BOE sets out final Approach to Enforcement documents

You may recall last year's Bank of England consultation, CP9/23, which set out proposed changes to the Bank of England's approach to enforcement documentation. The Bank has now confirmed its final approach documents in PS1/24, published on 30 January 2024.

We covered the key proposed changes to the approach documents floated in CP9/23 - the Early Account Scheme ("EAS"), Enhanced Settlement Discount ("ESD") and proposed changes to the determination of the Step 2 starting point for penalty calculation - in a webinar, which can be accessed on demand here. PS1/24 reflects the Bank's consideration of the 20 responses that it received, which it says were generally welcoming of the proposals.

In this note, we cover the changes made to the Bank's initial proposals. The changes took effect on Tuesday 30 January 2024 (noting that the prior 'approach' documents will remain in force for conduct before that date).

Applicability and operation of the EAS

The Bank has clarified a number of points about the applicability and operation of the EAS:

Applicability:

• The EAS will be a voluntary scheme which will not be imposed on the subjects of an investigation; whether to submit a request to participate in the EAS will be a matter for the subject.
• However, the Bank remains of the view that it is unlikely to be viable for wide-ranging investigations conducted under s.167 FSMA and so the PRA is more likely to agree where the investigation is proceeding under s.168 FSMA.
• Where an investigation involves multiple parties, the EAS may be available subject to the circumstances of the matter, but subjects are (understandably) unlikely to be permitted to produce a joint Account.
• Likewise, the Bank is unlikely to agree to utilise the EAS where a joint investigation is being conducted with another regulator and that other regulator does not consider the EAS process to be appropriate - that's important in the context of joint FCA and PRA investigations.
• As previously trailed, the EAS will not be available in cases where criminal conduct is suspected and is unlikely to be available where the investigation concerns a breach of FR7 (Integrity) and/or FR7 (Openness and Co-operativeness).
• No adverse inferences will be drawn where a firm does not participate in the EAS.

Operation:

• The period for firms to make a request to engage in the EAS will remain 28 days from receipt of the Notice of Appointment of Investigators. During this period, the Bank intends to discuss and agree discuss the scope and expectations with respect to the EAS.

  Practically, this means that there will be a lot of work for firms to do (in short order) on receipt of a NOA and MOA from the PRA to determine whether the EAS is viable including:

  • Scoping the investigation - what are the key issues and can the Account be produced in the required six month timeframe
  • Determining whether the likely merits support engaging in the EAS - this will be particularly difficult in complex cases where the outline of the facts is not yet known in reasonable detail
  • Identifying and briefing a Senior Manager to provide the required attestation (on which see below)

• The Account will required to be produced in six months and extensions will be agreed only in "exceptional circumstances" with overruns impacting the Bank's assessment of the subject's co-operation and so the applicability of the ESD (see below).

• The EAS may be terminated prior to production of the Account. The PRA has given the following non-exhaustive circumstances in which that might happen:

  • where the participating subject requests to withdraw
  • if there is a significant change in the scope of the investigation
  • the subject comes under a criminal investigation in relation to the same or connected events or matters
  • the subject's progress or lack of progress in relation to the work required on the EAS

• Subjects would not be expected to produce privileged material but "the Bank expects subjects 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". Plus ça change...

• There may be instances in which the Bank wishes to attend interviews conducted under an EAS and there may be circumstances in which interviewees are re-interviewed once the Bank has received the Account. The Bank will expect interviews to be recorded and transcribed and for the transcripts to be provided with the Account (and the recordings retained for possible future production).

Applicability of the ESD

The policy statement emphasises that the purpose of the ESD is to incentivise early admissions which "have the potential to play an important role in maintaining robust regulatory standards and frameworks".

In the Bank's view, an ESD of up to 50% sets the right incentive for a subject of an investigation to come forward early while not undermining the regulatory regime and maintaining the Bank's ability to send strong and timely messages through a financial penalty.

The level of the ESD will depend on a number of factors and a full 50% discount is only likely to be available where "subjects participate in the EAS, provide a detailed and accurate Account, make admissions of fact, and make good faith and fulsome admissions as to misconduct and regulatory breaches, either at the point on which the Account is delivered or within a specific time thereafter". Where there are no admissions, the subject will be entitled only to the usual 30% discount for reaching a settlement with the PRA.

Senior manager attestation for Accounts by firms

The Bank continues to consider that a senior manager attestation is a key safeguard notwithstanding that several respondents raised concerns about this element of the proposals. The updated policy does, however contain some clarifications:

• Detailed knowledge of the relevant area is not required but a sufficient understanding of the facts, events, individuals, systems, controls and governance structures is expected as well as the senior manager being sufficiently objective
• Where the Firm is subject to SM&CR the expectation is that the senior manager will be a senior manager for SM&CR purposes (i.e. someone approved under s.59 FSMA)
• The process for selecting the senior manager will be the subject of discussion between the Bank and the firm in the 28 day period for determining whether the EAS is appropriate. As above, this leaves a lot to be done in a short period on receipt of the NOA and MOA
• The Senior Manager will take responsibility for taking "all reasonable steps" to ensure that there has been appropriate challenge and oversight in the production of the Account, including related investigatory work carried out by the firm
• The attestation will cover: (i) the process followed in relation to the preparation of the Account; (ii) that the process followed has, in the view of the senior manager, been robust and diligent and the findings are accurately reflected in the Account; and (iii) there are no other related matters or relevant information which the senior manager is aware of which are relevant to the matters under investigation and which should be notified to the PRA
• The Bank "may consider sanctions against the attesting senior manager if the Bank identifies that the individual has knowingly misrepresented the position in the Account submitted to the Bank" or has "otherwise fallen short of the applicable obligations ... in overseeing production of the Account".

Firm penalty calculation

A number of clients that we discussed the PRA's proposals with raised that the proposed penalty calculation matrix at Step 2 of the PRA's five-step framework (replacing the prior approach of using a firm's revenue as the starting point) could result in higher penalties.

The policy statement states that the primary purpose of the penalty matrix is to increase transparency and consistency rather than to increase the size of fines. The PRA does recognize that in certain circumstances the application of the amended firm penalty policy could lead to higher fines, but has stressed that it will take each case on its merits and so considers that in the round penalties will not significantly increase.

The PRA considers that its proposed penalty ranges are broadly appropriate, but has slightly amended the matrix to: (i) remove overlaps between seriousness levels; (ii) amend the seriousness levels from ‘Low’, ‘Medium’ and ‘High’ to ‘Level 1’, ‘Level 2’ and ‘Level 3’. The final matrix can be viewed here.

Clearly, for Category 1 firms, the result is that the starting point for penalty calculation is a significant figure.

Breaches of FR1 and FR7 will be subject to a rebuttable presumption that they fall within the Level 3 seriousness band.

Conclusion

The amendments set out in this policy statement leave the PRA’s initial proposals relatively untouched, including some of the more challenging elements such as the requirement for an attestation from a senior manager. Notwithstanding those tricky elements, this is an innovative proposal that offers an investigation route that is quite different to that followed by other regulators. It will be very interesting to see whether the EAS is taken up and, where it is, whether it delivers outcomes more quickly than the traditional iterative investigative approach.