PRA enforcement changes: What you need to know

1. The EAS and enhanced settlement discount

The PRA has introduced the EAS, which compels the production by the subject of the investigation of a detailed factual account of the matters under investigation (the Account), and for those that participate in the EAS there is also the availability of an enhanced settlement discount of up to 50% in respect of fulsome cooperation during the EAS and early admissions of breaches. At a high level this operates as follows:

• The investigation subject decides whether to participate: The investigation subject has 28 days from the receipt of the Notice of Appointment of Investigators to consider whether to participate in the EAS. Participation is voluntary and will not be imposed upon the subjects of an investigation.  It is for the subject to weigh up the benefits against the potential risks and costs in participating in the Scheme. If the subject decides not to participate, the PRA will not draw an adverse inference or take that decision into account when considering cooperation or aggravation in the context of determining any disciplinary measure, including a financial penalty.
• The PRA considers the request to participate: All requests to participate in the EAS will be considered, but the PRA has indicated that the Scheme is more likely to apply in specific investigations commenced under section 168 of the Financial Services and Markets Act 2000 (FSMA) given their narrower initial focus, as opposed to general investigations under section 167 of FSMA. The PRA will not permit the use of the EAS where the investigation subject is under investigation for potential criminal breaches or where criminal conduct is suspected. There is also an assumption that the EAS would be unlikely to be appropriate where there are circumstances suggesting breaches of PRA Fundamental Rule 1 (lack of integrity) or 7 (being open and co-operative).
• The investigation subject is compelled to provide the Account: If the investigation subject applies to participate in the Scheme, and the PRA accepts the request, the subject would then be compelled to provide the Account, along with related evidence (such as relevant contemporaneous materials and transcripts of any interviews taken). The Account will generally be required to be produced within six months. Where the subject has already conducted its own investigation in relation to the matters under investigation, or was in the process of doing so when it was notified of the PRA’s investigation, the PRA may accept the existing investigation report as part of the Account, although this will be considered on a case-by-case basis, given the internal investigation that a firm has carried out on its own initiative may differ in scope or may not have been conducted through the same lens as that of the PRA’s investigation.
• Senior manager attestation: Where the subject under investigation is a firm, an “appropriate senior manager” will be expected to attest (in a form to be agreed by the PRA), on production of the Account, as to: (i) the process followed in relation to the preparation of the Account;  (ii) the senior manager’s role in overseeing its production; (iii) confirmation that the process followed in relation to the production of the Account has, in the view of the senior manager, been robust and diligent and the findings of any investigatory work carried out has been accurately reflected in the Account; and (iv) that based on the scope and methodology for the Account as agreed with the PRA, there is no other information that is relevant to the investigation of which the senior manager is aware and which should be notified to the PRA. The process for identifying and selecting the relevant senior manager will be agreed between the PRA and the firm as part of the discussions regarding the scope of the Account prior to compelling the Account. In terms of what is meant by an appropriate senior manager, this will generally be expected to be a senior manager approved under the Senior Managers and Certification Regime (SMCR) where relevant to the firm. Where the SMCR does not apply or for small firms if an appropriate approved senior manager is not available, the senior manager should be the relevant senior executive or board member the PRA has agreed should provide the attestation. Detailed knowledge of the relevant area is not a prerequisite for the appropriate senior manager, but they are expected to have a sufficient understanding of the relevant facts, events, individuals, systems, controls and governance structures.
• PRA next steps: Once the PRA has considered the Account and any other relevant information, it will write to the subject confirming whether it intends to: discontinue the investigation; continue the investigation, including undertaking further information gathering as necessary; invite the subject to enter without prejudice settlement discussions on the basis that the Account is sufficient for the PRA to make findings; or refer the matter to the Enforcement Decision Making Committee.
• Availability of enhanced settlement discount for early admissions: Where the investigation subject has participated in the EAS, including providing the Account, and at an early stage of the investigation also makes admissions, on a without prejudice basis, in relation to potential breaches under investigation, it may be entitled to a reduction in the amount or period of the relevant sanction of up to 50%, providing that in the PRA’s view, the subject’s cooperation merits such a discount having regard to all relevant circumstances. The PRA considers that increasing the 30% settlement discount by up to an additional 20% will incentivise both early admissions and participation in the EAS.

2. Changes to the approach to financial penalties

In addition to introducing the EAS and the enhanced settlement discount, the PRA has: (i) amended its policy on financial penalties imposed on firms by introducing a matrix which sets out the starting point for penalties linking to the firm’s impact categorisation; and (ii) updated the methodology for calculating fines for individuals and thresholds at which individuals may be able to apply for a reduction of a fine on the basis of serious financial hardship (SFH).

(i) Firms

The PRA has a five-step framework for penalty calculation. It has amended one part of this framework for penalties relating to firms – namely, the methodology for identifying a starting point for calculating the fine (the Step 2 starting point). The previous policy typically determined the Step 2 starting point figure by using the firm’s total revenue or revenue in respect of one or more areas of its business, then applied a percentage of the firm’s annual revenue to determine the base figure for the penalty calculation. The percentage would reflect the PRA’s assessment of the seriousness of the breach.

CP9/23 explains that a core part of the PRA’s supervisory risk assessment is the potential impact assessment, which assesses the significance of a firm on the stability of the UK financial system. This ‘potential impact’ reflects a firm’s potential to affect adversely the stability of the system by failing, coming under operational or financial stress, or because of the way in which it carries out its business. The PRA divides all firms into ‘categories’ of potential impact, which is a holistic supervisory assessment. In line with this, the PRA is replacing the Step 2 figure with a matrix, setting out the ranges for the penalty starting point by reference to the firm’s impact categorisation and the seriousness of the breach.  This matrix is below:

Where a firm has not been assigned a category of impact, then the PRA will determine which firm category is appropriate.

(ii) Individuals

With regards to individuals, the PRA has amended the penalty calculation so that relevant income (for the purposes of determining a starting point) is based on the duration of the breach, rather than using the individual’s annual income in the tax year preceding the date when the breach ended, and has raised the SFH thresholds to broaden eligibility. The new thresholds for SFH include a capital threshold based on Office for National Statistics data for individual wealth in Great Britain.

Impact of the changes

As noted above, as participation in the EAS is voluntary, whether or not firms and individuals will decide to opt into the scheme remains to be seen. An added dimension to the weighing up of the relative risks and benefits of participating in the EAS for firms is that they will need to provide the senior manager attestation as part of the EAS process, a proposal criticised by several respondents at consultation stage, but which the PRA retained in the final policy, on the basis that it views a senior manager attestation as a “key safeguard”. In response to comments to CP9/23, the Bank provided further clarification as to the requirements and scope of the attestation, which has been welcomed. However, given that ultimately signing an attestation exposes a senior manager to the risk of regulatory action should the attestation later found to be incorrect, firms participating in the EAS will need to have a robust and transparent governance process around the preparation of the Account to enable the senior manager in question to be able to make the attestation required.  

Whilst the PRA has said that the EAS may, in appropriate circumstances, be used in multi-party investigations of firms and individuals, the use of the EAS here is likely be more complex, although the PRA will consider the production of information collectively from members of the same corporate group on a case-by-case basis. In investigations being conducted jointly with another regulator, if the PRA permits use of the EAS, this will apply only to the PRA’s investigative processes and will not bind the other regulator or law enforcement agency, which will likely also be an important factor for an investigation subject to consider when deciding whether to opt in to the Scheme as they could find themselves settling with the PRA under the EAS, with all of the work and financial spend this entails producing the Account, but still subject to other ongoing regulatory investigations on the same subject matter.

With regards to the changes to the financial penalty calculations, it will take a little time for the impact of these changes to filter through to investigations – the penalty regime in place before 30th January 2024 will apply to misconduct before that date, and the new penalty regime will only apply to misconduct from that date onwards. Some respondents to CP9/23 stated that they thought that the changes to the methodology for the calculation of PRA firm penalties would increase the size of penalties imposed against a firm when compared to previous penalties imposed. The PRA believes that in aggregate there is unlikely to be a material uplift in penalties. However, it says that it cannot rule out that the size of the financial penalty may increase for certain firms. This may be a case of swings and roundabouts but those in the highest bracket clearly have most to gain from the increased discount available under the EAS. It will be interesting to see whether the FCA decides to make similar enforcement changes in the months to come to mirror the PRA’s new approach.