Name and shame: The true cost of FCA warning notices

The Financial Conduct Authority's (FCA) decision to name firms - and in some circumstances individuals - in public warning notices, has caused concern in the industry.

A primary concern, understandably, is of the FCA shaming the innocent before they are proven guilty.

The FCA argues the new approach is necessary to create improved transparency. It also said it hoped the change would deter more firms from behaving badly and, at the same time, instil greater public trust in the industry.

The true cost of publishing FCA warning notices

While the FCA has admitted the new policy could create extra costs for both itself and firms concerned, it says these should be "minimal". The regulator said there would be a "minimal increase in the operating costs of the Regulatory Decisions Committee (RDC) in making the additional decision whether to publish information in relation to a warning notice".

Financial concerns

However, industry specialists warned that added administration costs could be anything but small. Barrister Peter Hamilton, of 4 Pump Court chambers, said costs "will be significantly increased by the FCA's wish and desire to have the warning notice published".

He added: "These are going to be serious issues that the FCA is raising, so the firm is going to take them seriously and it's going to engage lawyers in the consultation process.

"These things don't just happen quickly or lightly, there is an awful lot of preparation involved on both sides that will increase the costs and I don't think it's reasonable to say that the costs are insignificant in relation to the regulation and supervision of that particular matter."

There were also concerns from the industry that the regulator's new policy could lead to an increase in litigation action and costs, however Hamilton said an increase in legal actions such as injunctions and libel suits is unlikely as "provided the FCA is acting in good faith it can't be sued".

Reputational damage

The real issue of cost for advisers, argued Association of Professional Financial Advisers (APFA) director general Chris Hannant, is the potential loss of business for firms that have been identified by the FCA.

He said: "The reputational damage is potentially worse than the direct pounds and pence of going through an enforcement action.

"There are costs to doing business and there are costs to regulation and they can be managed. But the reputational damage that might be done I think is a far more worrying factor because if your name is [shamed] potentially that will kill all new business or might even have a detrimental effect on existing clients."

In its cost-benefit analysis, the FCA admitted that firms could suffer a loss of business as a result of reputational damage. However, it stopped short of offering any form of compensation for those wrongly accused.

"We do not think it is appropriate to issue an apology or offer compensation; if a person wishes to complain about our actions they can make a formal complaint through our complaints scheme," it said.

The FCA offered instead to publicise notices of discontinuance in the same format as the original warning notice, as a "remedy for any harm caused" by the original publication. It also said it would only publish names of individuals after weighing up whether it was really necessary.

Hannant said he was relieved the FCA had taken some industry concerns on board before formulating its final policy.

"At this stage, we should welcome the fact that the FCA has listened, made some changes and we'll see how it works out in practice."

Did you know? Under the Financial Services Act 2012, the FCA cannot be sued for libel or damages unless it was acting "in bad faith" or unlawfully, according to the Human Rights Act 1998.

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• Topics
• Regulation
• FCA
• APFA