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26 Jun 2023

The Bank of England/PRA’s consultation on its approach to enforcement

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"Early Account Scheme" proposal to enable earlier and more heavily discounted settlements

On 21 June 2023, the Bank of England ("BoE")/Prudential Regulation Authority ("PRA")'s Head of Enforcement and Litigation, Oliver Dearie, gave a speech the Financial Services Lawyers Association explaining the rationale behind the changes proposed in its recent consultation paper on enforcement – CP9/23 (see here).

An important proposal which was discussed was the proposed Early Account Scheme ("EAS") and its associated enhanced settlement discount.

EAS – What is proposed?

The Consultation CP9/23 (see here) itself, published on 4 May 2023, describes the ordinary course of investigations, where in the early stages, the investigation team gathers information using the PRA’s statutory powers and ordinarily undertakes interviews with relevant individuals. However, feedback they had received suggests that subjects and their advisers who would like to assist the investigation team in reaching a resolution more quickly were unclear on how best to do so under the current investigation framework.

The Consultation proposes a new EAS under which the subject under investigation would be compelled to provide a detailed factual account of the matters under investigation (the "Account") together with all relevant materials/evidence at the initial stage of an investigation. They expect that the EAS could potentially reduce the length of the initial fact-finding stage in certain investigations. Within 28 days of receipt of a Notice of the Appointment of Investigators, a subject may inform the PRA in writing that they are interested in providing the Account, together with all relevant materials and evidence. The PRA will then consider the request and notify the subject of its decision whether the PRA is content for the subject to use the EAS, and the PRA will then determine the scope of the Account. They will also impose a deadline for receipt and agree the approach to witness interviews – in particular, where the subject proposes to interview any witnesses, the PRA may indicate it wishes to attend these interviews or, if appropriate, conduct the interviews themselves using their investigatory powers.

The EAS would be available to both firms and individuals at the PRA’s discretion. Senior management accountability would be a key component of the EAS so that where the subject of an investigation is a firm, the Account would need to be supported by an attestation by an independent senior manager (to be agreed with the PRA), that there are no other related matters, relevant information, or potential breaches of which the firm is aware, and which should have been notified to the PRA.  The EAS would not be available where the investigation concerns criminal matters and it would also be unlikely to be available where it is suspected that a subject lacks integrity, has a history of repeat behaviour for which they have been sanctioned, or where there have been on-going failures to cooperate. Where other regulators are investigating similar matters, the PRA would discuss with them before agreeing to go down the EAS route.

Once the PRA has considered the Account and any other relevant information, it will inform the subject whether it intends to:

(a). discontinue the investigation;

(b). continue the investigation, including undertaking further information-gathering;

(c). invite the subject to enter into without prejudice settlement discussions on the basis that the Account (in conjunction with any other relevant information) is sufficient for the PRA to make findings; or

(d). refer the matter to the PRA's Enforcement Decision Making Committee.

In addition to potentially speeding up the process, the PRA recognises the benefits of timely settlements being in the public interest in conserving PRA's regulatory resources and to get a message out to the market quickly to change regulatory behaviours and shore up market confidence.

Enhanced settlement discount

At present, a settlement discount of 30% of the penalty calculation if settlement is reached within a 28-day "Discount Stage" period. However, to incentivise even earlier admissions, the PRA proposes an enhanced discount of up to 50% where a subject under investigation participates in the EAS and provides early admissions well ahead of the commencement of the Discount Stage. This increased discount would reflect the benefits to both the subject of the investigation and the PRA (i) the enhanced cooperation provided by participating in the EAS; and (ii) early admissions in relation to potential breaches.

Commentary

The proposals Involve a novel approach to early settlement and applicable discounts. For both PRA-authorised firms and individuals, reaching an early settlement potentially involving less resources and receiving a discount of up to 50% in terms of monetary penalty could be an attractive option where the subject concerned does not intend to contest the PRA's allegations. It does, however, set the PRA apart from the Financial Conduct Authority ("FCA") in relation to both the introduction of the EAS and the potential for a much higher discount. Indeed, those facing FCA enforcement action might well argue that a similar EAS and enhanced discounts should be available in their case – the maximum FCA discount is 30%. The FCA also has its own "Focussed Resolution Agreement" regime which differs from the EAS and is not replicated in the PRA's proposals.  In addition, it is not clear how penalties will be calculated in circumstances where both the PRA and FCA are jointly pursuing the matter. Not all elements of the EAS are attractive, however, including in particular the need to elect at a very early stage and to make potentially damaging admissions early in the process and on an open rather than without prejudice basis in circumstances where the PRA may choose not to instigate settlement discussions, but continue their investigation and pursue an enforcement action. It will be interesting to see what the consultation responses provided to the PRA and Bank of England have to say, and whether ultimately the proposals will be adopted in their current form.

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Justin McClelland

Justin McClelland
Practice Group Leader

T:  +44 20 7809 2127 M:  Email Justin | Vcard Office:  London