Changes to the Bank of England and Prudential Regulation Authority's enforcement approach: CP9/23 ("Consultation")
The Bank of England (the "Bank") and Prudential Regulation Authority ("PRA") are consulting on significant changes to their enforcement policies. These changes, if implemented, may alter the experience of enforcement, as well as raising strategic considerations, for those the subject of investigation.
The Consultation includes the following three key proposals:
- A new route for early cooperation by the subjects of an investigation: the Early Account Scheme ("EAS").
- An enhanced settlement discount of up to 50% when the subject of an investigation has made early admissions and participated in the EAS.
- Changes to the approach used for calculating financial penalties.
i) Early cooperation
The Bank/PRA want to make investigations faster and more efficient. To help achieve this, under the EAS, they are proposing to offer the subjects of investigation the opportunity to help the Bank/PRA with core investigative steps at an early stage, in exchange for the prospect of an enhanced settlement discount.
The EAS would be available at the request of the subject of investigation and at the Bank/PRA's discretion. If used, the subject of investigation would be compelled to provide a detailed factual account ("Account") of the matters under investigation together with all relevant materials/evidence. Ordinarily, the timeframe for producing the Account and supporting evidence will be no longer than six months. Where the subject of investigation is a firm, the Account will need to be supported by an attestation by an independent senior manager (to be agreed with the Bank/PRA) that there are no other related matters, relevant information, or potential breaches of which the firm is aware, and which should be notified to the Bank/PRA.
In some ways the EAS represents a formalisation of existing features of the PRA's approach to enforcement in relation to firms. It is not unusual for the PRA to compel an account of events, nor is it unusual for the PRA to accept voluntary production of an internal investigation report and to treat that as a mitigating factor in penalty calculation. But the EAS formalises the opportunity to cooperate in this way, making it a process which "belongs" to the Bank/PRA and directly ties that cooperation with an enhanced settlement discount.
The proposal raises a number of issues and questions:
- the extent to which the Bank/PRA will rely on the Account and how the content of the Account will be tested. In recent years both the PRA and Financial Conduct Authority ("FCA") have tended to move away from reliance on internal investigations conducted by firms to avoid being seen to "outsource" work which they should be doing themselves and to mitigate the perceived risk that an internal investigation may not be sufficiently objective or thorough. Possibly in response to such concerns, the Consultation indicates the Bank/PRA will expect subjects who are using the EAS to consult on various aspects of its internal investigation in support of the Account, including its scope, the approach to interviews, and the production of underlying documents. The Consultation also clearly signals that the Bank/PRA may still take its own investigatory steps after receiving the Account, raising a question as to how that will work in practice;
- whether participation in the EAS will result in any overall efficiencies (in this regard, the Consultation notes the EAS may place additional burden on subjects of investigation at the outset of an enforcement investigation, but says this shall be balanced with anticipated benefits of faster resolution);
- the extent to which the Bank/PRA will, in practice, seek involvement in the firm's investigative steps in support of the Account, such as interviews (and whether that involvement might counter desired efficiencies, and make it impracticable to complete the EAS within six months);
- the impact (if any) on any parallel investigations, for example by the FCA (and whether the existence of such parallel investigations might counter perceived benefits of entering the EAS);
- the question of whether the Account and supporting documents may be at greater risk of being disclosed in other proceedings than is currently the case for similar equivalent documents but which are not produced under the EAS;
- how participation in the EAS may impact the ability of the subject of investigation to contest resulting factual findings by the Bank/PRA in other proceedings;
- the impact on other parties the subject of investigation, in particular the status of admissions made in the context of the EAS by one party against others (and where those other parties are individual employees, any consequential employment issues arising);
- the impact of the attestation requirement upon the investigatory steps perceived to be necessary to produce the Account.
ii) Enhanced settlement discount for early admissions
An enhanced discount of up to 50% potentially will be available where a subject of investigation participates in the EAS and provides early admissions well ahead of the commencement of the 28-day settlement period.
The Consultation indicates an admission will be relevant for the enhanced discount if it is "in relation to" potential breaches under investigation. This does not go as far as saying only admissions "of" the breaches under investigation will count, leaving room for debate as to what the Bank/PRA would consider to be a sufficient admission for the purpose of obtaining the enhanced discount.
If the proposals are implemented, it is unclear how the Bank/PRA will determine what enhanced percentage discount (out of a potential range of 30% to 50%) will apply to subjects who participate in the EAS and provide early admissions. The Consultation indicates it will be up to the Bank/PRA's discretion as to whether it considers the subject has complied with the requirements of the EAS, has made relevant admissions, and has provided co-operation that merits a discount above 30%. The circumstances that the Bank/PRA will consider in relation to this include a subjective assessment of "whether the subject has materially assisted the PRA in the efficient and effective conduct of the investigation, in particular by enabling the PRA to more quickly develop a sufficient understanding of the nature, seriousness and impact (or potential impact) of the suspected breach and make a reasonable assessment of any action that should be taken in consequence of it".
iii) Changes to the calculation of financial penalties
For PRA-authorised firms, the PRA proposes replacing "relevant revenue" (a firm's total revenue, or its revenue in respect of one or more business area, during the last financial year preceding the date the breach ended) as the relevant default starting figure for the calculation of penalties. Due to the nature of issues that the PRA oversees, that metric can often lead to a disproportionately large starting point for a penalty as the relevant revenue is often the entire revenue of the institution. The PRA now proposes using a "purely indicative" matrix structure which takes into account the firm's impact categorisation, and the seriousness of the breach.
|1||£25-75 million||£75-125 million||>£125 million|
|2||£15-45 million||£30-75 million||>£75 million|
|3||£1-7 million||£3-15 million||>£15 million|
|4||£0-0.2 million||£1-2 million||>£2 million|
For individuals, the PRA proposes to amend Step 2 of the five-step penalty policy so that where the breach lasted more than 12 months, the individual’s relevant income is calculated for the duration of the breach (rather than the annual income earned during the 12 months preceding the end of the breach).
An interesting question is whether these proposed changes will materially increase or decrease the likely overall penalty PRA-authorised firms or individuals will be subject to. The Consultation addresses this question by noting that, in respect of firms, the PRA does not consider that in aggregate there is likely to be a material uplift in the Step 2 figures, given revenue is currently used as a starting point. In respect of individuals, the Consultation notes that in some instances there may be an uplift in calculating the starting point figure, however the remaining steps of the penalty calculation may mitigate this, such that the change will not automatically result in larger penalties for individuals.