The Financial Conduct Authority (FCA) is currently seeking consultation responses to its CP24/2, ‘Our Enforcement Guide and publicising enforcement investigations – a new approach’. This plan will mark a shift in the FCA’s approach to enforcement action by publishing names of companies at the earlier stages of an investigation, prior to determinations of wrongdoing, based on a ‘public interest’ test.
Through this approach, the FCA intends to promote increased transparency of enforcement proceedings, allowing the financial services sector to be more readily aware of areas of serious misconduct. The intention is that this should encourage the rest of the market to review their own compliance and implement preventative measures, which could deter regulatory intervention in the future.
Regulators publishing the names of companies at early stages of an investigation is not a new concept, and is a model already followed both by national and international regulatory bodies. However, the Consultation Paper currently omits consideration of the market reactions to an announcement and how this may affect the target company’s share price.
Literature published in 2014, aimed to quantify the stock market’s reaction to the China Securities Regulatory Commission (CSRC) announcements of regulatory investigations into named firms, found that for 157 announcements between 2002-2011, the share price of the named firms suffered a '–6% of CAR' (cumulative abnormal return) over the two-day event window.[1] However, it is important to note that not all of the CSRC investigations resulted in a subsequent sanction announcement or punitive action by the regulator. Therefore, some companies faced adverse share price consequences based on unfounded allegations.
Moreover, similar research concerning European Union Antitrust Investigations looked at the link between early stage investigatory action being made public (dawn raids were the EU’s chosen fact-finding method) and the effect on share prices for 130 target firms from 1979-2009.[2] Over a 31-day event window a 2.89% reduction in share value was identified. This suggests that regardless of how information concerning regulatory investigations is released to the market, the announcements adversely impact companies who may later be proven to be compliant.
The trends observed in the above examples can offer insight into what the potential impact of an FCA enforcement announcement could have on the named company. The average market value of the five largest UK-listed financial institutions is c.£50 billion, and by using the more conservative percentage decrease, a 2.89% reduction would be equivalent to wiping off c.£1.6 billion from the market capitalisation.[3] In the event that the FCA proceeds with the implementation of this new enforcement approach, it raises the question of whether this trend will be observed in practice in the UK financial services sector in years to come.
As the consultation window draws to a close on 30 April 2024, FCA-regulated firms and the financial services industry will surely be eagerly awaiting the FCA’s feedback and policy statement.
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[1] Stock Market Reaction to Regulatory Investigation Announcements, Xi Wu, Junsheng Zhang. https://www.tandfonline.com/doi/pdf/10.1080/21697221.2014.891069
[2] The Effect of EU Antitrust Investigations and Fines on a Firm’s Valuation, Luca Aguzzoni, Gregor Langus, Massimo Motta. The Journal of Industrial Economics, Volume LXI No.2.
[3] Based on market capitalisation data sourced from Capital IQ.
