PRA unveils its new early settlement scheme – what might the likely impact be and should we expect similar for FCA Enforcement?

16 February 2024

The Bank of England (Bank) recently published its new policy statement, PS1/24 – The Bank of England's approach to enforcement, on the PRA’s approach to enforcement (Policy Statement). 

The Policy Statement follows feedback on the Bank’s consultation last year, CP9/23 – The Bank of England’s approach to enforcement: proposed changes and clarifications | Bank of England, (Consultation), and confirms the following main changes, which took effect from 30 January 2024:

  • The creation of a new option for early cooperation called the Early Account Scheme (EAS), which is intended to speed up enforcement investigations. Subjects will have:
  1. 28 days from receipt of the Notice of Appointment of Investigators, to decide whether to apply to participate in the EAS; and 
  2. a further six months to provide a detailed factual account of the matters under investigation (the Account), together with related evidence, should the Bank approve such participation. 

The Bank has made clear that extensions to either of these deadlines will only be agreed in exceptional circumstances. 

Despite some criticism during the Consultation, the Policy Statement confirms that firms’ Accounts must include a senior manager attestation. 

  • The introduction of an enhanced settlement discount (ESD) of up to 50% of any financial penalty imposed by the PRA for participants in the EAS. The Policy Statement confirms the PRA’s view that 50% is an appropriate level of discount, which will likely be sufficient to incentivise subjects of investigations to come forward with early admissions, whilst maintaining the deterrent effect of the PRA’s ability to impose a financial penalty on a sliding scale. 
  • Revisions to the methodology for calculating the starting point for financial penalties for firms, by using a matrix structure that reflects the firm's impact categorisation and the seriousness of the breach, instead of the firm's revenue. The PRA considers that this will increase consistency and proportionality in penalty calculations. 
  • Modifications to the penalty calculations for individuals, by basing the relevant income on the duration of the breach, and raising the thresholds for serious financial hardship, which may lead to a reduction or waiver of the penalty. 
  • Clarification of the PRA's policy on prohibition orders (orders that prevent individuals from performing certain functions in relation to regulated activities). The policy explains the circumstances under which the PRA would consider imposing, revoking or varying a prohibition order, and the factors it would take into account. 

The Policy Statement is relevant to all PRA-regulated firms and individuals, as well as their professional advisers, and is part of the PRA's efforts to enhance the efficiency and clarity of its enforcement policies and practices.

Likely impact

The introduction of the EAS and ESD, and the changes to the penalty framework, are a significant development. However, it remains to be seen the impact they will have in practice. The framework for the EAS in particular raises a number of questions. 

A shorter timeframe for enforcement action is welcome, however the feasibility of the EAS timeframes remains to be seen. The Consultation generated requests for more time than the allotted 28 days for subjects of investigation to decide whether to request to participate in the EAS. It also received comments that the six-month timeframe to produce the Account should be more flexible. The Bank has said in response that extensions may be granted in “exceptional circumstances”. There is no guidance at present as to what may constitute exceptional circumstances. In complex investigations (particularly those that span a significant time period and which involve a large scale document review and multiple witness interviews), six months may be an ambitious timeframe for completing an investigation and formulating it into an Account to which a senior manager is comfortable to attest.

It is also notable that, although not strictly unavailable, the Bank has indicated it is not likely to agree to requests to participate in the EAS where possible breaches of Fundamental Rules 1 (integrity) or 7 (openness with the regulator) are being investigated, given the nature of the potential breaches. Further, the Bank is unlikely to offer the EAS where a general investigation is launched under s.167 FSMA 2000; it has indicated that the EAS is more likely to be available in s.168 investigations into specific matters.

There is also a significant question around the interaction between the EAS and legal professional privilege. Firms often engage external legal advisers to assist with internal investigations. The Bank has stated that the EAS is not intended to circumvent the protection offered by s.413 FSMA 2000, which ensures legally privileged material does not have to be provided to the PRA. However, it does expect subjects of investigations to “carefully consider the scope of any privilege claims in light of the benefits of an open process for producing a fulsome Account and a comprehensive set of related materials and evidence”. It seems relatively certain that if external counsel is engaged to assist with preparation of an EAS Account, partial waivers of privilege will be needed if full advantage is to be taken of the scheme.

Will the FCA adopt a similar approach?

An obvious question arising from the PRA’s changes to enforcement policy is: will the FCA (which has been criticised for the length of its enforcement investigations) follow suit?

According to the most recent reports, the average length of FCA enforcement investigations currently stands at around 3.5 years (41 months) – many say this is far too long. If the PRA’s new EAS proves effective in generating faster enforcement outcomes, there may be further pressure on the FCA to speed up its enforcement processes.

The gap that the PRA changes opens up in potential settlement discounts is also eye-catching. Whilst the FCA currently offers a discount of up to 30% of any financial penalty it imposes for cases that are settled at an early stage (e.g. before a decision notice is issued), a potential discount of up to 50% from the PRA is naturally more attractive. 

Notwithstanding this, we query whether the new PRA enforcement approach would be viable for the FCA given the scale and breadth of firms that it regulates. The pool of FCA regulated firms is much larger than the PRA – the PRA regulates around 1,500 firms, while the FCA regulates almost 45,000 businesses - and the spectrum of firms varies greatly in terms of size, sector and financial resource. The EAS scheme, which requires the subject of an investigation to complete its own internal investigation and provide a senior manager attestation, may not be suitable for many of the firms regulated by the FCA. The PRA also conducts a much smaller volume of enforcement cases than the FCA, which arguably makes it easier from a practical perspective to implement new approaches.

It will be interesting to see the impact that the PRA enforcement changes will have on joint investigations with the FCA. The FCA has historically taken the lead on investigations where both regulators are involved. The Policy Statement addresses the matter of joint investigations with other regulators, noting that the Bank will discuss the suitability of using the EAS with the other regulator before consenting to its use. 

Last year saw a handover of responsibility in the FCA’s enforcement division, with the regulator appointing joint Executive Directors of Enforcement and Market Oversight, Therese Chambers and Steve Smart. Perhaps with the opportunity for this new leadership to bed in, we might see more strategic alliance with the PRA in the year to come. 

The FCA have not made comment on the Policy Statement as yet. 

The introduction of the EAS and ESD, and the changes to the penalty framework, are a significant development. However, it remains to be seen the impact they will have in practice. The framework for the EAS in particular raises a number of questions.