‘Jeremy Hunt is probably right to oppose the finance watchdog’s plans to name and shame firms under investigation’ – expert Q&A
- Written by Alper Kara, Professor of Banking and Finance, Brunel University London
The UK banking regulator, the Financial Conduct Authority (FCA), finds itself in a public row with the government and many City grandees over its proposals to name and shame firms that are being investigated for breaking financial rules. Chancellor Jeremy Hunt has called[1] on the FCA to scrap its plans, putting the regulator in the uncomfortable position of having to either climb down or double down.
We asked Professor Alper Kara, a banking specialist at Brunel University, to explain the best way forward.
What does the FCA want to do and why?
The FCA aims to increase transparency of its investigations of misconduct and regulatory breaches. It plans to reveal the names of companies under investigation at a much earlier stage of the process and more frequently. Currently, the FCA only comments in exceptional circumstances and we only hear about cases if there are fines or criminal charges at the end.
The FCA’s view is that increasing transparency will act as a deterrent for wrongdoing. It suggests that it will also increase awareness among companies on what standards they are expected to meet and what types of failings must be avoided. This, in turn, will help them to change their behaviour and reduce misconduct and breaches. The FCA also hopes that naming firms will encourage whistleblowers and witnesses to come forward.
Why are Jeremy Hunt and others opposed?
The City and trade bodies are strongly opposing the proposal, as is the House of Lords Financial Services Regulation Committee. They all argue it will unduly damage the reputations of named firms before an investigation has concluded, potentially hurting the share prices of those that are listed.
They point out that most companies investigated by the FCA turn out to be innocent, with two-thirds[2] of cases closing without any action taken.
Another worry relates to the UK’s competitiveness as a global financial hub. Jeremy Hunt fears that naming and shaming would dampen the government’s efforts to attract businesses and investments to London, making it harder to revive the struggling UK economy. Hence he has reminded the FCA that it has a secondary duty to facilitate growth.
How do the rules compare to other countries?
The FCA states that Singapore has[4] a similar framework, for example. On the other hand, as far as I am aware, naming and shaming is not common in other major economies such as the US, Germany[5], France or Japan.
For this reason, opponents also fear that a stricter UK regime might tempt companies to move elsewhere – at a time when this is happening[6] for other reasons already
Who do you think is right?
The FCA’s role is crucial in maintaining transparency, accountability and integrity in the UK’s financial markets. It is a mammoth task to regulate more than 45,000 companies and a wide spectrum of products and services including banking, insurance, pensions and asset management.
We only need to go as far as the 2007-09 financial crisis to understand why regulation matters in financial markets and why companies in this sector need to be watched carefully.
So the FCA is looking for ways to strengthen its tools to maintain the integrity of financial markets and protect consumers. The watchdog is often criticised – lately by MPs[7], for example – for lengthy investigations that lack transparency, so the new proposals appear to be a response to this.
However, there seems to be merit in the objections. In particular, it seems legitimate to worry that stricter regulations may prompt companies to relocate, impacting the UK’s competitiveness. Relocating is particularly easy in the financial sector because assets can be moved around swiftly.
Remember that many companies in the financial sector operate internationally. Being named in a case in the UK would impact their international reputation and affect their business elsewhere. This is an added incentive to avoid the risk and move away.
It’s unclear what criteria would be used to name companies. The FCA says it will evaluate this on a case-by-case basis. However, this seems to be defeating the transparency objective. Companies regulated by the FCA are likely to question whether such a process is fair.
The proposals could unfairly lead to volatility in bank share prices.
Ground Picture[8]
I worry about the potential for volatility in stock prices, especially when a case ends with no fines or charges. The FCA argues that this is unlikely, and has given examples from previous cases. But it is not sufficient to draw concrete conclusions from a handful of examples, and more robust research and data is required here.
The UK, like many countries, also maintains costly safety nets to reassure depositors in order to avoid bank runs, such as deposit insurance schemes and lender of last resort facilities. Naming firms under investigation may contradict these efforts.
Is there potential for a compromise?
The FCA proposal and the objections are polar opposites, so I cannot see a middle ground here. The latest response[9] from the FCA indicates that it stands firmly behind the proposal.
Nonetheless, it intends to listen to all views before making a final decision. Even though transparency is generally to be welcomed, it may be better for the watchdog to prioritise stability here.
References
- ^ has called (www.ft.com)
- ^ two-thirds (www.fca.org.uk)
- ^ Mark Zakian/Alamy (www.alamy.com)
- ^ Singapore has (www.mas.gov.sg)
- ^ US, Germany (www.ft.com)
- ^ this is happening (theconversation.com)
- ^ lately by MPs (committees.parliament.uk)
- ^ Ground Picture (www.shutterstock.com)
- ^ latest response (www.fca.org.uk)
