* Named firms could suffer "reputational hit" -lawyers
* New FCA approach "risky and penalises innovation"
By Huw Jones
LONDON, Feb 17 (Reuters) - The financial sector reacted angrily on Thursday over UK government plans to name firms being probed for misconduct before an investigation is completed, saying the practice could harm a company's image and livelihood.
The government published its revised reform of financial supervision, saying that making a decision to probe a company public would act as a deterrent.
The fear among banks and legal experts is that making a probe public is effectively a sanction in itself and may prompt a firm's clients to run for the exits.
"By pre-emptively informing a firm's clients of its investigation the new regulator could do serious damage to the firm's reputation and business," said Steven Francis, a partner at law firm Reynolds Porter Chamberlain.
"The Financial Services Authority regularly commences investigations that lead to no disciplinary outcome. The firm either satisfies the FSA there has been no wrong-doing; or the FSA simply gets it wrong," Francis said.
The Association for Financial Markets in Europe (AFME), a banking lobby, also voiced its concerns.
"There is little to be gained and much damage to result from publicly associating a named firm with an allegation that might later prove unfounded," said Peter Beales, AFME's managing director for policy.
Regulators will need to be confident of their position when making pre-emptive announcements, said Arnondo Chakrabarti of Allen & Overy law firm.
"Those under scrutiny will take a hefty reputational hit before their case has been heard in any independent way," Chakrabarti said.
The government also announced the planned new Financial Conduct Authority, which replaces the FSA next year, will have powers to ban products, limit their distribution for up to a year and slap extra requirements on new products.
Traditionally, regulators have supervised how products are sold to consumers, stopping short of effective product approval.
"It appears to be a charter for regulators to micro-manage regulated institutions on a product-by-product basis," said Simon Gleeson, a partner at Clifford Chance.
"However since the regulator has neither the resources nor the ability to do this comprehensively across the entire industry, the practical outcome is unlikely to be too significant," Gleeson added.
Allen & Overy's Bob Penn said such a "shoot first, ask questions later approach" is risky and penalises innovation.
The planned rules would fundamentally change how financial services firms create and sell their products and make life more difficult, added David Kenmir of consultancy PwC. (Reporting by Huw Jones; Editing by Hans Peters)