A new ‘naming and shaming’ regime for financial markets: striking a balance
The Dutch ‘naming and shaming’ regime for financial markets has recently been harmonised by European financial law. The regime may now be regarded as better synchronised with fundamental rights, more specifically the presumption of innocence.
‘Naming and shaming’ has a long-standing reputation as an effective enforcement tool in the supervisory toolkit of Dutch supervisory authorities. This includes the financial supervisory authorities the Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB). Part of this toolkit is the immediate publication of an administrative fine as soon as it has been imposed, i.e. before the administrative sanction has become final. The sanction decision will be published via the supervisory authority’s website, a press release and, more recently, even through Twitter, explicitly stating the name of the alleged violator. Such a publication is felt as a severe penalty for market participants as it causes reputational damage, which is often considered more punitive than the underlying pecuniary sanction. The publication regime has been heavily criticised, as publication was not considered a ‘criminal charge’ and (therefore) the publication decision lacked legal protection, thus conflicting with the presumption of innocence. Due to recent harmonisation, the publication regime has been subject to changes which seem to enshrine the presumption of innocence.
The previous regime comprised a general obligation for the authorities to publish: publication could only be withheld if the publication would harm the objectives of supervision. This is the reason DNB, the prudential supervisor, rarely published sanctions; publication could easily run counter to its objective to safeguard financial stability, for instance by resulting in bank runs. Such risk applies to a lesser extent to supervision by the AFM, the conduct-of-business supervisor, resulting in a long list of publications. Moreover, the previous regime did not provide for a proportionality test, so that the interests of the alleged violator in the publication decision could be taken into account. This lack of proportionality could run foul of the presumption of innocence, as the immediate publication of a sanction is based on a presumption of guilt and thus resembles so-called ‘early enforcement’. The European Court of Human Rights (ECtHR) ruled in Janosevic v Sweden that such early enforcement does not always constitute a conflict with the presumption of innocence. However, considering the (potential) harm of such early enforcement measures, the ECtHR ruled that States are required to ‘strike a fair balance between the interests involved’, hence requiring a proportionality test.
For the presumption of innocence to apply, the immediate publication must qualify as a ‘criminal charge’ within the meaning of Article 6 of the European Convention on Human Rights (ECHR). The Dutch legislature, the supervisory authorities and the judiciary did (and still do) not deem an immediate publication a criminal charge, arguing that the publication’s (primary) purpose is to inform and warn the public, not to punish the alleged violator. Legal literature has been very critical. Various authors argue that immediate publication should be qualified as a criminal charge because of its deterrent and punitive character, regardless of its primary objective. The irreversible potential reputational damage will in most cases prove more deterrent and de facto punitive than the underlying fine. Nonetheless, the Dutch legislature did not feel the need to consider the interests of the alleged violator in the publication decision-making process.
The debate remaining unsettled, European financial law has intervened in the publication regime by introducing a proportionality test, silently confirming the criminal features of such publication. Under the new regime, publication must be deferred or published anonymised if full publication would disproportionately harm the party involved. As a consequence, the supervisory authorities now have to balance the interests of warning and informing the public against the potential reputational damage of the party involved. On paper, it sounds like the ‘fair balance’ the ECtHR champions. In practice, it seems that the AFM will assign a heavy weight to warning and informing the market, even where any immediate danger has already been averted.
Today the ball lies in the judiciary’s court, which may now give its views on the application of the new regime. It seems from recent case law that courts show reluctance to allow full publication if the exclusive purpose of publication is general prevention, i.e. without an objective to warn the public. Hence, it seems that introducing the alleged violator’s interest as a determining factor may lead to a regime better synchronised with the potential implications of a publication and with fundamental rights, more in particular the presumption of innocence.