Recent changes to the PRA’s approach to enforcement show an increased focus on expediting the investigative process and incentivising early admissions.

On 30 January 2024, the Bank of England (the Bank) unveiled a number of changes to the Prudential Regulation Authority’s (the PRA’s) approach to enforcement (PS1/24), including the introduction of an Early Account Scheme and Enhanced Settlement Discount. The changes largely reflect the proposals included in the Bank’s Consultation paper published in May 2023 (CP9/23).

Introduction of the Early Account Scheme

Those participating in the Early Account Scheme (the EAS) are required to produce a written factual account of the matters under investigation (the Account), together with supporting materials, during the initial stage of an investigation (usually within six months). Once the PRA has considered the information provided, it will decide whether further investigation is needed, or whether it has sufficient information to either discontinue the investigation or move to enforcement. The scheme therefore has the potential to significantly shorten the information-gathering stage of an investigation.

The EAS is voluntary, and the PRA will consider requests to participate on a case-by-case basis, having regard to factors such as the complexity and scope of the investigation, the position of other regulatory authorities, and the nature and seriousness of the breaches involved.

Key features of the EAS include:

• Timing: any request to participate in the EAS must be made within 28 days of receipt of the notice of the appointment of investigators.
• The Account: the scope of the Account (such as the relevant period in which the suspected breaches took place and individuals involved) will be discussed and agreed between the subject and the PRA, and may be prepared internally or with the assistance of external parties (such as a law firm). The Account must also be supported by relevant materials and evidence, including an explanation of the methodology used to produce the Account, interview transcripts, contemporaneous material and evidence, as well as other material such as chronologies of relevant events, structure charts, summaries of relevant systems, controls and policies, and remediation plans.
• Senior manager attestation: in addition to producing the Account, a senior manager (who should be sufficiently objective and competent in relation to the subject matter of the investigation) must provide an accompanying attestation covering the following:
  • The process followed in producing the Account and the senior manager’s role in overseeing its production
  • That the process has, in the senior manager’s view, been robust and diligent, and the findings of any investigatory work accurately reflected in the Account
  • That, in relation to the matters covered by the Account and based on the agreed scope and methodology for the Account, the senior manager is aware of no other related matters or information which should be notified to the PRA
• The Enhanced Settlement Discount: subjects of an investigation who have participated in the EAS and have made early admissions (on a without prejudice basis) in relation to potential breaches are eligible to receive a discount of up to 50% if they agree to settle within the Discount Stage of an investigation. A flat discount of 30% will continue to apply to those who have not participated in the EAS.

Comment

The average length of investigations is 2¼ years;[1] the opportunity to participate in the EAS and significantly reduce that timespan will be welcomed, particularly by firms which have conducted their own internal investigation and remediation, and (understandably) want to focus on the future and draw a line under the matter.

As for the Account itself, it may not differ materially in substance to the narrative responses that are often required in response to statutory information requirements. However, agreeing the scope of the Account upfront will likely provide more clarity on the investigation’s parameters and yield efficiencies in approach and methodology, such as avoiding the need to re-interview witnesses / re-review documents through different lenses (as can often be the case when responding to multiple, separate information requirements over a period of months or years).

The accompanying senior manager attestation may also impact how an investigation is run. A firm’s in-house counsel team, together with external counsel, would ordinarily have day-to-day conduct of the investigation, updating senior stakeholders when appropriate. However, given the content of the attestation to be provided by a senior manager under the EAS (and the potential consequences for them if the attestation proves to be inaccurate), the senior manager will likely need to be more closely involved in the investigative process (all of which will need to be carefully documented).

The requirement for a senior manager attestation may also raise practical difficulties if there is a lack of clarity at the outset of the investigation into the involvement of certain individuals in matters relevant to the investigation. (Such lack of clarity could give rise to the risk that the individual who agrees to provide the attestation is later deemed to lack the necessary degree of objectivity). As such, the scheme may be more suited to cases in which the firm has already undertaken an internal investigation.

As for the Enhanced Settlement Discount, the opportunity to achieve a discount of up to 50% is obviously appealing. However, that top discount will only be available if the firm has made early admissions, and the PRA considers a 50% discount to be merited, having regard to “all relevant circumstances”. As to what those circumstances might be, the policy lists a range of factors including the fulsomeness of the Account, the extent of any remediation, and a firm’s prior disciplinary record. If the PRA is not satisfied that the top discount is merited, it may instead choose to apply a discount in excess of 30% but less than 50%.

The PRA therefore has a significant degree of discretion when determining the discount. How it exercises that discretion in the next few years will be a significant (if not the primary) factor in whether firms see value in participating in the EAS.

This post was prepared with the assistance of Gemma Cotton in the London office of Latham & Watkins.

Endnotes

[1] “The Bank of England’s approach to enforcement: a decade in the making” — speech by Oliver Dearie dated 21 June 2023.