Increased transparency in enforcement: Market uncertainty and the potential cost of FCA announcements

The Financial Conduct Authority (FCA) has been criticised for its proposal to publicly identify firms that are under investigation (CP24/2).[1] Notably, in May 2024, the Financial Services Regulation Committee (FSRC) initiated a parliamentary inquiry and call for evidence in relation to the proposal. The FSRC’s concerns were surrounding the absence of a cost-benefit analysis in the FCA’s initial consultation document and possible “unwarranted impacts on share prices” on named firms.[2] The Rt Hon. Lord Forsyth, Chair of the FSRC, requested that the FCA take no further action[3] until the inquiry had reached a verdict.

Following a short break caused by the dissolution of Parliament after the General Election, the FSRC was reappointed by the House of Lords on 29 July 2024. The FSRC has now resumed its inquiry into the FCA’s proposal, with the call for evidence extended until 11 October 2024. The FCA has made no comment as to whether it will delay releasing the results of the CP24/2 consultation, in line with the FSRC’s request.

The FCA’s position

At the time of writing, the FCA is proceeding with its proposition to publicise, in certain circumstances, the names of firms that it is investigating. In its response to the FSRC, dated 25 April 2024, the FCA published findings from its own analysis of the impact on share prices between 2021 and 2024 where firms had self-disclosed to the market that they were under investigation by the FCA.

According to its data, “the relevant firm’s share price did not move negatively by more than 1.0%”.[4] However, as set out below, there are several areas where the FCA’s analysis may not capture the full impact of an announcement.

The FCA’s analysis is based on four instances where firms self-disclosed to the market. The sample size is very small, particularly given the number of FCA-regulated firms, so it is unclear the extent to which the results are representative of all regulated firms. For comparison, there are approximately 45,000 FCA-regulated firms,[5] of which 256 are listed in the financial services sector on the FTSE All Share index. Therefore, the 1.0% drop identified by the FCA is based on just 1.6% of the listed financial services firms.

Further, the FCA seems to assume that a company's self-disclosure will have a similar impact on share price as a regulatory announcement. However, the validity of this assumption is unclear. Firms are incentivised to try to mitigate the impact on their share price as part of their communication to the market. Conversely, a regulator’s direct announcement to the market would not have any such consideration. The possibility exists that the market may view self-disclosure entirely differently than one publicised by the FCA, independent of the regulated firm.

The assumption is further challenged based on how the firms included in the FCA’s sample made their self-disclosure. One firm disclosed the investigation in a standalone trading update to the market.[6] The remaining three firms reported the existence of the investigation within their annual financial statements.[7] In these three cases, the relevant disclosure was often several hundred pages into a report covering a plethora of financial and non-financial information. The FCA did not provide a breakdown of the share price impact per firm for the four firms sampled, despite the firms using different disclosure mechanisms. On this basis it is difficult to reconcile whether the impact of self-announcing, especially when done as part of scheduled market communications, will produce similar share price impacts to an FCA announcement which only pertains to a regulatory investigation.

The FCA chose to exclude a fifth firm from its analysis, attributing the 27.7% reduction in share price to issues related to the solvency of the firm’s consumer credit division rather than the FCA investigation.[8] However, the same trading update included the solvency issues and the FCA’s investigation,[9] suggesting that both factors likely contributed to the share price impact on the day of the announcement. Excluding this firm entirely from the analysis may underestimate the projected impact of CP24/2.  

Comparative analysis on share price impact

Given the FCA’s chosen approach, it is useful to consider the wider narrative around regulators who implement similar regimes. In our last insight we identified two pieces of literature which sought to quantify the share price impact of early-stage investigatory actions by overseas regulators.[10] The studies, involving the China Securities Regulatory Commission’s (CSRC) and European Commission, observed statistically significant decreases in share price, of 6.0% and 2.9% respectively, following regulator intervention.

There are two areas of divergence between the nature of these studies and the FCA's approach. First is the comprehensive nature of the underlying data. The literature surrounding the China Securities Regulatory Commission’s (CSRC) investigation announcements examined 157 cases over a 10-year period. The second study which analysed the effect of the European Commission’s anti-trust dawn raids on the share price reviewed 130 target firms from 1979-2009. These studies provide more data points than those evidenced by the FCA.

The second aspect pertains to the manner in which the market receives the information. In contrast to the FCA’s dataset, which is reliant on self-disclosure, the overseas studies demonstrate the impact of direct communications from the regulators to the market. The method of announcement could therefore contribute to the heightened negative impact observed in the literature.

It is worth noting that the relevance to the current UK market of these studies may be limited due to their focus on overseas regulators and cases from decades ago. Therefore, to bridge the gap, Grant Thornton’s Economic Consulting team conducted a series of preliminary, simplistic event studies to estimate the share price impact associated with a UK regulator’s investigation announcement. The team analysed the effect of the Competitions and Markets Authority (CMA) announcements on the share price of the publicly listed firms that had been named as being under investigation. The CMA, a UK regulator arguably already implementing the ‘naming regime’ proposed by the FCA, was one of three regulators referenced in the FCA’s consultation paper.[11]

Our Economic Consulting team produced preliminary estimates of the impact of 26 CMA announcements[12] on the share price of named firms between 2020 to 2024. The analysis indicated that on average within one day post-announcement, share price declined by 0.8%, which aligns with the FCA’s findings. However, when assessing the impact over a three-day post-event period, the average decrease amounted to 1.7%, with the most significant decline being 8.4%. This variation may be attributable to the seriousness of the allegations, and the extent to which the CMA was acting in conjunction with other competition authorities who had already opened investigations.

The findings from our analysis alongside estimates from the FCA and overseas regulators, offer a range of potential financial cost estimates that are useful when assessing the proposed FCA approach. The table below illustrates this range by applying the various percentage decreases to the average market capitalisation of the five largest listed-regulated firms (c. £51 billion):

This analysis indicates that the possible impact of one of the five largest firms being named in a regulatory investigation could result in an immediate decrease in market capitalisation anywhere between c.£0.4 billion to £3.1 billion.

While these studies go some way to highlight the possible impact a regulatory announcement can have on a firm’s value, they do not consider any further effects resulting from the release of additional related information. Nor the possible recovery in the share price, particularly if the investigation ultimately finds that no infringement took place.

Next steps

The FCA’s proposed approach is designed to inform the market about its expectations and create a deterrent effect,[13] by highlighting where others have fallen short – but at what cost?

The FCA's own analysis shows that it has considered the impact of disclosure on firms under investigation. Nevertheless, as discussed above, the dataset's limitations may lead to an overly conservative conclusion that the share price of an affected firm would not drop by more than 1.0%.

Through our own research and preliminary analysis, we have provided insights into a potential range of financial costs, drawing from data on large, listed firms. However, the implications for smaller listed and unlisted firms remain uncertain.

The FCA has declared it will provide greater detail on how CP24/2 could work in practice later this autumn[14]. These new case studies, along with the results of the FSRC’s call for evidence, are expected to offer additional insights into the future of CP24/2 and its potential implementation plans.

For more insight and guidance, get in touch with James Helme, Tom Middleton, Emily Bahous, and Casey Buddin.