CP9/23 – The Bank of England’s approach to enforcement: proposed changes and clarifications

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Responses are requested by Friday 4 August 2023.

Please address any comments or enquiries by email to: CP9_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:

Enforcement & Litigation Division Policy Team

Bank of England

Threadneedle Street,

London, EC2R 8AH.

1. Overview

1.1 This consultation paper (CP) proposes changes to the Bank of England (the Bank) and the Prudential Regulation Authority’s (PRA) enforcement policies and procedures, the PRA’s policies and procedures for making supervisory and non-enforcement statutory notice decisions, and to the procedures of the Enforcement Decision Making Committee (EDMC).

1.2 The CP sets out the Bank’s and the PRA’s proposed amendments to:

• the PRA’s approach to enforcement: statutory statements of policy and procedure (the PRA Enforcement Approach Document);
• the statement of policy for financial penalties imposed by the Bank under the Financial Services and Markets Act 2000 or under Part 5 of the Banking Act 2009 (the Financial Market Infrastructure (FMI) Penalty Policy);
• the Bank’s statutory statements of procedure in respect of the Bank’s supervision of financial market infrastructures (the FMI Procedures); and
• the EDMC Procedures.

1.3 The Bank and the PRA propose creating a consolidated set of statements of policy (SoPs) entitled ‘The Bank of England’s approach to enforcement: statements of policy and procedure’ (the Bank Enforcement Approach).

1.4 The PRA also proposes creating a new separate SoP entitled ‘The PRA’s allocation of decision-making and approach to supervisory decisions’ (the PRA Supervisory Decision-Making Policy).

1.5 The proposed amendments seek to:

• clarify the scope of the Bank’s enforcement powers by creating a document that draws together the Bank’s existing enforcement policies and procedures into one consolidated document – the Bank Enforcement Approach;
• move those sections of the current PRA Enforcement Approach Document which relate to the use of statutory tools other than enforcement powers into the proposed PRA Supervisory Decision-Making Policy;
• make specific and consequential amendments to policies and procedures relating to the PRA Enforcement Approach Document to further incentivise cooperation by subjects under investigation;
• clarify the approach and procedures the Bank would adopt in FMI enforcement investigations;
• set out in the new PRA Supervisory Decision-Making Policy revised policies which ensure operational efficiency and better advance the PRA’s statutory objectives;
• update the EDMC remit to include various enforcement powers available to the PRA and/or the Bank under the Financial Services and Markets Act 2000 (FSMA); and
• clarify the EDMC Procedures to reflect how the procedures have operated in practice and clarify the roles and responsibilities of the EDMC, in light of practical experience of the EDMC in dealing with cases.

1.6 The Bank (including in its capacity as the PRA) is making these amendments to clarify the scope of our decision-making and more clearly distinguish between enforcement powers and non-enforcement regulatory action. We will continue to pursue the Bank’s objectives of monetary and financial stability, including the advancement of the PRA’s statutory objectives, through coordinated regulation, supervision, and enforcement activity. The proposals are designed to reinforce the strong regulatory standards that are at the heart of the Bank’s (including the PRA’s) objectives.

1.7 This CP is relevant to PRA-authorised banks, building societies, PRA-designated investment firms, FMIs, qualifying parent undertakings, insurers, actuaries, auditors, and senior employees of those entities (including, but not limited to, authorised senior management function holders and certified employees under the Senior Managers and Certification Regime (SM&CR)). It is also relevant to credit unions and of interest to professional advisers who represent firms and individuals potentially subject to enforcement action taken by the Bank and/or the PRA.

1.8 The PRA’s obligations to prepare a cost benefit analysis are not engaged here as the PRA is not making rules. As these changes are not related to rule changes, the Bank and the PRA therefore considers that the associated costs for firms attached to its proposals are likely to be minimal or none. The proposed changes are designed to increase regulatory transparency for firms and individuals. See the cost benefit analysis in Chapter 2 for further detail.

1.9 Before issuing a statement of procedures under sections 63C, 69, 142V, 169, 192N, 192Z2, 210, 312J, 345D, and 395 of FSMA, the Bank and the PRA have a statutory duty to consult. While the PRA is not proposing to make or change rules in this CP, the Bank and the PRA also have a public law duty to consult widely where it would be fair to do so. Furthermore, the PRA, in carrying out its policymaking functions, is required to comply with several legal obligations under FSMA. Chapter 2 of this CP sets out the relevant statutory obligations applicable to the PRA’s policy development process.

Background

The Bank’s approach to enforcement

1.10 The Bank (including where it acts in its capacity as the PRA) has a range of investigatory and enforcement powers (including criminal powers) under various statutory regimes, such as FSMA, the Banking Act 2009 (BA09), and the Financial Services (Banking Reform) Act 2013 (FSBRA). The Bank currently sets out its approach to using these powers in multiple statements of policy and procedure (see paragraph 2.3 below).

1.11 Since publishing the PRA Enforcement Approach Document in 2013, the Bank (including in its capacity as the PRA) has made several changes to enforcement policy and published documents setting out the Bank’s and the PRA’s approaches to using enforcement powers under a number of statutory regimes.^{footnote [1]} The Bank also established the EDMC in August 2018 and published the EDMC Procedures which list the statutory regimes under which the EDMC has remit to act on behalf of the Bank, including the PRA, in contested enforcement cases. The Bank and the PRA have gained significant experience over the course of multiple investigations and settlements since 2013, providing insight as to the impact of current enforcement policy and processes, how they work in practice, and how they could potentially be improved.

1.12 In light of this experience and feedback received, the Bank proposes a number of changes to its enforcement policies and procedures.

1.13 The proposed changes would:

• aid regulatory transparency and clarity, by bringing together and/or sign-posting the Bank’s (including the PRA’s) enforcement policies and procedures for uncontested regulatory and criminal cases in a consolidated document, the Bank Enforcement Approach, which would set out the Bank’s various investigatory and enforcement remits (paragraphs 2.3 to 2.5 below);
• in appropriate cases, (i) provide a route for early cooperation by subjects through the introduction of an ‘Early Account Scheme’ (the EAS) (paragraphs 2.6 to 2.10 below), and (ii) incentivise early admissions through an enhanced settlement discount (paragraphs 2.11 to 2.13 below);
• for PRA enforcement, better align the PRA’s penalty policy with the PRA’s prudential remit and further increase transparency and consistency with respect to the calculation of penalties for PRA-authorised firms by introducing a matrix which sets out the starting point for financial penalties which links clearly to the firm’s impact categorisation (paragraphs 2.14 to 2.20 below);
• for PRA enforcement, update the methodology for calculating fines for individuals (see paragraphs 2.21 to 2.23 below);
• update the thresholds for individuals to claim serious financial hardship (paragraphs 2.24 to 2.26 below);
• provide further clarity regarding the PRA’s policy on prohibition orders under section 56 of FSMA (paragraph 2.27 below);
• remove references to supervisory notices from, and make consequential amendments to, the PRA Enforcement Approach Document as incorporated into the Bank Enforcement Approach (paragraphs 2.28 to 2.29 below); and
• for FMI enforcement, update and provide further clarity as to the Bank’s policy and procedures in respect of FMI enforcement investigations (paragraphs 2.30 to 2.36 below).

1.14 Consequently, the Bank is proposing to make specific amendments to the PRA Enforcement Approach Document, FMI Penalty Policy, and FMI Procedures, including any necessary consequential amendments. The amended statements of policy would be incorporated into the Bank Enforcement Approach.

1.15 As part of this CP, the Bank (including in its capacity as the PRA) is also proposing to:

• draw a clearer distinction between PRA enforcement and supervisory powers by moving those sections of the current PRA Enforcement Approach Document that relate to the use of statutory tools other than enforcement powers to the newly created PRA Supervisory Decision-Making Policy (paragraphs 2.37 to 2.39 below); and
• update and clarify the EDMC Procedures, including the remit of the EDMC, in light of practical experience of the EDMC in dealing with cases (paragraphs 2.47 to 2.57 below).

The PRA’s allocation of decision-making and approach to supervisory decisions

1.16 The PRA has a number of formal supervisory powers available to it which it can use in the course of its supervision, subject to specified tests being met, and which are distinct from enforcement powers. These include, for example, powers to vary a PRA-authorised firm’s permissions or impose a requirement under Part 4A of FSMA to prevent or curtail a firm undertaking certain regulated activities. Many of these are exercised through issuing written notices to the firms the PRA regulates.

1.17 The PRA proposes creating a separate SoP, the PRA Supervisory Decision-Making Policy, that would set out:

• the allocation of decision-making regarding statutory notices (warning notices, decision notices, final notices, and supervisory notices);
• the decision-making process when the PRA issues notices for statutory decisions that are supervisory in nature, being those outside the scope of the Bank Enforcement Approach and/or the EDMC Procedures; and
• the publication of regulatory action in relation to statutory decisions that are supervisory in nature.

1.18 The proposed PRA Supervisory Decision-Making Policy would adopt text previously contained in the PRA Enforcement Approach Document. However, it would more clearly reflect the supervisory nature of the decisions to which the above procedures would apply. Further, to ensure operational efficiency and better advance the PRA’s statutory objectives, the PRA proposes to set out revised policy, within the PRA Supervisory Decision-Making Policy, in relation to:

• timely decision-making;
• the minimum time period for representations;
• the disclosure of material to firms; and
• the continuing supervision of firms during the decision-making process
  (paragraphs 2.40 to 2.46 below).

The Enforcement Decision Making Committee (EDMC) Procedures

1.19 The EDMC was established in 2018 by the Bank’s Court of Directors to help discharge the Bank’s responsibilities and strengthen its enforcement processes by ensuring a functional separation between the Bank’s investigation teams and the Bank’s decision-makers in contested enforcement cases under the statutory regimes in relation to prudential regulation; FMIs; and resolution. The EDMC also has responsibility for contested enforcement decisions in Scottish and Northern Ireland banknote regime enforcement cases, pursuant to the Scottish and Northern Ireland Banknote Statement of Penalty Policy (see paragraph 2.3 below).

1.20 The Bank proposes to update the remit of the EDMC, as defined within the schedule of statutory provisions set out at paragraph 2.2 of the EDMC Procedures, to include certain enforcement powers which are not currently included in the EDMC Procedures, specifically sections 192Y,^{footnote [2]} 312FA,^{footnote [3]} and 384^{footnote [4]} of FSMA. In addition, the Bank proposes to clarify that the powers under sections 192K^{footnote [5]} and 345A^{footnote [6]} of FSMA are exercisable by the PRA in relation to PRA-authorised firms, but also by the Bank in relation to certain FMIs (section 192K) and auditors of certain FMIs (section 345A) by virtue of paragraphs 17(1)(h) and 17(2) of Schedule 17A of FSMA respectively. These powers are therefore within the remit of the EDMC in respect of both PRA-authorised firms and FMIs.

1.21 The Bank also proposes various amendments and clarifications to the EDMC Procedures to reflect the practical experience gained over the last five years and clarify the roles and responsibilities of the EDMC. These include the following changes:

• disclosure requirements and publication of the annual report;
• associated statutory decisions;
• decisions on publication of notices and related information;
• maintaining a panel with the minimum number of EDMC members present for decision-making to be valid (a quorate panel); and
• allowing stays for settlement discussions.

1.22 The Bank is also proposing to amend EDMC member term limits which are currently set out in the 2018 EDMC policy statement.

Implementation

1.23 Subject to the consultation responses, the proposed implementation date for most of the changes outlined in this CP would be the date of the publication of the Bank Enforcement Approach, the PRA Supervisory Decision-Making Policy and the amended EDMC Procedures (likely 2023 Q4). Changes relating to the imposition of financial penalties will only take effect with respect to conduct that occurs after the implementation date.

Responses and next steps

1.24 This consultation closes on Friday 4 August 2023. The Bank invites feedback on the proposals set out in this consultation. This CP includes specific questions in Chapter 2 to which the Bank (including the PRA) would welcome responses, although we would welcome responses on all aspects of the proposals (see Appendix 4 for a full list of the specific questions). The Bank also invites stakeholders to bring to our attention any relevant issues that are not addressed in the proposals set out in this CP. Please address any comments or enquiries to cp9_23@bankofengland.co.uk.

1.25 Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

2. The Bank’s and the PRA’s proposals

The Bank’s and the PRA’s enforcement policies and procedures

2.1 To aid regulatory transparency and clarity, the Bank is proposing to create a new consolidated Bank Enforcement Approach which clearly sign-posts the range of enforcement powers at the Bank’s disposal. Those powers include the Bank’s statutory powers relating to criminal enforcement, enforcement action taken by the PRA, enforcement action in respect of FMIs, and enforcement under the Scottish and Northern Ireland Banknotes Regulations 2009.^{footnote [7]}

2.2 In the new Bank Enforcement Approach, the Bank (in its capacity as the PRA, where relevant) also proposes to:

• introduce a new Early Account Scheme to provide clarity for the subjects of investigations as to how they can best assist the PRA and/or the Bank, and to incentivise earlier cooperation by subjects in appropriate cases - see paragraphs 2.6 to 2.10 below for further details;
• amend the PRA’s policy on the imposition and amount of financial penalties in relation to PRA-authorised firms to better align with the PRA’s statutory objectives;
• provide further clarity regarding the PRA’s policy on prohibition orders (ie an order through which the PRA prohibits an individual from performing one or more functions) under section 56 of FSMA;
• update the (i) methodology for calculating fines for individuals; and (ii) thresholds at which individuals may be able to apply for a reduction of a fine on the basis of serious financial hardship;
• amend the policy for settlement to further incentivise early admissions by subjects;
• amend the PRA Enforcement Approach Document to remove reference to supervisory statutory notices that would now be addressed in a separate SoP;
• update the FMI Penalty Policy to reflect the Bank’s full remit of FMIs, make clear that the Bank may, where appropriate, settle an enforcement action, and clarify the penalty policy for individuals;
• set out the Bank’s policy on the imposition of financial penalties for auditors of certain FMIs under section 345A of FSMA;^{footnote [8]}
• set out the Bank’s policy on prohibitions under section 312FA of FSMA;
• clarify the Bank’s policy with regards to enforcement statutory notices, the allocation of decision-making in uncontested cases, settlement decision-making procedure, and publicity of statutory notice decisions in uncontested enforcement cases with regards to FMIs; and
• clarify that, where appropriate, the Bank may adopt similar procedures in the context of FMI enforcement investigations that it applies in PRA enforcement investigations.

Creation of consolidated Bank Enforcement Approach

2.3 The Bank (including where it acts in its capacity as the PRA) has a range of investigatory, enforcement and criminal powers under various statutory regimes, such as FSMA, BA09, and FSBRA. The Bank’s enforcement powers ensure that it can uphold and encourage high standards of conduct, risk management, and governance on the part of those firms and FMIs which, and individuals who, are subject to its regulatory requirements and standards, and advance the Bank’s mission and the PRA’s objectives. The Bank currently sets out its approach to using these powers in several statements of policy and procedure, specifically:

• the PRA Enforcement Approach Document;^{footnote [9]}
• the EDMC Procedures;
• the Bank's Approach to Supervision of FMIs;
• the Banks’s statements of procedure in respect of the supervision of financial market infrastructures August 2018 (FMI Procedures);
• the Bank’s Supervision of Service Providers to Recognised Payment Systems;
• information on the effect of the UK’s withdrawal from the EU on FMI Supervision;
• the FMI Penalty Policy;
• the Bank’s Approach to Resolution;
• the Bank’s Approach to Regulating Scottish and Northern Ireland Commercial Banknotes; and
• the Scottish and Northern Ireland Banknote Statement of Penalty Policy.

2.4 To aid regulatory transparency and clarity, the Bank is proposing to create a new consolidated Bank Enforcement Approach that clearly sign-posts the range of enforcement powers at the Bank’s disposal and draws together the Bank’s existing enforcement statements of policy into a consolidated document.

2.5 The new consolidated Bank Enforcement Approach would describe and identify the Bank’s statutory powers with regards to:

• criminal enforcement;
• enforcement action taken by the PRA;
• enforcement action in respect of FMIs;
• enforcement under the special resolution regime; and
• enforcement under the Scottish and Northern Ireland Banknotes Regulations 2009.

Amendments to the PRA Enforcement Approach Document

The Early Account Scheme and Enhanced Settlement Discount

Early Account Scheme

2.6 In the early stage of an investigation, the appointed investigation team^{footnote [10]} gathers information using the PRA’s statutory powers. The investigation team reviews the materials produced and, ordinarily, undertakes interviews with relevant individuals. The resource required for each case varies depending on, among other things, its scale and complexity. However, in the initial stages of an investigation, ensuring that the investigation team has access to and identifies the most relevant information usually requires a substantial amount of time and resource both for the PRA and subjects of an investigation. Feedback suggests that subjects and their advisers who would like to assist the investigation team to reach a resolution more quickly are unclear on how best to do so under the current investigation framework.

2.7 The PRA will continue to use all investigatory tools at its disposal to progress an investigation. However, to expedite the initial information gathering stage, the PRA proposes to introduce the Early Account Scheme (the EAS). This would be available at the request of the subject in appropriate cases, at the PRA’s discretion. The Bank also proposes to incorporate the EAS into its enforcement approach with regards to FMIs (see paragraph 2.35 below).

2.8 Under the EAS, the subject under investigation would be compelled to provide a detailed factual account of the matters under investigation (the Account) together with all relevant materials/evidence at the initial stage of an investigation. The PRA expects that the EAS could potentially reduce the length of the initial fact-finding stage in certain investigations. Upon receipt of the Account, the PRA would review the Account and the underlying material and may take any additional investigatory steps which it deems necessary.

2.9 Within the scope of its investigatory and enforcement powers, the PRA, under these proposals, may investigate and, if appropriate, take enforcement action with respect to firms or individuals involved in their management. These proposals are not directed towards changing the type of cases we would investigate and are instead intended to introduce clarity and efficiency. In particular:

• the EAS would be available to both firms and individuals at the PRA’s discretion; and
• senior management accountability would remain a key component of the framework – accordingly, where the subject of an investigation is a firm, the PRA proposes that the Account must be supported by an attestation by an independent senior manager (to be agreed with the PRA), that there are no other related matters, relevant information, or potential breaches of which the firm is aware, and which should be notified to the PRA.

2.10 The EAS would not be made available where the investigation concerns criminal matters. Equally, it would be unlikely to be available where it is suspected that a subject lacks integrity, has a history of repeating behaviour for which they have received sanctions, or where there have been on-going failures to cooperate with regulators in an open manner. Where other regulators are investigating similar matters, we would discuss with those regulators before agreeing to the use of the EAS.

Enhanced settlement discount

2.11 The PRA has resolved many enforcement cases using the settlement procedure.^{footnote [11]} The PRA recognises the benefits of a timely settlement which is in the public interest. A settlement can conserve regulatory time and resources, mitigate potential reputational damage for a subject under investigation, get a message quickly out to the market to change regulatory behaviours, and shore up market confidence. Where the PRA and the subject under investigation agree to settle a case involving a proposed financial penalty, and depending on the stage which the enforcement process has reached when any settlement discussions are concluded, the subject will usually be entitled to a reduction in the financial penalty that would otherwise be imposed by the PRA (a settlement discount).

2.12 At present, a settlement discount of 30% is applied at Step 5 (application of any applicable reductions for early settlement or serious financial hardship) of the penalty calculation if agreement is reached ordinarily within a 28-day period (the Discount Stage).^{footnote [12]} The current 30% settlement discount applies irrespective of when the subject indicates the terms on which they may be willing to resolve the matter.

2.13 The PRA continues to recognise the potential value of settlement even when a subject only indicates it is willing to accept failures during the Discount Stage. However, to incentivise even earlier admissions, the PRA considers that there may be merit in providing an enhanced discount of up to 50% where a subject under investigation participates in the EAS and provides early admissions well ahead of the commencement of the Discount Stage. The increased discount would reflect the benefits to both the subject and to the PRA arising from: (i) the enhanced and ongoing cooperation provided by participation in the EAS; and (ii) early admissions in relation to potential breaches of regulatory rules or requirements. We also propose to incorporate the enhanced discount into the Bank’s enforcement approach with regards to FMIs (see paragraphs 2.34 and 2.35 below).

Q1: Do you have any views on the PRA’s proposals to introduce an Early Account Scheme and the enhanced settlement discount?

Changes to the PRA’s policy on the imposition and amount of financial penalties for firms and individuals

Firms

2.14 The PRA currently applies a five-step penalty policy when calculating a penalty for both firms and individuals:

• Step 1: Disgorgement: where relevant, the disgorgement of any economic benefits derived from the breach.
• Step 2: Seriousness: determination of a starting point figure having regard to the seriousness of the breach by the firm^{footnote [13]} or individual that committed the breach, and a suitable indicator of the size and financial position of the firm or income of the individual (typically determined using income, relevant revenue, or a qualitative analysis of the seriousness of the breach).^{footnote [14]}
• Step 3: Aggravating and mitigating factors: adjustment of the Step 2 figure to account for aggravating, mitigating, or other relevant circumstances, where appropriate.
• Step 4: Deterrence: upwards adjustment of the figure determined following Steps 2 and 3 to ensure the penalty has an appropriate and effective deterrent effect, where appropriate.
• Step 5: Settlement and financial hardship: adjustments for settlement discount and/or serious financial hardship.

2.15 Currently, the Step 2 starting point figure for firms is typically determined using the firm’s total revenue or revenue in respect of one or more areas of its business. The Step 2 starting point figure is usually a percentage of the firm’s annual revenue that will be used to determine the base figure for the penalty calculation. The percentage reflects the PRA’s assessment of the seriousness of the breach. This approach can lead to anomalies as there is a significant variance in revenue between small firms and large multi-national firms. It is often possible to use revenue as the starting point for smaller firms without adjusting to ensure the figure is proportionate. However, for larger firms the PRA may need to apply an overriding proportionality reduction or an alternative metric to revenue.

2.16 The PRA proposes to replace the Step 2 starting point figure to better align the approach to penalty with the PRA’s prudential remit and supervisory approach. A core part of the PRA’s supervisory risk assessment is the potential impact assessment. The PRA assesses the significance of a firm to the stability of the UK financial system. This ‘potential impact’ reflects a firm’s potential to affect adversely the stability of the system by failing, coming under operational or financial stress, or because of the way in which it carries out its business. The PRA currently divides all firms into ‘categories’ of potential impact.^{footnote [15]} This is a holistic supervisory assessment, reflecting the PRA's approach to risk to its objectives and not just revenue as an indicator of the firm's size and financial position.

2.17 The PRA, therefore, proposes replacing revenue as the relevant default metric with a matrix structure defining the indicative range for the penalty starting point by reference to the firm’s impact categorisation and the seriousness of the breach. The proposed matrix structure is in Table 1. In arriving at the indicative ranges, the PRA has had regard to the type and size of firms in each category and to previous enforcement cases.

2.18 In assessing the seriousness of a breach, and therefore an allocation under the proposed matrix, the PRA would have regard to all relevant facts and circumstances. Potentially relevant factors are set out in the updated PRA Enforcement Approach Document within the consolidated Bank Enforcement Approach (Appendix 1 of this CP). In substance, these are matters to which the PRA may already have regard under its current penalty policy, including:

• the effect or potential effect of the breach on the advancement of the PRA’s statutory objectives;
• the duration or frequency of the breach in relation to the nature of the requirement contravened;
• whether the breach was deliberate or reckless;
• the person’s responsibility for the breach;
• whether the breach forms part of a course or pattern of non-compliant behaviour; and
• whether the breach reveals serious or systemic weaknesses or potential weaknesses in the firm’s business model, financial strength, governance, risk or other management systems and internal controls relating to all or part of its business.

2.19 In general, the more serious and widespread the breach and the greater the threat or potential threat it posed or continues to pose to the advancement of the PRA’s statutory objectives, the higher the category of seriousness is likely to be. In particular, breaches of Fundamental Rule 1^{footnote [16]} and Fundamental Rule 7^{footnote [17]} in the PRA Rulebook are central to the regulatory regime and breaches of either will be taken particularly seriously and would be classified as ‘high seriousness’ for the purposes of the starting point.

2.20 The PRA considers that the indicative ranges would facilitate a more proportionate and consistent application of the penalty policy while continuing to provide flexibility to ensure that the penalty is appropriate to the relevant breach. In particular, by removing firm revenue as the key basis for the penalty starting point figure it is likely that this would remove the disparity between the treatment of small and large firms. The proposal would also benefit firms by providing them with clarity in the matters which contribute to the seriousness of that particular breach. However, the PRA considers that the ranges are purely indicative, and the PRA would always reserve the discretion to increase or reduce the starting point as necessary and appropriate.

Individuals

2.21 Currently, for individuals, the Step 2 starting point figure is ordinarily determined using the individual’s annual income with an appropriate percentage applied at the PRA’s discretion. Usually, the PRA will calculate the individual’s annual income during the tax year preceding the date when the breach ended. Where the breach is continuing, the PRA may, for example, have regard to the individual’s annual income in the last and/or current tax year. Where the PRA determines that an individual’s income is not an appropriate basis for determining a penalty at Step 2 that properly reflects the seriousness of the breach, it may use an alternative; for example, the net worth of the individual.^{footnote [18]}

2.22 However, the use of income in the tax year preceding the date when the breach ended creates a distorted base from which to calculate the appropriate penalty because the relevant period of the investigation is often longer than one financial year. Therefore, only considering income in the year preceding the breach is likely to produce a lower starting point figure.

2.23 To remedy this distortion, the PRA proposes to amend Step 2 of the five-step penalty policy for individuals so that the individual’s relevant income is calculated for the duration of the breach. However, where the breach lasted less than 12 months, or was a one-off event, the relevant income would continue to be that earned by the individual in the 12 months preceding the end of the breach. Where the individual was in the relevant employment for less than 12 months, the relevant income would be calculated on a pro rata basis to the equivalent of 12 months. This proposal would bring the current policy in line with the FCA’s approach.

2.24 Step 5 provides for a potential adjustment for serious financial hardship. For an individual, the PRA may have regard to: (i) the individual’s ability to pay the penalty over a reasonable period (normally no more than three years); (ii) the starting point that an individual may suffer serious financial hardship only if during that period their net annual income will fall below £14,000 and their capital will fall below £16,000 as a result of payment of the penalty. These figures for net annual income and capital have been in place since 2013. The PRA considers that fairness requires these figures be updated.

2.25 The PRA proposes to raise these thresholds to two thirds of the Office for National Statistics current figures for median annual pay for full time employees and for the median estimate for average total individual wealth.^{footnote [19]} Consequently, the PRA proposes that individuals whose gross income falls below £22,000 and capital falls below £83,133 may be eligible for consideration of an adjustment for serious financial hardship. The Bank also proposes to apply these serious financial hardship figures within the FMI Penalty Policy (see paragraph 2.31 below).

2.26 These proposed changes seek to clarify the existing five step penalty policy as it is applicable to individuals. These clarifications would facilitate better regulatory outcomes and alleviate any undue economic hardship placed on individuals due to the imposition of financial penalties that it is evidenced that they do not have the means to pay.

Q2: Do you have any comments on the PRA’s proposed changes to the penalty policy for firms?Q3: Do you have any comments on the PRA’s proposed changes to the penalty policy for individuals?

Q4: Do you have any comments on the PRA’s proposed changes to the serious financial hardship thresholds for individuals?

PRA’s policy on prohibition orders

2.27 The current PRA Enforcement Approach Document includes limited information with regards to prohibition orders. The PRA proposes to set out the PRA’s policy on prohibition orders in the new consolidated Bank Enforcement Approach. This would also set out the circumstances under which the PRA would consider revoking a prohibition or partial prohibition order.

Removing supervisory statutory notices from the PRA Enforcement Approach Document

2.28 The PRA proposes to remove references to supervisory notices from the PRA Enforcement Approach Document. This is to make clear that the procedures in the new Bank Enforcement Approach (including those relevant to PRA investigations) apply to uncontested enforcement cases (ie settlement cases). The new Bank Enforcement Approach would include links to the EDMC Procedures, which detail procedures in contested enforcement cases, and to the PRA Supervisory Decision-Making Policy.

Other consequential amendments to the PRA Enforcement Approach Document

2.29 In light of these proposed amendments, there are consequential amendments to the PRA Enforcement Approach Document that mainly seek to clarify the statutory provisions referred to in the document. The amendments to the PRA Enforcement Approach Document are set out within the consolidated Bank Enforcement Approach at Appendix 1 of this CP.

Changes to the Bank’s FMI enforcement policies and procedures

FMI Penalty Policy

2.30 In 2018, the Bank updated the FMI Procedures to reflect the fact that decisions in contested enforcement cases^{footnote [20]} would be made by the Bank’s EDMC. However, the FMI Penalty Policy, published in 2013, has not been updated to reflect the possibility of settlement. We therefore propose to amend the FMI Penalty Policy to reflect that the Bank may reduce a proposed penalty to take into account early settlement.

2.31 In addition to introducing the ability to reach a settled outcome, to provide greater clarity with respect to the Bank’s investigatory processes in FMI enforcement cases, the Bank proposes to:

• incorporate the amended FMI Penalty Policy into Annex 2^{footnote [21]} of the new consolidated Bank Enforcement Approach;
• amend the FMI Penalty Policy to make clear that it applies in relation to individuals, including applying the serious financial hardship thresholds for individuals as set out in the amended PRA Enforcement Approach Document;
• set out the Bank’s policy on the imposition of financial penalties for auditors of recognised clearing houses (RCHs) or recognised central securities depositories (Recognised CSDs) under section 345A of FSMA; and
• update the FMI Penalty Policy to clarify that it applies to all relevant FMIs supervised by the Bank including, in addition to RCHs, qualifying parent undertakings of UK RCHs (RCH QPUs) and operators of recognised interbank payment systems (RPS), Recognised CSDs, qualifying parent undertakings of Recognised CSDs (together with RCH QPUs, FMI QPUs), third country central counterparties and service providers of RPS.

Clarification of approach and procedures

2.32 Pursuant to section 312J of FSMA, we are required to publish a SoP in relation to the imposition of prohibitions on a member of the management body or other person who effectively controls the business of a Recognised CSD under section 312FA of FSMA and the period for which prohibitions are to have effect. The Bank proposes to incorporate that statement as part of Annex 2 of the new consolidated Bank Enforcement Approach.

2.33 The Bank also intends to clarify its policy and procedures with regards to enforcement statutory notices, the allocation of decision-making in uncontested enforcement cases, settlement decision-making procedure, and publicity of statutory notice decisions in uncontested enforcement cases in relation to FMIs. To do so, the Bank proposes to update and replace the FMI Procedures.

2.34 With regards to settlement, the Bank proposes to clarify that in FMI enforcement cases we would:

• ordinarily apply the PRA’s settlement discount scheme (incorporating any amendments resulting from this consultation); and
• adopt, where appropriate, the PRA’s procedures with respect to settlement.

2.35 Additionally, the Bank proposes to clarify the approach and procedures that the Bank will apply in certain other aspects of FMI enforcement investigations. In the interests of efficiency and consistency across the Bank’s enforcement remit, the Bank proposes to adopt a similar approach to the PRA’s procedures with respect to information gathering (including the EAS) and conduct of interviews at the request of an overseas regulator.

2.36 Within the scope of its investigatory and enforcement powers, the Bank may investigate and, if appropriate, take enforcement action with respect to FMIs and individuals involved in their management. As noted at paragraph 2.9 above, these proposals are not directed towards changing the type of cases we would investigate and are instead intended to introduce clarity and efficiency. Senior management accountability is a key component of the robust regulatory framework operated by the Bank, and we will continue to investigate individuals where it is appropriate.

Q5: Do you have any comments on the Bank’s proposed changes to the FMI Penalty Policy and the FMI Procedures, and Annex 2 of the new consolidated Bank Enforcement Approach?Q6: Do you have any other comments on the proposed changes to the current PRA Enforcement Approach Document and/or the introduction of the new consolidated Bank Enforcement Approach?

Supervisory decisions of the PRA

2.37 Legislation requires the PRA to have a formal decision-making process for decisions where the PRA issues a statutory notice. It also requires the PRA to issue a statement of its procedure (the Decision-Making Policy).

2.38 As noted at paragraphs 1.15 to 1.18 above, the PRA proposes to separate the sections of the current PRA Enforcement Approach Document that relate to the use of statutory tools other than enforcement powers and insert them into a separate SoP, the PRA Supervisory Decision-Making Policy.

2.39 The PRA Supervisory Decision-Making Policy would set out:

• the allocation of decision-making regarding statutory notices (warning notices, decision notices, final notices, and supervisory notices);
• the decision-making process when the PRA issues notices for statutory decisions that are supervisory in nature, being those outside of the Bank Enforcement Approach and/or the EDMC Procedures; and
• the publication of regulatory action in relation to statutory decisions that are supervisory in nature.

2.40 As part of this process, the PRA is proposing the following minor amendments to the supervisory decisions under the current Decision-Making Policy outlined in the current PRA Enforcement Approach Document. The aim of the proposals is to give the PRA more flexibility during the decision-making process and to adapt the Decision-Making Policy so it is better suited to making decisions on supervisory matters where the facts may change in the course of the decision-making process.

Timely decision-making

2.41 The requirements in FSMA and the Decision-Making Policy generally allow for statutory notice decisions to be made expeditiously, if required, while providing an adequate opportunity for representations to be heard to ensure a fair process. The PRA proposes to amend the policy to clarify that when determining the procedure that will apply to specific supervisory decisions, there are factors the Decision Making Committee (DMC) would need to take into account, such as the need for the process to be completed by a particular point in time, for example to meet a statutory deadline.

Minimum time period for representations

2.42 Under FSMA, those subject to warning notices are given no less than 14 days to make representations.

2.43 For other supervisory notices (i.e. not warning notices), the PRA proposes amending the policy to state that it would normally provide a period for representations of no less than 14 days but there may be circumstances where the PRA considers a shorter period is appropriate or justified to give greater flexibility for decisions to be taken quickly. Recipients of these notices would be given an appropriate amount of time to make their representations, either before the action is taken and it comes into effect, or afterwards where the PRA action takes effect immediately.

Disclosure of material to firms

2.44 The PRA proposes aligning the policy with section 394 of FSMA on the disclosure of material upon which decisions are based. This would provide rights for the subject of a decision to have access to PRA material in a more limited number of cases; in particular, this would only apply to some warning notices and not supervisory notices.

2.45 This proposal is based on the principle of proportionality and would give more flexibility for the DMC to decide what is appropriate to disclose in each case, taking into account factors such as the specifics of the case, and whether any material in addition to the statutory notice served may be required to enable effective representations. In practice, the PRA expects that while this may result in less material being disclosed in some cases, this would not materially affect the ability of recipients of notices to make representations and would make the decision-making process more efficient for both recipients and the PRA.

Supervision during decision-making process

2.46 The PRA proposes that the Decision-Making Policy is amended to note that the firm should engage with the decision-makers or secretariat for matters relating to the decision itself. Recipients are encouraged to engage early and fully with the process. Where a recipient of a notice is supervised by the PRA, in relation to matters not relating to the notice, the recipient should engage with its supervisory contacts in the usual way. This amendment would help to clarify that the supervisory relationship and decision-making process are separate.

Q7: Do you have any comments on the proposed new statement of policy relating to the PRA’s allocation of decision-making and approach to supervisory decisions?

Amendments to the EDMC Procedures

2.47 The EDMC was established by the Bank’s Court of Directors (Court) in 2018 to help the Bank discharge its responsibilities and strengthen its enforcement processes by ensuring a functional separation between the Bank’s investigation teams and the Bank’s decision-makers in contested enforcement cases under the statutory regimes in relation to prudential regulation, FMIs, resolution, and the Scottish and Northern Ireland banknote regime.

Remit of the EDMC

2.48 Other than for cases under the Scottish and Northern Ireland Banknote Statement of Penalty Policy, the remit of the EDMC is defined by means of a schedule of statutory provisions set out in paragraph 2.2 of the EDMC Procedures. Paragraph 2.1 of the EDMC Procedures states that the schedule may be amended from time to time to add (or remove) provisions in response to a change in the relevant legislation. As part of this CP, the Bank proposes to update the remit of the EDMC to include certain enforcement powers that are not currently included in the EDMC Procedures.

2.49 Section 192Y of FSMA (imposing a financial penalty on, or issuing a public censure against, a financial holding company, mixed financial holding company, or persons knowingly concerned in the contravention) was enacted after August 2018 and therefore not included in the schedule. The Bank proposes to add section 192Y of FSMA to the schedule as set out in Appendix 3 of this CP. This would complement amendments to the PRA Enforcement Approach Document made in 2021 to set out the PRA’s approach to action under section 192Y.^{footnote [22]} In addition, we propose to add section 384 of FSMA (power of the PRA to require restitution) to the schedule.

2.50 The proposed amended EDMC Procedures at Appendix 3 of this CP also contains proposed changes to clarify that the EDMC can take decisions in contested enforcement cases involving a broader range of powers concerning FMIs; namely section 312FA of FSMA (power to censure publicly, impose a financial penalty, or impose a prohibition on a member of the management body or other person who effectively controls the business of a Recognised CSD) and section 384 of FSMA (power of the Bank to require restitution). It also clarifies the scope of sections 192K of FSMA (power to impose a financial penalty, publicly censure or impose a restriction in relation to qualifying parent undertakings or persons knowingly concerned in the contravention, as applicable) and 345A of FSMA (power to take disciplinary action against an auditor or actuary) which, in the context of FMIs, apply to FMI QPUs^{footnote [23]} and auditors of RCHs or Recognised CSDs respectively.^{footnote [24]}

2.51 In addition, the Bank is proposing various amendments and clarifications to the EDMC Procedures in light of the practical experience of the EDMC in dealing with cases. These include the proposed changes set out below.

Appointment of EDMC members

2.52 The current 2018 EDMC policy statement that accompanied the EDMC Procedures confirms that EDMC members are appointed for renewable, fixed three-year periods and cannot serve more than two consecutive appointment terms. In order to ensure greater continuity and the accumulation of case experience on the EDMC, the Bank is proposing to increase the term for new members to five years (renewable once) and give current EDMC members the opportunity to increase their current terms to five years so they could serve eight years in total. The Bank is also proposing, in circumstances where an EDMC member is working on a live matter and their term is coming to an end, to allow that term to be extended until the matter they are working on has come to a resolution.

Disclosure requirements and publication of the annual report

2.53 The EDMC is required to submit a statement to Court, at least once a year, with a copy also provided to the Prudential Regulation Committee. It reports on a number of topics, such as: the frequency of EDMC meetings; costs incurred by the EDMC; situations where a member was unable to hear a matter because of an actual or perceived conflict; and the number of statutory notices dealt with. The report is subsequently published. The Bank proposes to make clear that the statement to Court will be published subject to applicable disclosure restrictions.

Associated statutory decisions

2.54 If the EDMC decides to give a warning notice, the EDMC will also make any relevant associated statutory decisions. In the current EDMC Procedures, an explanation of ‘associated statutory decisions’ is a footnote but, given the importance of associated statutory decisions, the Bank is proposing to include this explanation throughout in the main body of the EDMC Procedures. The Bank is also proposing to make clear that associated statutory decisions include the statutory decisions on publication of notices and related details.

Decisions on publication of notices and related information

2.55 The Bank is proposing to create a new section in the EDMC Procedures called ‘Publication’. This would consolidate the processes, roles, and responsibilities in relation to whether it is appropriate to publish information about the matter to which a warning notice or a decision notice relates, where the EDMC is the decision-maker. This proposed new section outlines that Bank staff can make recommendations to the EDMC regarding its decisions as to whether to publish notices, and/or details and/or related information. The EDMC will consult subjects of the notice before taking such decisions. Also, Bank staff will consult the Panel Lead (as defined in the EDMC Procedures) about the content of any press statements or other material to be published, relating to a warning notice or decision notice.

Maintaining a quorate panel

2.56 The EDMC Procedures currently provide that the EDMC Chair will oversee arrangements to ensure the panel is quorate should the Panel Lead and other panel members become unavailable. To provide the EDMC more flexibility, the Bank is proposing that the EDMC Deputy Chair is also able to oversee these arrangements.

Allowing stays for settlement discussions

2.57 In line with the PRA’s current settlement policy, it is already possible for Bank staff and a recipient of a warning notice to settle the matter before the EDMC takes a decision on the matter. The Bank is proposing to make clear that it is open to the recipient of the warning notice and/or relevant Bank staff to request the EDMC to pause proceedings to enable settlement discussions to take place. It is within the discretion of the EDMC to agree such a pause. This recommendation would make the EDMC decision-making process more efficient and potentially more expeditious.

Q8: Do you have any comments on the proposed changes to the EDMC member term limits?Q9: Do you have any comments on the proposed changes to the EDMC Procedures?

PRA objectives analysis

2.58 In discharging its general functions, the PRA must, so far as reasonably possible, act in a way that advances its general objective to promote the safety and soundness of PRA-authorised persons; and in the context of insurance, to contribute to policyholder protection. The proposals in this CP are intended to increase the efficiency of both PRA enforcement action and the allocation of decision-making and approach to supervisory decisions, and the transparency of these processes. Enforcement action contributes to the PRA’s objectives of promoting the safety and soundness of firms and securing an appropriate degree of protection for policyholders.

2.59 Furthermore, setting out the Bank’s statutory powers with regards to enforcement action and the allocation of decision-making and approach to supervisory decisions into two separate documents would facilitate greater regulatory transparency and provides clear information and guidance to those who fall under the Bank’s regulatory remit to better understand the Bank’s approach to enforcement and the PRA’s allocation of decision-making and approach to supervisory decisions.

2.60 When discharging its general functions, the PRA is legally required, as far as is reasonably possible, to facilitate effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities. The PRA has assessed whether the proposals in this CP facilitate effective competition and considers that there is no significant impact on competition arising from these proposals as the proposed changes seek to ensure that firms continue following the regulatory rules and relevant requirements applicable to them.

2.61 The PRA anticipates minimal impact on the secondary competition objective from any of the proposed changes.

2.62 The Financial Services and Markets (FSM) Bill 2022 includes measures to amend the PRA’s objectives by introducing a new secondary competitiveness and growth objective. At the point that those measures come into force, this new secondary objective would require the PRA (in discharging its general functions in a way that advances its primary objectives and so far as reasonably possible) to act in a way that facilitates (subject to aligning with relevant international standards): (a) the international competitiveness of the economy of the UK (including in particular the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

2.63 In light of this and the proposed implementation date for the changes proposed in this CP, the PRA has considered whether the proposals set out in this CP would facilitate the international competitiveness of the UK economy and its growth in the medium to long term. The PRA considers the changes proposed in this CP are unlikely to have a material impact on UK growth or international competitiveness in and of themselves. However, the PRA considers increased transparency and efficiency in its enforcement and decision-making processes would reinforce strong prudential standards, which are key to instilling trust and confidence among investors, firms, and other regulators. Therefore, the PRA considers the proposals would have a positive impact on ensuring that the UK remains competitive and attractive as a place to do business, with a robust, effective, and trusted regulatory regime.

‘Have regards' analysis

2.64 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. During the development of these proposals, the PRA also had regard to the aspects of the Government’s economic policy set out in the HMT recommendation letter from March 2021 and the supplementary recommendation letter sent in April 2022. The following factors, to which the PRA is required to have regard, was significant in the PRA’s analysis of the proposals outlined in this chapter:

1. Efficient and economic use of resources (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The PRA’s proposals are designed to encourage early settlement of PRA enforcement matters, which should result in a more efficient use of PRA resources. The proposals relating to PRA supervisory decisions are also intended to make decision-making in supervisory cases more efficient and allow the PRA greater flexibility.

2. Proportionality (FSMA regulatory principles): The PRA considers these proposals would not impose an additional burden on firms and individuals. The Bank and the PRA considers that the associated costs for firms attached to its proposals are likely to be minimal or none as the changes are designed to increase regulatory efficiency and/or transparency for firms and individuals.

3. Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The PRA’s proposals would clarify current practice and create greater transparency of PRA penalty calculation, enforcement powers, and settlement processes. In respect of the disclosure of material to firms, the DMC would retain discretion (subject to section 394 of FSMA where that applies) to decide in each case what should be disclosed to subjects taking into account the need to be fair and transparent as well as other factors such as reaching a decision in an efficient and economic way.

4. Government commitment to reach net zero emissions: The FSM Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it will add a regulatory principle relating to the UK’s net zero emissions target. The PRA considers the changes proposed in this CP are unlikely to have a material impact on the UK’s target to reach net zero emissions by 2050.

Cost benefit analysis (CBA)

2.65 We have considered, as a matter of good practice, what the costs and benefits of the proposed changes are likely to be.

2.66 The Bank (including in its capacity as the PRA) considers that these proposals help to clarify the Bank’s powers and processes. As the proposals do not involve rule changes or the creation of new powers, we therefore consider that the associated costs for firms, FMIs and individuals attached to our proposals are likely to be minimal or none. All the changes are designed to increase regulatory transparency.

2.67 In determining the indicative ranges in the Step 2 starting point matrix for PRA-authorised firms, past sanctions have been a relevant consideration. The PRA does not consider that in aggregate there is likely to be a material uplift in the Step 2 figures given revenue is currently used as the starting point. Under the proposals in paragraph 2.23, in determining an individual’s relevant income in a PRA enforcement case, there may be an uplift when calculating the Step 2 starting point figure for an individual. This would only be the case for breaches longer than 12 months’ duration. However, as the remaining steps of the penalty calculation would still apply (including any considerations of proportionality, mitigation, or serious financial hardship), a change in the method of calculation for individual penalties at Step 2 would not automatically result in larger penalties for individuals.

2.68 The EAS is likely to free up regulatory resource, reduce the uncertainty surrounding an enforcement investigation for firms and individuals, and allow for matters raising significant regulatory concern to be remediated more quickly. The Bank (including the PRA), using the EAS, could therefore communicate timely messages about regulatory behaviour to firms, consumers, and the markets facilitating transparency, accountability, and promoting safety and soundness of the firms, FMIs and associated individuals we regulate. It is possible that the EAS may place an additional burden on subjects under investigation at the outset of the enforcement investigation. However, this is to be balanced with the anticipated benefits of faster resolution, allowing for quicker regulatory outcomes and the more efficient use of regulatory resources. Indeed, while there is a public interest in the Bank and the PRA achieving timely settlements, there are also benefits to subjects who choose to settle, including mitigating potential reputational damage, potentially obtaining an enhanced settlement discount, and greater certainty of outcome.

2.69 The proposals on the EDMC Procedures and the PRA Supervisory Decision-Making Policy are intended to promote efficient decision-making in line with the Bank’s and/or the PRA’s obligations set out in legislation.^{footnote [25]}

Impact on mutuals

2.70 The PRA considers that the impact of the proposals on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

2.71 The Bank (including in its capacity as the PRA) has considered the equality and diversity issues that may arise from the proposals in this consultation. We do not consider that the proposals in this CP raise any concerns with regards to equality and diversity.