PRA Enforcement Changes - The Good, the Bad, and the Ugly

On 4 May 2023, the Bank of England (BOE) and the Prudential Regulation Authority (PRA) published a consultation paper on the proposed changes to their enforcement procedures and policies. The consultation is due to close on 4 August 2023. The proposed amendments are aimed at clarifying the scope of decision-making powers and at drawing a clearer line between enforcement and non-enforcement actions.

For example, the BOE and the PRA are seeking to:

• Create a consolidated BOE enforcement approach document, which will consist of all the BOE’s and the PRA’s regulatory and criminal enforcement policies and procedures. The purpose of this consolidation is to clarify the scope of such powers enjoyed by the BOE and the PRA.
• Collate a new PRA supervisory decision-making policy, which will set out the PRA’s powers beyond enforcement, such as in relation to the PRA acting in a supervisory capacity when issuing notices, and the connected processes of, for example, publishing such notices. It is also anticipated that the policy will allow the PRA to reach operational efficiency and further its statutory objectives.

Most notably, the PRA proposes to introduce the Early Account Scheme (EAS) and the enhanced settlement discount. 

EAS

Under the EAS, the subject may request to participate in the scheme provided that such request is made within 28 days of them receiving an investigation notice from the PRA. As a caveat, it is worth noting that the EAS will not be available in, for example, criminal cases, and that it will be in the PRA’s discretion to decide if a matter qualifies for the EAS after the subject expresses their interest. When assessing a subject’s suitability to the scheme, the PRA will take various considerations into account, including compliance and supervisory records of the subject and the seriousness of the matter under investigation.

If the PRA allows the subject to participate in the EAS, then the subject will have to prepare detailed factual and documentary evidence relating to the investigation. In circumstances where any witness interviews are held as part of this process, the PRA may request to participate in, or even conduct, the interview itself. There are various other elements of the scheme which will need to be agreed between the subject and the PRA. The period for evidence collection and preparation is set to be no longer than six months.

Once the subject finishes its investigation role and hands over the collated materials relevant to the breach under the investigation to the PRA, the PRA will then step in as a decision-maker and assess how the matter will progress further. The PRA may discontinue the investigation, ask the subject to provide additional evidence, enter into without prejudice discussions with the subject if the evidence submitted by the subject was sufficient for the PRA to make findings, or make a referral to the PRA’s enforcement decision making committee.

Enhanced Settlement Discount

In addition to potentially retaining significant control during the fact-gathering stage of the investigation, which would otherwise be lost if the PRA conducted this process, the subjects of any investigation may be encouraged to participate in the EAS because of the possibility (but not a guarantee) of receiving a reduction of up to 50% of any financial penalty imposed by the PRA. However, it should be noted that a penalty discount of up to 30% is already available to subjects under the current regime. 

The Good, the Bad, and the Ugly

EAS From the Subjects’ Perspective

This naturally poses the question—is it really worthwhile for the subjects to invest time and resources to participate in the EAS? Ultimately, it will be a decision for each subject dependent upon their own circumstances, but the scheme, as currently drafted, may not be perceived by the subjects of investigation to be as attractive as the PRA is hoping it will be. 

• Firstly, the subjects are likely to be put under significant time pressure in order to decide whether to participate in the EAS. It is likely that the proposed 28-day period may be insufficient for the subject to properly evaluate and scope such an investigation, including the availability and expertise of internal resources, to be part of the scheme. 
• Furthermore, if a subject chooses to enrol in the scheme, it will only have up to six months to collect and prepare to present all of the relevant factual and documentary evidence. This may prove to be impossible in more document heavy, cross-border, or factually complicated situations. 
• Finally, even after a subject presents its case to the PRA, it does not automatically entitle the subject to a more substantial penalty discount than the 30% currently available in circumstances where the PRA would undertake the whole investigation process. Instead, any reduction will now be awarded on a discretionary basis by the PRA. 

There are, inevitably, some benefits for subjects under investigation to participate in the scheme. 

• Subjects will likely retain significantly more control over the investigation process but what remains unclear is to what extent the PRA will be involved in scoping this investigation, day to day decision making, and the overall strategic approach.  For example, should a subject identify a significant issue that is not the subject of the original investigation but may amount to a breach of regulatory requirements, it appears inevitable that the PRA would expect the subject to extend its investigation to cover such an issue. 
• The key questions for a subject will be the extent to which it can retain control of the investigation, and ultimately some of the wider narrative, and whether such an approach will reduce the resources a subject expends in conducting such an investigation in comparison to responding to the PRA conducting such an investigation.

Potential Issues With EAS

When considering the proposed EAS more broadly, there are further uncertainties in relation to the effectiveness of the scheme. Albeit such strategy of outsourcing parts of investigations to the subject is undoubtedly beneficial to the PRA in saving costs, allowing it to direct resources to other matters, and potentially even shortening the investigation timeframe, the PRA will need to address some issues that are likely to arise. 

• One of the most obvious difficulties is the actual powers of the subject when collating the evidence. Whilst it may have limited difficulties in persuading current employees to assist with the internal investigation, former employees will likely be beyond reach for the subject, whereas the PRA could use its powers in order to compel such employees to cooperate. 
• The EAS also becomes more complicated if the subject is on the radar of other regulators, or if there is a divergence of agreed facts between an entity and an individual, where both are part of the investigation. 
• Finally, subjects may also feel pressured to come to conclusions, which may not necessarily be entirely accurate but which, at least in part, would accord with the PRA’s initial view when starting the investigation in order to show that they have performed their investigative role well.

There is clear potential for the new approach to result in subjects outsourcing the conduct of the investigation to external providers, for example, law firms and other compliance professionals. One can readily see the attraction of this approach to the PRA as it should result in more investigations being completed in a timely fashion at a drastically reduced cost to the PRA. Whether or not there is any significant benefit to the subject of an investigation remains to be seen.

Conclusion

The PRA’s efforts in reforming its investigation process are undoubtedly novel. However, if the EAS is adopted following the consultation process, and whether it proves to be successful, remains to be seen. Given the amount of internal resources and time required, subjects of investigation may be reluctant to take on the burden of wearing an investigator’s hat where an enhanced settlement discount is not even guaranteed. In any case, if the EAS is implemented, entities and individuals considering taking advantage of the scheme should seek out experienced and knowledgeable advisers to guide them through the process before a decision on whether to enrol to the EAS is made.