Relevance of proposals

This consultation is relevant to PRA-authorised firms, financial market infrastructure firms (FMI), qualifying parent undertakings, auditors and senior employees of such entities (e.g., PRA-approved senior manager function (SMF) holders and employees under the Senior Manager & Certification Regime (SM&CR)). It will also be relevant for those who represent firms and individuals potentially subject to enforcement action taken by the Bank or the PRA.

Overview of proposals

The Bank’s (including in its capacity as the PRA) overall objective in consulting on these amendments is to distinguish between enforcement powers and non-enforcement regulatory action. The Bank states that its objective is to reinforce strong regulatory standards. In particular, the Bank believes the proposals would bring a number of benefits, including:

• Aiding regulatory transparency and clarity by bringing together and/or sign-posting the Bank’s and the PRA’s enforcement policies and procedures for uncontested regulatory and criminal cases.
• In appropriate cases, (i) providing a route for early cooperation by subjects through the introduction of an ‘Early Account Scheme’, and (ii) incentivising early admissions through an enhanced settlement discount.
• For PRA enforcement, better aligning the PRA’s penalty policy with the PRA’s prudential remit and further increasing transparency and consistency with respect to the calculation of penalties for PRA-authorised firms by introducing a matrix which sets out the starting point for financial penalties and links it clearly to the firm’s impact categorisation.
• For PRA enforcement, updating the methodology for calculating fines for individuals.

More detail on the changes the Bank and the PRA intend to make to deliver these benefits is provided below.

Publication of a new consolidated Bank Enforcement Approach for uncontested enforcement cases to:

• Create a single consolidated set of statements of policy: this will combine all of the Bank’s and the PRA’s relevant enforcement policies and procedures, and clarify the scope of the Bank’s and the PRA’s enforcement powers.
• Clarify the Bank’s approach in FMI enforcement investigations: this includes implementing a route to settlement similar to the one used in PRA enforcement investigations.

Publication of a new, separate PRA supervisory decision-making policy to:

• Set out the PRA’s decision-making process outside the use of its enforcement powers: for example, the issue of statutory notices that are supervisory in nature (warning notices, decision notices, and supervisory notices).
• Explain the process for deciding on the publication of regulatory action: this will cover the publication of the above statutory notices.
• Detail revised policies which ensure operational efficiency: the proposals would allow the PRA to reduce the minimum time period for representations and reduce the circumstances in which firms would have access to the PRA material upon which decisions are based.

Introduction by the PRA of the Early Account Scheme and the enhanced settlement discount:

• Early Account Scheme (EAS): the PRA would have the discretion to enable the subject of an investigation, on request, to provide a factual account of the matters under investigation, together with supporting materials and information.
• Enhanced settlement discount: for parties who provide early admissions ahead of the normal 28 day period (the Discount Stage) and participate in the EAS, a discount of up to 50 per cent on penalties will apply. This is more than the discount of 30 per cent which currently applies when a firm indicates that it is willing to accept failures at the Discount Stage. In addition to the financial incentives for early cooperation and admission, this will likely appeal to firms for reputational reasons, since firms are often keen to move on, avoiding public scrutiny and fluctuating share prices.

Changes to the PRA’s policy for fines on firms and individuals to:

• Revise the five step penalty policy: this is currently used to calculate penalties for both firms and individuals. The five steps are disgorgement, seriousness, aggravating and mitigating factors, deterrence, and settlement and financial hardship.
• Alter its approach to deciding on step 2: seriousness, which is used as a basis for determining for penalty figures. These changes are detailed below.

Firms

• The PRA is proposing a matrix structure. This will define the indicative range for the penalty starting point by categorising firms by their ‘impact’ and the seriousness of the breach.
• In assessing ‘impact’, the PRA will consider a firm’s significance to the stability of the UK financial system and categorise it into one of four categories.
• In assessing the seriousness of the breach, the PRA will consider the following:
  • The effect of the breach on the advancement of the PRA’s statutory objectives
  • The duration/frequency of the breach
  • The nature of the breach, i.e., whether reckless or deliberate
  • The person’s responsibility for the breach
  • Whether the breach forms a part of a course/pattern of non-compliant behaviour
  • Whether the breach reveals serious/systemic weakness in the firm’s internal management systems.
  • In particular, breaches of Fundamental Rule 11 and 72 in the PRA Rulebook will result in an automatic classification of ‘high seriousness’.
  • Firms that are of the greatest significance to the stability of the UK’s financial system and in respect of which there has been a breach of high seriousness can expect the largest financial penalties.
  • The PRA notes that these ranges are purely indicative and it reserves the discretion to increase/reduce the starting point as necessary and appropriate.

Individuals

• The PRA proposes to use the individual’s relevant income for the duration of the breach as a starting point for penalty calculations, rather than the current approach which is normally to consider the individual’s relevant income for the preceding tax year.
• If a breach lasted less than 12 months, or was a one-off event, the relevant income would continue to be that earned by the individual in the 12 months preceding the end of the breach.
• If the individual was in the relevant employment for less than 12 months, the relevant income would be calculated on a pro rata basis to the equivalent of 12 months’ relevant income.
• Adjustments for serious financial hardship may apply. The PRA proposes that individuals whose gross income falls below £22,000 and capital falls below £83,133, may be eligible. 

1. A firm must conduct its business with integrity.
2. A firm must deal with its regulators in an open and cooperative way, and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.

Client Alert 2023-113