Recent Developments Regarding the UK Prudential Regulation Authority’s Approach to Enforcement – Key Takeaways

The FCA is the conduct regulator for financial services firms in the UK and the prudential regulator for a proportion of those firms not regulated by the PRA. Firms regulated by the PRA will also be regulated by the UK FCA. The PRA and FCA often coordinate enforcement activity, including by conducting joint investigations.

The general objective of the PRA is outlined in statute as to promote the safety and soundness of those firms it regulates, including by seeking to ensure that their business is carried on in a way that avoids adverse effect on the stability of the UK financial system and to minimize the adverse effect that a failure of those firms could have on the UK financial system.¹ With respect to insurance, the PRA’s objective includes contributing to securing protection for those who are or may become policyholders.²

The PRA has various enforcement powers that it can use on those firms and individuals it regulates where they fail to meet regulatory requirements, including imposing financial penalties, public censure, suspensions or restrictions, and prohibitions. Enforcement action by the PRA will commence with an investigation.³ This can result in various recommendations by the investigators to decision makers within the PRA, which could include, for example, (i) taking no further action, (ii) imposing an enforcement sanction which could prompt settlement discussions, (iii) imposing supervisory measures, or (iv) conducting additional investigations.⁴ Where an investigation leads to a settlement of the matter between the firm and/or individual being investigated and the PRA, it may result in a discount of any penalty imposed by the PRA.⁵

Where the case is not settled or closed and is therefore a “contested enforcement case,” it will be referred to be decided by the Bank of England’s Enforcement Decision-Making Committee.⁶ This committee was established in 2018 with the aim of detaching the investigatory from the decision making functions within the bank.⁷

In carrying out its supervisory functions, the PRA will often cooperate with other regulators and enforcement agencies, both in the UK and in other countries.

Enforcement Action to Date

On July 16, 2019, Miles Bake gave a speech to the Financial Services Lawyers Association, on the PRA’s approach to enforcement. Bake noted that since April 2013, the PRA had opened 22 cases, which included opening investigations into 17 firms and 32 individuals.⁸ Of the 17 firms, Bake reported that two investigations closed with no enforcement action, eight were ongoing and seven concluded with a settled outcome. Of those investigations into individuals, 19 were ongoing, seven had been closed with no enforcement and six had resulted in a formal sanction.⁹

Of the investigations into firms concluded with a settled outcome, the penalties imposed by the PRA have included financial penalties and public censures. Penalties imposed on individuals have included financial penalties and prohibition orders.

Bake commented that the PRA’s cases to date have in general fallen into two broad categories (i) “those where conduct by a firm and/or an individual could impair [the PRA’s] ability to supervise properly; or represents behaviour outside the bounds of what the PRA considers acceptable” and (ii) “where there has been a crystallised ‘risk’, action or public event which could have a direct impact on the PRA’s statutory objectives.”¹⁰

Bake illustrated this point with examples of previous PRA cases. For example, he noted that in the first category, relevant PRA actions included that into QIB (UK) Plc, which in April 2016 was fined near £1.4 million, including on the basis that it failed to report complete information with respect to large exposures. QIB (UK) plc qualified for a discount on the financial penalty that would otherwise have been imposed, having agreed to settle at an early stage of the PRA’s investigation.¹¹

Bake illustrated the second category with, among others, the case into the Royal Bank of Scotland, National Westminster Bank and Ulster Bank, which in 2014 received a financial penalty from the PRA of £14 million.¹² The PRA imposed the penalty as a result of failures that led to an IT incident. The FCA fined the banks for the same matter.¹³ Again the banks agreed to a settlement at an early stage, entitling them to a discount on the penalty, which would have otherwise been £20 million.¹⁴

Enforcement Approach

In his speech, Miles Bake discussed the PRA’s rationale and “distinctive approach” to enforcement as consisting of a number of elements, which he commented could be seen in practice in the PRA’s cases to date.

1. Supervision and Enforcement

Of those elements discussed by Miles Bake, a number related to the interrelationship of the PRA’s role of supervision and enforcement. Bake noted that PRA enforcement action supplemented but did not supplant the PRA’s “forward looking and judgement-based” supervision, that in practice the PRA’s enforcement division worked closely with the supervision and policy personnel at the PRA, and that when deciding whether to investigate, alternatives were explored with supervisors, and they did not “‘jump’ to investigation.”¹⁵

2. Investigation and Decision Making

Bake also referred to the separation of investigation and decision making functions within the PRA. In particular he noted that senior PRA executives who are independent of the investigation team make the decision on whether to seek settlement in a given case, and he referred to the creation of the Enforcement Decision Making Committee, which has decision making power on contested cases (as described above).

3. Cooperation With the FCA

Another aspect of the PRA’s enforcement approach mentioned by Bake was cooperation between the PRA and other regulators and enforcement agencies, illustrated by the fact that a number of cases opened by the PRA since its creation have been joint with the FCA.¹⁶

4. Focus on Individuals

A further theme that can be drawn from Bake’s speech is the PRA’s approach to enforcement against individuals. Bake stated that the PRA “balance the liability of firms with the importance of driving accountability amongst senior-level individuals” and went on to comment that “senior managers…have always been, and will continue to be, squarely within our appetite and interest.”¹⁷

As mentioned, Bake noted that since its creation, the PRA has opened investigations into 32 individuals. By way of example, in May 2018 the PRA fined the chief executive of Barclays Group £321,230 for failing to act with due skill, care and diligence in relation to an anonymous letter. Again, this case was settled between the individual and the PRA at an early stage and resulted in a reduction in the fine that would otherwise have applied.¹⁸ The FCA also imposed a fine in relation to the same conduct.¹⁹

Changes to the PRA’s Settlement Policy

On October 4, 2019, the PRA published Policy Statement PS23/19 in which it outlined that it had amended its ‘Statement of Policy on the Prudential Regulation Authority’s approach to enforcement: statutory statements of policy and procedure’ (Statement of Policy), in respect of its settlement policy. The main change to the Statement of Policy (which became effective on October 4, 2019), is to the penalty discounts available for settlement. While the Statement of Policy retains the ability for firms to obtain a 30 percent discount on a sanction where early settlement occurs, it abolishes the 20 percent and 10 percent discounts previously available for settlements reached in later stages (previously referred to as “stage 2” and “stage 3”).

While this amendment will likely have little impact in practice (the consultation document for the amendments notes that the PRA had “never settled a matter at Stages 2 or 3”²⁰), it emphasizes that the PRA encourages early settlement of enforcement matters.

Other amendments to the Statement of Policy include those intended to “clarify and make more transparent the PRA’s procedures for settlement.”²¹

Conclusions and Points to Note

Although Bake doesn’t directly comment on it in his speech, it is clear from the PRA’s enforcement activity to date that the PRA has had an appetite for settlement of enforcement actions and, as set out in the recently amended Statement of Policy, firms looking to settle are incentivized to do so at an early stage. It is likely that the desire to settle cases goes both ways, as those firms that are PRA regulated will need to have an ongoing relationship with their regulator and will likely not want an antagonistic future relationship that might result from heavily contested regulatory litigation. At the conclusion of his speech, Bake commented that he hoped the PRA and firms and their legal advisers would continue to engage, to mutual benefit. It is apparent that the PRA’s approach to enforcement to date has been one that encourages collaboration and transparency between the PRA and the firms it regulates and that this is an approach likely to continue.

¹ As set out in Section 2B of the Financial Services and Markets Act 2000.

² Section 2C of the Financial Services and Markets Act 2000.

³ Bank of England, Prudential Regulation Authority, ‘Regulatory Investigations Guide,’ April 2019.

⁴ Bank of England, Prudential Regulation Authority, ‘Regulatory Investigations Guide,’ April 2019, page 5.

⁵ Bank of England, Prudential Regulation Authority, ‘Regulatory Investigations Guide,’ April 2019, page 5.

⁶ Bank of England, Prudential Regulation Authority, ‘Regulatory Investigations Guide,’ April 2019.

⁷ Bank of England, Enforcement Decision Making Committee, Policy Statement PS/EDMC2018, August 2018, page 2.

⁸ Bank of England, ‘The PRA’s Approach to Enforcement,’ speech given by Miles Bake, Head of Legal, Litigation and Enforcement Division, July 16, 2019, page 4.

⁹ Bank of England, ‘The PRA’s Approach to Enforcement,’ speech given by Miles Bake, Head of Legal, Litigation and Enforcement Division, July 16, 2019, pages 4-5.

¹⁰ Bank of England, ‘The PRA’s Approach to Enforcement,’ speech given by Miles Bake, Head of Legal, Litigation and Enforcement Division, July 16, 2019, page 5.

¹¹ Final Notice, QIB (UK) Plc, April 8, 2016, Bank of England, Prudential Regulation Authority.

¹² Final Notice, Royal Bank of Scotland Plc, National Westminster Bank Plc, Ulster Bank Ltd, November 19, 2014, Bank of England, Prudential Regulation Authority.

¹³ Bank of England, news release, ‘Prudential Regulation Authority fines Royal Bank of Scotland, NatWest Bank and Ulster Bank £14 million for IT failures,’ November 20, 2014.

¹⁴ Bank of England, Prudential Regulation Authority, Final Notice, Royal Bank of Scotland Plc, National Westminster Bank Plc, Ulster Bank Ltd, November 19, 2014.

¹⁵ Bank of England, ‘The PRA’s Approach to Enforcement,’ speech given by Miles Bake, Head of Legal, Litigation and Enforcement Division, July 16, 2019, page 3.

¹⁶ Bank of England, ‘The PRA’s Approach to Enforcement,’ speech given by Miles Bake, Head of Legal, Litigation and Enforcement Division, July 16, 2019, page 4.

¹⁷ Bank of England, ‘The PRA’s Approach to Enforcement,’ speech given by Miles Bake, Head of Legal, Litigation and Enforcement Division, July 16, 2019, pages 3 and 6.

¹⁸ Final Notice, Mr James Edward Staley, May 11, 2018, Bank of England, Prudential Regulation Authority.

¹⁹ Bank of England, news release, May 11, 2018, ‘FCA and PRA jointly fine Mr James Staley £642,430 and announce special requirements regarding whistleblowing systems and controls at Barclays.’

²⁰ Consultation Paper CP10/19 ‘Enforcement: Changes to the PRA’s settlement policy,’ April 2019.

²¹ ‘Enforcement: changes to the PRA’s settlement policy,’ Policy Statement 23/19, October 4, 2019.