it believes it would be in the public interest. The plans are open for consultation until the end of April. Some other domestic regulators often already do so — for example, energy watchdog Ofgem.
The regulator’s aims are understandable. Greater transparency from the start could act as a strong deterrent. Its investigations take an (unacceptably long) average of four years. By the time lawyers at rival firms get to pore over the details of any enforcement action against a competitor, it is often too late to correct their own behaviours.
The FCA has also been lambasted in the past by MPs for failing to provide reassurance that it is investigating issues of concern, given the current limitations over what it can say publicly.
But the unintended consequences of publicity could be more severe in financial services than in other sectors. Ofgem probes rarely cause customers to bolt or significantly move share prices. This is partly because there are few listed UK energy companies. Energy infrastructure companies are also monopolies.
In finance, it is easy to imagine clients rushing for the exit as a precaution — say, were an investigation into the application of anti-money laundering rules at an asset manager disclosed. About 65 per cent of the FCA’s investigations ultimately close without action.
Given the FCA says it will make decisions case by case, law firms will be the big winners here: companies at risk of identification will put the public interest argument to the test in court.
Internationally, few financial regulators name and shame. At a time when London is struggling to attract listings and business, the FCA will need to justify why the UK should be an outlier here. Last year it adopted a secondary objective to “facilitate” the UK’s international competitiveness.
Deterrence tools, such as letters to chief executives highlighting concerns, are already at the FCA’s disposal. Other UK regulators publish details of probes without identifying the target. Such half-measures may feel like a cop-out. In this case they may be the best way of ensuring high regulatory standards without adverse effects.