Higher fines and early settlement - the future of UK PRA Enforcement?

As the Bank of England finalises its new Approach to Enforcement, we have taken a closer look at the implications for PRA enforcement cases and the answers to some important questions about the changes around the way firms and individuals under investigation will be able to seek to settle cases early and access larger discounts. The changes also include a new starting point for penalty calculations, which have led to concerns about higher fines for 'certain firms'.

Background

Last summer, the Bank of England (BoE) consulted on changes to its enforcement policy. The objective was to enhance the clarity, transparency and accessibility of enforcement policies, and expedite information gathering in investigations.

As we described at the time, a key element of the changes was the proposed new Early Account Scheme (EAS) for PRA Enforcement investigations. The EAS involves the subject of an investigation producing an 'Account' admitting facts and breaches in return for early settlement and a penalty discount up to 50% - which is higher than the 30% currently available from both the PRA and the FCA.

In addition, the BoE consulted on changes to the 'starting point' for the basis on which fines are calculated by the PRA, using a matrix.

The BoE has now issued its Policy Statement (PS1/24) confirming its new approach to enforcement for the PRA, as well as the BoE's wider activities including in relation to financial market infrastructure (FMI) policies and other governance and decision making processes. The changes are now generally in force as of 30 January 2024.

In short, the fundamental changes to the PRA's Enforcement Approach, EAS and the new penalty 'starting point', remain as envisaged at the consultation stage. The BoE has, however, now included some of further detail that was missing in the consultation. We describe the final position below.

The EAS

At a glance

• The EAS will likely not be available where there are criminal allegations, for general investigations under s.167 FSMA, or where there are breaches of Fundamental Rule 1 (Integrity) or FR 7 (Openness with Regulators).
• The EAS may be appropriate in joint investigations when other regulators or agencies are investigating similar issues, and in investigations with multiple subjects, but whether it would available would be subject consultation with the other regulators involved.
• The tight timescales for requesting access to the EAS, and completing the associated Account, have not been changed – but there is now scope for them to be extended 'in exceptional circumstances'.
• While legal privilege will be respected in relation to the EAS, the BoE has encouraged participants to consider whether claiming privilege broadly would be helpful in producing a fulsome Account. This presents challenges to firms when considering parallel proceedings.
• There is some important practical guidance about how interviews must be carried out when participating in the EAS. This includes the need to record and transcribe interviews.
• There are answers to some, although not all, of the questions relating to how firms can benefit from the full 50% penalty discount which is available under the EAS.
• In key respects, the scope of the attestation to be given by a Senior Manager, which is required for firms participating in the EAS, appears to be narrower than under the consultation. The attestation does however now need to address the process of producing the Account. The fact that the attestation is to be in a form agreed by the PRA, the Senior Manager and the firm under investigation indicates there will be some flexibility in the precise wording.

The finer detail

The EAS must be requested by the subject of an investigation within 28 days of the investigation starting, and if the PRA agrees, the subject would then be compelled to provide a detailed factual account (the 'Account') of the matters under investigation and supporting evidence within six months. This would be supported by a Senior Manager attestation.

The main advantage of the EAS for firms would be the offer of a discount of up to 50% (rather than 30% through Stage 1) (the 'Enhanced Settlement Discount' or 'ESD') and resolving the matter more quickly.

Voluntary process: The BoE confirmed in PS1/24 that a request to use the EAS is voluntary and would not be imposed, and that the PRA would not make negative inferences where subjects decided not to request it.

Section 168, not s.167 investigations: In light of the wide-ranging nature of general investigations under s.167 of the Financial Services and Markets Act (FSMA), it would be unlikely that the EAS would be appropriate. It would be more likely to be accepted by the PRA in s.168 investigations into specific issues.

Not for criminal cases: The EAS will not be available for cases where criminal conduct is suspected, even if the PRA has brought and then closed a criminal case without prosecution before opening separate enforcement proceedings. This is because there would be minimal efficiencies gained by the PRA using the EAS in these circumstances.

Not likely to be available for FR1 or FR7: The PS confirms that the PRA would be unlikely to accept EAS requests where there are FR 1 (Integrity) or FR 7 (Openness with Regulators) concerns – but requests will be considered on a case-by-case basis.

Possible where there are multiple parties under investigation: Where there are multi-party investigations into firms and individuals, the PRA will consider each request separately and on its own merit. It is unlikely that joint Accounts will be allowed, but this will be considered on a case-by-case basis. The PRA may use the EAS in multi-party investigations and does not rule out taking further action where necessary where there are competing or contradictory narratives from the different parties involved.

Possible in joint investigations, but after consultation: Where there are joint investigations with other regulators or agencies, the PRA will discuss the suitability of the EAS with the other investigators before making a decision to consent to a request from the subject, and is unlikely to do so where the other regulator does not think it is appropriate. Decisions to accept Accounts and settle on that basis will not bind other regulators.

No more time to make the request, except in exceptional circumstances: Some respondents asked for more time for firms to consider whether to participate in the EAS, as 28 days from the receipt of the Notice of Appointment was felt to be too short. The BoE disagreed – but has updated the provisions to ensure that the PRA can grant an extension in exceptional circumstances.

Account to be produced in six months, other than in exceptional circumstances: The BoE reiterated that the Account is expected to be produced within six months and extensions will also only be granted in exceptional circumstances. When an account is not produced in time, the PRA may consider this when assessing the subject's cooperation as part of determining any financial penalty.

Termination of the EAS: The PRA can terminate the EAS process at any point prior to the production of the Account. There is a non-exhaustive list of what the PRA will have regard to when considering termination, including: the subject has requested to withdraw; there is a significant change in the scope of the investigation; a criminal investigation into the subject has commenced on connected facts; the impact of termination on the PRA's investigation and, where relevant, other subjects of the investigation or regulatory authorities; and the subject's progress or lack of progress in working towards the Account.

Privilege is protected – but subjects are expected to consider the benefits of an open process: Questions were raised during the consultation period about how the production of the Account would interact with the protections regarding legally privileged material and the risk that it could be disclosed to other parties or regulators – particularly where lawyers are involved in producing it. The BoE confirmed that the EAS is not meant to circumvent the protection for privileged material under s.413 FSMA, but expects subjects to consider the scope of privilege claims in light of the benefits of an open process in producing a fulsome Account to the PRA.

Confidential Information can be shared by the PRA, 'Without Prejudice' admissions will not be: Confidential Information in an Account is still protected by s.348 of FSMA. However, the BoE does not rule out the PRA sharing the information where it is permissible and necessary to do so. However, 'Without Prejudice' admissions will be held on a confidential basis and will not generally be disclosed.

Interviews will be considered on case-by-case basis: Decisions about the PRA conducting interviews itself, or attending interviews undertaken by the subject as part of producing the Account, will be case dependent – but they will be mindful of firm or individual resources.

Need to record and transcribe interviews undertaken when producing the account: Where interviews are undertaken by the subject, the PRA will expect that transcripts are produced and provided alongside the EAS, and that copies of recordings are kept.

May be possible to use internal investigations: Using existing internal investigations as the basis for an Account would be accepted only on a case-by-case basis, as it may be that they do not have the same lens as the PRA investigation.

Considering what information the subject can access: When discussing the scope of the Account, and assessing it, the PRA will consider limitations on the information available to the subject, and the steps taken to obtain information that is relevant but not in their possession.

Senior Manager Attestation: Many respondents disagreed with the need for the attestation, and expressed concerns about the difficulty with identifying a relevant individual, and the burden on, and risks to, the person chosen. It was also questioned whether an attestation was necessary if the Account was provided on a compelled basis. The BoE has clarified its position and made some useful amendments:

• The firm will be expected to nominate an appropriate senior manager (approved under the Senior Manager and Certification Regime (SMCR) where that applies) to attest and oversee the production of the Account. The PRA will consider the firm's nomination, assessing the relevant areas of responsibility, and whether the Senior Manager is sufficiently objective and competent.
• The attestation, agreed between the subject and the PRA, now will cover: the process followed in preparing the account; the Senior Manager's role in it; their confirmation as to the robustness and diligence of the process; and that the Account reflects the investigation. It will also confirm that there are no other related matters or relevant information which the senior manager is aware of which are relevant to the matters under investigation and which should be notified to the PRA (i.e. that there are no other material factors or information that the firm should have made the PRA aware of in relation to the matters the PRA is investigating).
• The attestation is more clearly focused on the awareness of the Senior Manager, rather than the firm.
• The explicit requirement from the consultation that the Senior Manager attests that there are no further 'potential breaches' of which the Senior Manager is aware has been removed.
• The PRA may consider sanctions against the Senior Manager if the PRA finds that the individual has knowingly misrepresented the position in the Account, or has otherwise fallen short (e.g. breach of a Conduct Rule) in overseeing its production.

How big will the ESD be? The BoE is of the view that early admissions and quick resolutions lead to more effective PRA notices. It has not increased the ESD beyond 50%, and the size of the ESD available will depend on a number of factors including the nature and scope of the admissions. The full ESD is only likely to be available when participants provide a detailed and accurate Account, and make admissions of fact, misconduct and breaches in good faith.

Other points:

• The BoE will not introduce a scheme at the PRA to mirror the FCA's Focussed Resolution Agreement scheme at this time, as it is introducing the EAS and ESD.
• Unsurprisingly, the BoE noted that risks associated with follow on litigation arising from producing the Account are for firms to weigh up themselves.
• The EAS will also be available to investigations into FMI.

The penalty 'starting point'

• The BoE was also consulting on a proposed new basis on which to start the PRA's penalty calculation. In contrast to the previous approach which started with a percentage of the firm's annual revenue to reflect the seriousness of the breach, the new approach is based on a matrix, using the impact categorisation for the firm, and a set of indicative ranges based on the seriousness of the breach.
• In its consultation, the BoE said that any breach relating to FR 1 or FR 7 would be categorised as Level 3 seriousness by the PRA. However, this is now a rebuttable presumption.
• The BoE says that in aggregate there is unlikely to be any material uplift in penalties as revenue is currently used as the default starting point by the PRA. However, with a move to a new starting point it cannot rule out that the size of penalties may increase for certain firms.
• The BoE considers this nonetheless to be appropriate as the PRA retains the discretion to ensure that any sanction imposed remains proportionate by reducing or increasing it under other relevant steps in the penalty calculation – the new figures are just a starting point.
• The BoE has removed the overlaps in the ranges which were consulted on to ensure that each is distinct. It has also changed the terminology of the seriousness descriptors to a numeric scale rather than 'low', 'medium' or 'high'.
• The penalty regime in place at the time of the breach will apply – this means that the new approach is only relevant to future breaches. Where a firm changes category in a relevant period, the lower category will be used, but the PRA has the discretion to increase it at later stages of the penalty calculation.
• The amended matrix is below:

• The BoE has also updated the serious financial hardship thresholds for individuals to align with the Office for National Statistics metrics in the context of setting financial penalties, and set out guidance as to the factors it will consider when considering if an individual is in serious financial hardship.

Reflections

While the clarifications provided in PS1/24 are helpful, firms and individuals under investigation will still need to carefully weigh up the benefits and disadvantages of participating in the new EAS on a case-by-case basis. The prospect of a discount of up to 50%, as opposed to the standard 30% Stage One discount, combined with the time and cost savings from an early resolution of an investigation, may be appealing but there are challenges for firms and their Senior Managers in producing and attesting to an Account, not least in the timescales envisaged.

In terms of penalties generally, the BoE has acknowledged, albeit not accepted, that the new starting point matrix might give rise to increased penalties from the PRA for 'certain firms', and, disappointingly it remains unclear how it has decided on these ranges – or how often they will be reviewed.