UK Financial Services Authority Ordered to Disclose Identity of Entities Investigated for, But Not Formally Charged with, Regulatory Breaches

September 19, 2007

In a previous client update ("UK Court of Appeal confirms that documents created by regulators are not always protected from production in court proceedings"), we discussed a recent Court of Appeal decision confirming the limitations on the statutory protections granted to documents created by the chief regulatory body in the UK, the Financial Services Authority (the FSA), in the course of its confidential investigations into regulated entities for suspected rule breaches.  In particular, the Court of Appeal confirmed that such documents are not always protected from production in subsequent court proceedings, even though this will enable claimants to obtain documents that already contain the benefit of a regulatory body’s analysis of facts and to obtain advance indications of witnesses’ likely testimony.  This is so irrespective of whether or not the relevant entity was ultimately disciplined by the FSA. 

A recent decision of the UK’s Information Commissioner under the UK Freedom of Information Act 2000 (the FOIA) suggests still further inroads into the protections granted to regulated entities the subject of investigations for suspected rule breaches.  In this case, the Commissioner ordered the FSA to disclose the identities of certain entities, which had been investigated, but not ultimately disciplined, by the FSA.  This could have serious ramifications for the satisfactory informal resolution of suspected rule breaches.

The Freedom of Information Act 2000

The FOIA came fully into force in England on 1 January 2005.  Since that date, individuals and companies (including private civil litigants) have had the right to obtain certain information from public authorities on request.  The FSA is a public authority within the meaning of the FOIA.

The basic rule is that a public authority has a duty to disclose information on request, unless an exemption applies.  There are two types of exemptions:

  1. absolute, which exempts the public authority from disclosing the information at all, for example information which is subject to a statutory restriction on disclosure (FOIA, section 44); and
  2. qualified, which only exempts the public authority from disclosing the information if the public interest in maintaining the exemption outweighs the public interest in disclosing the information, for example (i) information, the disclosure of which would, or would be likely to, prejudice effective law enforcement (FOIA, section 31); and (ii) information, the disclosure of which would, or would be likely to, prejudice the commercial interests of any person (FOIA, section 43).

Disputes between the requesting party and the public authority about the application of the FOIA are resolved by the UK Information Commissioner. 

The decision of the Information Commissioner

On 7 August 2007, the Information Commissioner published a decision notice addressed to the FSA, in respect of a complaint from an individual about the FSA’s adherence to its obligations under the FOIA.  The complainant had requested that the FSA provide to him the names of any companies it had identified as using inappropriate charges in setting premiums when selling endowment mortgages.  It was public knowledge that the FSA had conducted an investigation into the selling of endowment mortgages in the UK, including whether those sales had been in compliance with the various rules and regulations: whilst the FSA had publicly disciplined certain product providers, including by the imposition of large fines in some cases, a number of investigations into other product providers had been resolved informally and confidentially without charge on condition that they voluntarily agreed to compensate their clients. 

The FSA relied upon the exemptions in section 31 (law enforcement), section 43 (commercial interests) and section 44 (statutory prohibition) of the FOIA to refuse the complainant’s request. 

Section 31 – law enforcement

The FSA argued that section 31 of the FOIA applied, because disclosure of the names of the relevant companies would prejudice the exercise of its functions for the purposes of ascertaining, for example, whether any person has failed to comply with the law or whether circumstances exist which would justify regulatory action, and therefore would prejudice effective law enforcement.

In particular, the FSA argued that many of its investigations into possible rule breaches are conducted and resolved on an informal basis, without the FSA needing to invoke its more costly and time-consuming formal enforcement powers.  More specifically, entities the subject of investigation frequently voluntarily provide information to the FSA and frequently voluntarily agree to remedy problems (including by offering compensation to disadvantaged customers) to avoid the sanction of publicity involved in the formal process.  If section 31 did not protect the identities of entities whose suspected breaches were resolved on an informal and confidential basis, then such entities would be less likely to engage in open dialogue with the FSA and to provide information and offer remedies on a timely, voluntary and informal basis. 

The Commissioner disagreed.  Whilst he appreciated that the opportunity to avoid adverse publicity was one of the benefits of cooperating with the FSA, there were other benefits to this approach, including avoiding the FSA imposing penalties such as fines.  The Commissioner was not, therefore, satisfied that a disclosure would undermine the FSA’s ability to carry out its functions.  Section 31 did not, therefore, apply.

Section 43 – commercial interests

The FSA also argued that section 43 of the FOIA applied, because disclosure of the companies’ names would prejudice their commercial interests, for example, by affecting their ability to gain new business.

The Commissioner agreed that identifying the companies could damage their reputations, which would be likely to affect their future sales.  Thus, he agreed that those companies’ commercial interests would be likely to be prejudiced.  He, therefore, accepted that section 43 applied.

However, the Commissioner thought that the historical nature of the information, the general bad publicity surrounding endowment mortgages, which had already substantially affected all providers of such products, together with the fact that the companies had already taken steps to rectify the problem, meant that both the likelihood and degree of prejudice would be reduced.  

In contrast, he believed that there was a great deal of public interest in disclosing the information.  In particular, he noted that, at the time of the FSA’s review of endowment mortgages, those types of mortgages had been the most popular means of funding a mortgage loan.  Further, there are still a number of complaints being made about these products.  It was, therefore, in the public interest for any information, which sheds light on the problems associated with endowment mortgages, to be disclosed to the public.  There may also be mortgage purchasers who have a right to compensation, who may be more inclined to make complaints, if they are aware of the FSA’s findings on these particular companies, but might not otherwise do so within the relevant time limits. 

He, therefore, determined that the public interest in maintaining the commercial interests exemption did not outweigh the public interest in disclosing the information.

Section 44 – statutory prohibition

Finally, the FSA argued that section 44 of the FOIA applied, because there was a statutory restriction on disclosure of the names of the relevant companies.  In particular, the FSA argued that, before it published a statement of regulatory misconduct (or imposed a fine), the FSA’s statutory enforcement powers required it to issue a "warning notice" to the accused entity, setting out its allegations and giving the entity an opportunity to respond.  The FSA argued that identifying the companies would amount to a statement of misconduct or public censure without going through the required process. 

The Commissioner disagreed.  He considered there was a significant difference between a formal statement of non-compliance or misconduct by the FSA pursuant to its enforcement powers, which required compliance with due process prior to publication, and a disclosure of names as a result of an FOIA request, which required no formal warning procedures. 

The FSA also argued that identifying the companies would amount to a statement of misconduct or public censure without the companies having the right to appeal the allegations made in the FSA’s review.  This would be contrary to the requirements of the Human Rights Act 1998 (including the right to a fair trial). 

Again, the Commissioner disagreed.  Whilst he considered that there was some weight in this argument, because identification could imply at least some degree of guilt or fault on the part of the companies, those companies had had the opportunity to appeal the FSA’s findings by requiring it to invoke its formal investigatory powers.  Thus, the companies had been given the opportunity to exercise their right to a fair trial, but had chosen not to do so.  In sum, he determined that section 44 did not apply.

Ramifications of the Information Commissioner’s decision

The impact of the Commissioner’s decision is potentially extremely far-reaching.  The FSA currently operates a proportionate and risk-based approach to regulation, in which it only takes formal disciplinary action against wrong-doers in circumstances where it believes it appropriate and proportionate to do so.  In other circumstances, it aims to resolve issues without having to incur the cost and expense of conducting a formal investigation.  If a voluntary and informal resolution of alleged regulatory breaches cannot guarantee the relevant entity’s protection from adverse publicity, even where the entity has voluntarily compensated any disadvantaged consumers, then regulated entities may well be more reluctant to agree to such resolution.  The FSA’s approach may therefore have to change. 

The FSA has invoked the appeal procedure in the FOIA.  Only time will, therefore, tell which public interest will reign supreme: the freedom of access to information or the quicker and cheaper resolution of regulatory issues, including the prompt and voluntary payment of recompense to consumers.

[This article was also published, in a slightly different form, in the November 2007 edition of Privacy & Data Security Law Journal.]

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, Rachel Couter (+44 20 7071 4217, [email protected]) or Philip Rocher (+44 20 7071 4202, [email protected]) in the firm’s London office.   

© 2007 Gibson, Dunn & Crutcher LLP

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