PS1/24 – The Bank of England's approach to enforcement

1: Overview

1.1 This Bank of England (Bank) policy statement (PS) provides feedback to responses to consultation paper (CP) 9/23 – The Bank of England’s approach to enforcement: proposed changes and clarifications . It also contains the Bank’s final policy, as follows:

• the Bank of England’s approach to enforcement: statements of policy and procedures (the Bank Enforcement Approach) (Appendix 1), incorporating:
  • amendments to The Prudential Regulation Authority’s (PRA) approach to enforcement: statutory statements of policy and procedure (PRA Enforcement Approach)^{footnote [1]}; and
  • a consolidation of new or updated statements of policies and procedures relevant to financial market infrastructures (FMIs) into The Bank’s approach to enforcement in respect of FMIs: statements of policy and procedure (FMI Enforcement Approach);^{footnote [2]}
• amendments to the PRA’s allocation of decision-making and approach to supervisory decisions (the PRA Supervisory Decision-Making Policy) (Appendix 2); and
• amendments to the Enforcement Decision Making Committee (EDMC) Procedures (Appendix 3).

1.2 The documents at Appendices 1, 2 and 3 are collectively referred to as the statements of policy.

1.3 This PS is relevant to all PRA-authorised banks, building societies, PRA-designated firms, Bank-regulated 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.

Background

1.4 In CP9/23 the Bank and the PRA proposed 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 previously published PRA Enforcement Approach which relate to the use of statutory tools other than enforcement powers into a new PRA Supervisory Decision-Making Policy;
• make specific and consequential amendments to policies and procedures relating to the PRA Enforcement Approach to further incentivise cooperation by subjects under investigation and to revise the approach to calculating the starting point for financial penalties;
• 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.

Summary of responses

1.5 The Bank received 20 responses to the CP and respondents generally welcomed the Bank and PRA’s proposals to enhance clarity, transparency, and accessibility of its enforcement policies. The Bank also received comments on the CP at three industry roundtable events held in June and July 2023. A majority of the respondents were supportive of creating a structured pathway for early, meaningful cooperation with investigations. Respondents made a number of observations and requests for clarification, particularly in relation to the Early Account Scheme (EAS or the Scheme), Enhanced Settlement Discount (ESD), and changes to the policies on the imposition of financial penalties for individuals and PRA-regulated firms, which are set out in Chapter 2.

1.6 A small number of responses were on the sections regarding supervisory decisions of the PRA and amendments to the EDMC Procedures. Responses received about the EDMC Procedures were in relation to the disclosure of materials to subjects, changes to EDMC members’ terms, and a query around whether subjects could refer only the proposed sanction to the EDMC. We received two responses about supervisory decision-making which focused on the proposal regarding the representation period.

1.7 Respondents did not raise any Equality Act 2010 concerns.

Changes to draft policy

1.8 Following consideration of the comments, suggestions and observations made by the respondents the Bank has made the following changes to the Bank Enforcement Approach:

• clarified the applicability of the EAS and ESD including by providing further information in relation to the circumstances in which the EAS is likely to be available, timings for the EAS and information sharing;
• clarified the scope of the senior manager attestation which will need to supplement any Early Account provided by a firm or FMI;
• made minor amendments to the Step 2 starting point matrix which provides the starting point for the calculation of fines in respect of PRA authorised firms;
• updated the serious financial hardship thresholds for individuals to ensure they reference the appropriate Office for National Statistics metrics;
• amended and clarified Annex 2, Chapter 6 of the Bank Enforcement Approach regarding the availability of the EAS in FMI investigations; and
• corrected unintended deletions and typographical errors within the statements of policy.

1.9 The Bank has considered the impact of these changes and considers they are consistent with the costs and benefits outlined in Chapter 2 of CP9/23. Some respondents to the consultation stated that changes to the methodology for the calculation of PRA firm penalties would increase the size of penalties imposed against a firm when compared with previous penalties imposed. The Bank has considered these responses carefully. The Bank’s view is that in aggregate there is unlikely to be a material uplift in penalties given revenue is currently used as the default starting point for calculating financial penalties. However, in view of the move to an alternative starting point for calculating financial penalties, the Bank cannot rule out that the size of the financial penalty may increase for certain firms. We nonetheless consider that the proposed changes remain appropriate, particularly given the PRA penalty policy continues to allow for the individual circumstances of the firm and the case to be taken into account in determining the appropriate penalty. Therefore, while it may be that the Step 2 starting point figure for firms increases in some cases, this does not necessarily mean firms will automatically be subject to larger fines.

1.10 Given the number of observations and suggestions the Bank received in relation to CP9/23, the Bank has provided additional detail on amendments and clarifications to the statements of policy, and feedback to the responses in Chapter 2 ‘Feedback to responses’ of this PS.

1.11 In carrying out its policymaking functions, the PRA is required to have regard to several matters, as set out in CP9/23 in Appendix 5.^{footnote [3]} In CP9/23 the PRA explained how it had had regard to the most relevant of these matters in relation to the proposed policy. The anticipated secondary competitiveness and growth objective for the PRA has now been enacted by the Financial Services and Markets Act 2023 (FSMA 2023).^{footnote [4]} In CP9/23 the PRA considered that the changes were unlikely to have a material impact on UK growth or international competitiveness in and of themselves. However, increased transparency and efficiency in the PRA’s enforcement and decision-making processes will reinforce strong prudential standards, which are key to instilling trust and confidence among investors, firms, and other regulators. Therefore, the PRA still considers the proposals are likely to have a positive impact in ensuring that the UK remains competitive and attractive as a place to do business, with a robust, effective, and trusted regulatory regime. Most of the responses to the consultation supported the proposals and the analysis, as presented in the CP9/23, remain unchanged.

1.12 Since 29 August 2023, when exercising its policymaking function, the PRA has also been required to have regard to a further regulatory principle, being the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act 2007 (the UK’s net zero emissions target) where the PRA considers its functions to be relevant to making such a contribution: section 3B(1)(c). The PRA considers that exercising its functions to make the changes proposed in CP9/23 and in this PS are not relevant to making such a contribution, and that the changes are unlikely to have a material impact on making such a contribution.

1.13 In exercising its policymaking function with respect to FMIs, the Bank has had regard to its Financial Stability Objective^{footnote [5]} and, for certain FMI entities^{footnote [6]}, the matters set out in sections 30D(1) and (2) of the Bank of England Act (BOEA 1998). In relation to section 30D(2), the Bank considers the proposals in this PS are consistent with its secondary objective of facilitating innovation in the provision of FMI services and regulatory principles relevant to exercising FMI functions. The Bank considers that the proposals are unlikely to have a material impact on innovation^{footnote [7]}, facilitating fair and reasonable access to FMI services^{footnote [8]} or on growth.^{footnote [9]} However, any increased transparency and efficiency in the Bank’s enforcement processes is likely to reinforce a robust regulatory framework which is central to instilling trust and confidence among investors and the regulated community. Consequently, the proposals are likely to have a positive impact in conjunction with the other proposed changes.

1.14 The Bank has had regard to the regulatory principles under section 30E and consider the following are relevant:

• the need to use the resource of the Bank in the most efficient and economic way^{footnote [10]},
• the principle of proportionality^{footnote [11]};
• the responsibilities of the senior management of FMI entities subject to requirements by or under FSMA 2000 in relation to compliance with those requirements^{footnote [12]};
• the desirability of exercising FMI functions in a way that recognises differences in the nature and objectives of businesses carried on by different persons^{footnote [13]}; and
• the principle of transparency.^{footnote [14]}

Implementation

1.15 The statements of policy will generally take effect on Tuesday 30 January 2024.

1.16 However, sections 69(8) and 210(7) of FSMA and section 198(4) of the Banking Act 2009 require us to have regard to the policies on imposing penalties, restrictions or suspensions and the amount of such penalties or the period of such restrictions or suspensions in force at the time the misconduct, contravention or failure (collectively referred to as ‘breach’) occurred. Consequently, when a breach begins before 30 January 2024 (when the new policies take effect) and continues after that date, two different regimes will apply. The penalty, suspension and restriction regime in place before 30 January 2024 will apply to conduct before that date, and the new penalty, suspension and restriction regime will apply to conduct from that date onwards.^{footnote [15]}

1.17 FSMA 2023 supplements the Bank’s enforcement powers, including in relation to the oversight of wholesale cash distribution and critical third parties. The Bank expects to consult on policies with respect to the additional powers in due course.

2: Feedback to responses

2.1 The Bank must consider representations that are made to it in accordance with its duty to consult on its general policies and practices and must publish, in such manner as it thinks fit, responses to the representations.

2.2 The Bank has considered the responses received to the CP. This chapter sets out the Bank’s feedback to those responses and its final decisions.

2.3 The sections below have been structured broadly along the same lines as the chapters of the CP. The responses have been grouped as follows:

• creation of consolidated Bank Enforcement Approach;
• changes to the PRA Enforcement Approach:
  • Early Account Scheme (including senior manager attestation);
  • Enhanced Settlement Discount;
  • changes to the PRA’s policy on the imposition and amount of financial penalties for firms; and
  • changes to the PRA’s policy on the imposition and amount of financial penalties for individuals.
• PRA’s policy on prohibition orders;
• changes to the Bank’s FMI enforcement policies and procedures;
• changes to supervisory decisions of the PRA; and
• changes to EDMC Procedures.

Creation of consolidated Bank Enforcement Approach

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

2.5 Ten respondents expressly supported the creation of a consolidated set of statements of policy and the Bank’s proposal to create a new separate Bank Enforcement Approach Document. In particular:

• one respondent supported the aim to create greater regulatory transparency and stated these changes provide greater clarity on enforcement and non-enforcement action with minimal to no costs;
• two respondents welcomed greater clarity in relation to FMIs; and
• one respondent stated the consolidated Bank Enforcement Approach will be helpful to firms, individuals and legal advisers.

2.6 The Bank acknowledges this support and recognises the benefits of a consolidated Bank Enforcement Approach document.

Changes to the PRA Enforcement Approach

Early Account Scheme (including senior manager attestation)

2.7 The Bank proposed a new option for early cooperation called the Early Account Scheme (EAS or Scheme).

2.8 Under the EAS, the subject of an investigation would apply to participate in the Scheme and if the Bank accepts the request, the subject would be compelled to provide a detailed factual account of the matters under investigation (Account), along with related evidence at the initial stage of an investigation. Where the subject under investigation is a firm, the Account would need to be supported by a senior manager attestation.

2.9 Thirteen respondents generally welcomed the Scheme in principle and supported the Bank’s efforts to create routes to more timely and efficient investigations. Other respondents had either no objections or provided no specific comments to the Scheme. Most of the respondents sought further information about how the Scheme would operate in practice or suggested possible amendments focusing on practical matters such as timing, scope of the Account, the nature of the work required to produce it and the degree of involvement the Bank might have in that work. Respondents also stated that further clarity might be required as to the types of cases in which the EAS would be available or suggested that the Bank allow its use in a broader range of cases (for example, that it ought to be equally available in investigations under section 167 of FSMA, as well as those under section 168). There were also requests for guidance as to how it would work in certain circumstances – for example, where there are either multiple investigations being conducted by several regulators or law enforcement organisations, or where there are multiple subjects under investigation in the same matter.

2.10 Many of the respondents either disagreed with, or questioned the value of, the Bank requiring the Account to be accompanied by a senior manager attestation (where the subject participating in the EAS is a firm). Concerns expressed in this regard included potential difficulty identifying an appropriate senior manager (particularly if no senior manager with sufficient knowledge to attest was independent of the matters under investigation, such as in smaller firms), the potential burden upon the senior manager and reluctance to give the attestation without further clarification as to its requirements, scope and possible consequences for an erroneous attestation. Finally, as the Bank will compel production of the Account and related materials using its statutory powers, with possible sanctions for non-compliance, some respondents queried whether an additional attestation was necessary.

2.11 The Bank has considered these comments and provides the following feedback.

Requests to participate in the EAS and availability of the EAS

2.12 The Bank confirms participation in the EAS is voluntary and it will not be imposed upon subjects of an investigation. It is for the subject of an investigation to decide whether to submit a request to participate in the EAS, weighing up the potential benefits against the costs and risks of doing so.

2.13 The Bank will consider all requests to participate in the EAS and invites discussion at the earliest opportunity with any firm or individual interested in using the EAS. However, the Bank remains of the view that the wide-ranging nature of general investigations conducted under section 167 of FSMA are unlikely to lend themselves to the desired efficiencies of the EAS.^{footnote [16]} For this reason, the EAS remains more likely to be available in specific investigations commenced under section 168 of FSMA than section 167 investigations.

2.14 The Bank confirms the EAS will not be available in cases where criminal conduct is suspected. If the PRA opened a regulatory investigation after closing a criminal investigation without bringing criminal sanctions, it is unlikely that the EAS would be available in the newly opened regulatory case. This is because any additional efficiencies from offering the EAS are likely to be minimal if the Bank has advanced knowledge of the potential misconduct at the time of opening the regulatory case.

Suitability of EAS in multi-party and joint investigations

2.15 The EAS may in appropriate circumstances be used in multi-party investigations of firms and individuals.^{footnote [17]} That is, the Bank may allow more than one party in a multi-party investigation to participate in the EAS and for each to produce their own Account. It will consider each request to participate separately and on its own merits. It is unlikely that the Bank will permit multiple subjects to provide a joint Account. However, the Bank will consider on a case-by-case basis whether it is appropriate for members of the same corporate group to produce information collectively.

2.16 In investigations involving other regulators or law enforcement agencies, the Bank will discuss the suitability of using the EAS with the other regulator or regulators and/or law enforcement agencies before consenting to its use. In investigations being conducted jointly with another regulator, the Bank is unlikely to permit the use of the EAS if the other regulator does not consider the EAS process to be appropriate. However, if the Bank permits use of the EAS, then this will apply only to the Bank’s investigative processes and not bind the other regulatory or law enforcement investigation.^{footnote [18]}

EAS notification and production timings

2.17 Some respondents asked for more time for subjects to consider whether to participate in the EAS. The Bank continues to consider that 28 days from receipt of the Notice of Appointment of Investigators will be sufficient time for subjects to consider whether to request to participate in the EAS. Indeed, during this period, the Bank would discuss the scope and expectations with respect to the EAS. Whilst the Bank has chosen not to specify a longer timeline for a request to participate, the Enforcement Approach Document has been updated to note that an extension can be granted in exceptional circumstances.^{footnote [19]}

2.18 Some respondents asked for additional flexibility around the timeframe within which the Account should be produced. Ensuring that the Account is produced promptly is vital to achieving the benefits of the EAS. The Bank, therefore, confirms its expectation that the Account will generally be required to be produced within six months. Extensions will be agreed only in exceptional circumstances. Where a subject under investigation fails to provide a compelled Account within the specified time, the Bank may take this failure into consideration when assessing a subject’s co-operation, in the context of determining any disciplinary measure such as a financial penalty.^{footnote [20]} In doing so, the Bank will take into account all relevant circumstances, including proportionality in light of any mitigating factors.

Adverse inferences and termination of EAS

2.19 Some respondents queried the impact of not participating in the EAS. If a subject of an investigation does not wish to make use of the EAS, the Bank will not draw an adverse inference or take this into account when considering co-operation or aggravation in the context of determining any disciplinary measure (such as a financial penalty).

2.20 To provide further clarity on the operation of the EAS, the Bank has amended the PRA Enforcement Approach to confirm it may terminate the EAS prior to production of the Account, relevant materials and evidence and (if applicable) the senior manager attestation. If the Bank has already issued a statutory requirement for production of this material, the Bank will rescind the requirement. In deciding to terminate the EAS, a non-exhaustive list of factors to which the Bank may have regard in determining whether to terminate the EAS in a particular case is set out in paragraph 2.15 of Chapter 2 of the PRA Enforcement Approach.

External advisors and legal professional privilege

2.21 Some respondents queried how the production of the Account would interact with the protections regarding legally privileged material and to what extent the Account may be disclosed to other regulators or parties.

2.22 Whilst the Account must be produced by the subject, the Bank recognises the subject of an investigation may wish to instruct an external party to assist it in meeting the requirements of the EAS. In these circumstances, the Bank may wish to discuss matters including, but not limited to, the extent of any claims for legal professional privilege, the role of the external party in advising the subject or any other parties on any related matters and how any actual or potential conflicts will be managed.

2.23 Pursuant to section 413 of FSMA, legally privileged material is protected from disclosure to the PRA. The Bank confirms that nothing in the EAS is designed to circumvent that protection. However, 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.^{footnote [21]}

2.24 Confidential information in an Account and related material produced by a subject will be protected under section 348 of FSMA. However, the Bank cannot rule out sharing the information where it is permissible and necessary to do so. By contrast, without prejudice admissions provided will be held on a confidential basis and will not generally be disclosed. We have provided further clarity in paragraph 2.7 of the PRA Enforcement Approach and, with respect to without prejudice material, Chapter 8 of the PRA Enforcement Approach.

Scope of EAS and approach to interviews

2.25 Some respondents requested additional information about when the Bank may wish to attend interviews as part of the compilation of an Account and when the Bank may choose to conduct interviews itself. Such decisions will inevitably be case dependent. There may be certain circumstances where a subject of an investigation uses the EAS, where it is nevertheless necessary to attend or conduct interviews. This might arise, for example, where an individual and a firm are both under investigation or where the subject cannot produce the required transcripts. There may also be cases where the Bank decides to re-interview witnesses already interviewed by the subject of an investigation. Where the witness is not the subject of the investigation, the Bank will consider, on a case-by-case basis, whether it is appropriate for the subject’s legal representative to attend interviews conducted by the Bank. The Bank will, in any event, provide the finalised transcript to the subject prior to production of the Account.^{footnote [22]} In any event the Bank will always take a proportionate approach having regard to the size and resources of the subject of an investigation (including but not limited to the size of the firm and whether the subject is a firm or an individual). It will discuss these issues with the relevant subject as part of the discussions regarding the production of the Account.

2.26 Two respondents were concerned about the assumption that the EAS would be unlikely to be appropriate where there are circumstances suggesting breaches of PRA Fundamental Rule (FR) 1^{footnote [23]} or FR 7.^{footnote [24]} Notwithstanding those concerns, the Bank continues to consider it inappropriate to offer participation in the EAS if there are reasons to doubt the integrity or openness of the subject. That said, the Enforcement Approach Document retains flexibility for the PRA to consider applications even where there are circumstances suggesting breaches of this nature. Any such applications will be considered on a case-by-case basis.

2.27 One respondent asked if the PRA could clarify whether it would be acceptable for the Account to consist of the results of the firm’s own initial investigation (pre-dating receipt of the Notice of Appointment of Investigators). The Bank confirms where the subject of an investigation has already conducted an investigation or was in the process of doing so, the Bank may be able to accept the existing investigation report as part of the Account. However, as that work will not necessarily have been conducted through the same lens as the Bank’s investigation, this will need to be considered on a case-by-case basis.

2.28 Some respondents sought clarification as to whether the Bank would require interviews to be recorded and transcribed. Where the Bank does not conduct interviews required for the EAS, the Bank continues to expect the subject participating in the EAS to provide copies of transcripts as transcripts are the most fulsome evidence of the interview. It also expects the subject to retain copies of recordings, as the Bank may subsequently require production of these.

EAS and individual investigations

2.29 Some respondents raised concerns and questions regarding whether the EAS would be available in multi-party investigations and if so how the Bank would analyse competing Accounts (for example where separate Accounts are compelled from an individual and their current or former employer, and where an employer might produce an Account suggesting that culpability for the potential breach lay with the individual). Like other regulators, the Bank already regularly interrogates competing or contradictory narratives as part of its investigatory work. Any Accounts will be rigorously assessed, and the Bank reserves the right to take appropriate further investigatory steps before concluding what (if any) action is appropriate. For this reason, the Bank does not rule out using the EAS in multi-party investigations with different parties being compelled to produce their own Accounts (if more than one party chooses to participate in the EAS).

2.30 In discussing the scope of the Account and assessing the Account and accompanying materials, the Bank will consider limitations on the information available to the subject of an investigation. The Bank will also consider the steps the subject of an investigation has taken to try to obtain information that may be relevant to the Account but is not in their possession.

Senior manager attestation for Accounts by firms

2.31 Several respondents criticised the proposal to require that an Account provided by a firm is supported by an attestation by a senior manager. We have considered that feedback. We continue to consider that a senior manager attestation is a key safeguard. It is designed to provide the Bank with assurance that the firm has conducted the work associated with preparation of the Account rigorously and that an identifiable senior manager has taken responsibility for ensuring that the Account has been subject to due challenge and oversight.

2.32 We have, however, made some changes to better reflect the policy intent behind the senior manager attestation. Specifically:

• The Bank has provided further clarification as to the requirements and scope of the attestation. This may alleviate some of the concerns raised by respondents. In particular, the Bank has clarified its expectation for the senior manager to attest (in a form agreed by the Bank, the firm and the senior manager) as to the process followed in preparing the Account, their role in overseeing its production, their confirmation as to the robustness and diligence of the process, and that the Account accurately reflects any investigatory findings. Further, the Bank has clarified its expectation for the senior manager to attest that, in relation to the matters to be covered by the Account and based on the scope and methodology for the Account agreed with the Bank, there are no other related matters, relevant information or potential breaches of which the senior manager is aware and which should be notified to the Bank.^{footnote [25]}
• Some respondents queried whether the senior manager attestation accompanying the Account should be provided by an ‘independent’ or ‘appropriate’ senior manager, given slight differences in terminology between the CP and the draft Bank Enforcement Approach. The Bank recognises that small firms such as credit unions are limited in the number of allocated SMF positions and there may not be another SMF of sufficient independence to provide an attestation. The Bank confirms that the broader term ‘appropriate’ will remain in the final statement of policy. The Bank confirms that an attestation should be provided by a person approved under section 59 of FSMA (approved person) where the SM&CR applies to the firm. However, for small firms or firms for which the SM&CR is not currently applicable (for example FMIs), the Bank will allow the attestation to be provided by a senior executive or board member (that is, a person of suitable seniority involved in the management of the firm, even if they are not an approved person).
• We have provided further clarity regarding the process for selection of the relevant senior manager. The Bank and the firm will agree the identity of the senior manager providing the attestation as part of the discussions regarding the scope of the Account prior to compelling of the Account. The firm will be invited to nominate a relevant senior manager to provide the attestation and oversee the production of the Account. The Bank will consider any nominations put forward by the firm by reference to all relevant matters including: (i) the senior manager’s areas of responsibility; and (ii) whether there are circumstances suggesting that the relevant senior manager is sufficiently objective and competent in relation to the matters under investigation. Detailed knowledge of the area is not required but a sufficient understanding of the facts, issues, systems and controls, and governance structures is expected.^{footnote [26]}

2.33 Several respondents questioned what the sanctions would be for senior managers who provide the attestation. 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 (for example under the Individual Conduct Rules or Senior Manager Conduct Rules^{footnote [27]}) in overseeing the production of the Account.

Enhanced Settlement Discount (ESD)

2.34 The Bank proposed that the subject of an investigation could receive a settlement discount of up to 50% in respect of fulsome cooperation through the EAS and early admissions of breaches.

2.35 Five respondents asked that the Bank provide clarity on what percentage discount above 30% a subject may receive, having regard to the potential cost and resources required to create the Account. Several respondents sought clarification as to what the proposals’ reference to ‘providing admissions at an early stage’ meant. Some respondents also suggested that the proposed discount is too low to incentivise participation in the EAS when weighed against possible risks. Two respondents asked the Bank to consider providing a higher ESD, for example an up to 100% discount, and provide guidance as to the factors that would be considered in assessing the availability of an ESD. In addition, some respondents queried whether the PRA would introduce a scheme akin to the FCA’s Focused Resolution Agreement regime to permit subjects to participate in the EAS and agree liability but contest financial penalty and/or the size of any discount applied to penalty.

2.36 The Bank has considered these comments and provides the following feedback.

2.37 The Bank recognises the robustness with which it can reinforce regulatory standards and requirements through the publication of statutory notices is heightened where such notices follow relatively quickly after the events under investigation. Early admissions, therefore, have the potential to play an important role in maintaining robust regulatory standards and frameworks. Increasing the 30% settlement discount by up to an additional 20% is designed to incentivise both early admissions and participation in the EAS (which is itself intended to bring efficiencies to the investigation process). An ESD of up to 50% discount provides the right incentive for a subject of an investigation to come forward early while not undermining the regulatory regime and maintaining our ability to send strong and timely messages through a financial penalty. For this reason, the Bank is not proposing to increase the ESD beyond 50%.

2.38 The scale of ESD a subject receives will depend on a number of factors which cannot be known in advance, such as the level of cooperation made by the subject during the provision of the Account and the nature and scope of the admissions received.^{footnote [28]} The full extent of the ESD (50% discount) is likely to be available only when 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 specified timeframe thereafter.

2.39 Where the EAS is not used and the subject does not proffer early admissions, the subject would still be entitled to a 30% discount subject to the terms of the relevant settlement discount scheme.

2.40 Given the Bank is introducing the EAS and ESD, the Bank does not propose to mirror the FCA’s Focused Resolution Agreement scheme at this time.

2.41 On other risks raised by respondents with respect to admissions (for example, possible follow-on litigation), this is a matter for subjects of investigation to weigh against the potential benefits of an early settlement.

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

2.42 The PRA has a five-step framework for penalty calculation. It proposed amending one part of this framework for cases involving firms – namely, the methodology for identifying a starting point for calculating the fine (the Step 2 starting point). The previous policy ordinarily determined the Step 2 starting point figure for firms by using the firm’s total revenue or revenue in respect of one or more areas of its business. The PRA then would use a percentage of the firm’s annual revenue to determine the base figure for the penalty calculation. The percentage would reflect the PRA’s assessment of the seriousness of the breach.

2.43 The PRA proposed replacing this approach to calculating the Step 2 starting point figure with a matrix structure setting out the ranges for the penalty starting point by reference to the firm’s impact categorisation^{footnote [29]} and the seriousness of the breach.

Table 1 – Step 2 Starting Point Matrix in CP9/23

2.44 Six respondents supported the proposal to move away from revenue as a base metric under Step 2, although a number of respondents raised concerns that the new penalty matrix table would result in higher penalties being imposed on firms. Three respondents expressed concerns as to the appropriateness of the Step 2 starting point matrix for specific types of firms in the insurance sector. On the other hand, three respondents raised concerns stating the proposed approach might result in the PRA imposing fines that lessen their deterrent effect or risk fettering regulatory discretion for what is perceived as limited increased transparency and consistency.

2.45 Three respondents asked the PRA to consider increasing the proposed three bands of seriousness to five in line with the FCA’s approach. Respondents also queried how often the PRA would use the ‘low’ seriousness band.

2.46 Five respondents asked for guidance on the distinguishing factors between the low, medium and high seriousness bands and how the relevant factors would map to the new matrix. Respondents asked the PRA to reconsider the decision to treat all potential FR1 and FR7 breaches as falling into the ‘high’ seriousness band. Several respondents queried the proposed benefits of clarity and consistency, given that the proposed policy described the ranges as ‘purely indicative’. There were also queries as to the design of the ranges, including why they were overlapping in some instances.

2.47 One respondent asked the PRA to clarify how it may exercise its discretion in a situation where a breach does not affect all aspects of a firm’s UK business and to clarify the approach the PRA would take where a firm’s category changed during the period covered by breaches in relation to which it intended to impose a financial penalty. Another respondent also sought guidance as to transitional arrangements – that is, how the PRA would calculate penalties in cases spanning the old and new policies.

2.48 The Bank has considered these comments and provides the following responses.

2.49 The PRA has removed the overlaps to ensure that each range is distinct.^{footnote [30]}

2.50 In terms of the impact of the revisions on the size of financial penalties on PRA firms, the changes made to the firm penalty policy were primarily designed to increase transparency and consistency rather than to increase the size of fines. However, in light of feedback received, the PRA recognises that in certain circumstances the application of the amended firm penalty policy may lead to the imposition of higher penalties. See paragraph 1.9 above.

2.51 The PRA has removed the reference to ranges being ‘indicative’ to provide clarity, and confirms it will use regulatory discretion to determine the exact Step 2 starting point figure within the relevant range. The PRA will, however, retain the discretion to ensure that any sanction imposed remains proportionate by reducing or increasing it under other relevant steps.

2.52 In arriving at the proposed ranges, the PRA considered, amongst other things, all types of firms within all categories. The PRA confirms the ranges in the Step 2 starting point matrix are broad to reflect the diversity of firms regulated by the PRA across each category and to provide a suitable deterrent effect. The PRA therefore considers that the use of ranges is appropriate, particularly as it retains discretion within other parts of the policy to adjust the penalty to meet the circumstances of the case. The PRA considers the amended penalty policy is sufficiently flexible to arrive at a proportionate result for all firms.

Table 2 – amended Step 2 Starting Point Matrix

2.53 The PRA imposes disciplinary measures (including fines) where this is proportionate to the breach. This will not change under the new policy. However, the feedback received suggested that the use of the word ‘low’ caused confusion in implying that the PRA would take enforcement action for minor breaches. To avoid confusion, the PRA has amended the seriousness descriptors in the Step 2 starting point matrix from ‘Low’, ‘Medium’ and ‘High’ to ‘Level 1’, ‘Level 2’ and ‘Level 3’.^{footnote [31]}

2.54 The PRA will use its regulatory discretion to assess the seriousness of any given breach. It will do so having regard to the factors set out in the penalty policy.^{footnote [32]} To address feedback we have, however, clarified that rather than FR1 and FR7 breaches automatically falling into the ‘Level 3’ seriousness band, such breaches will involve a rebuttable presumption that they fall within Level 3 seriousness.^{footnote [33]}

2.55 The PRA considers the other parts of its penalty policy – including the other steps in the five-step penalty calculation – allow the PRA to continue to ensure financial penalty calculations are proportionate and fair. The PRA confirms the importance of maintaining robust prudential standards and effective deterrent as part of its approach to enforcement.

2.56 The PRA confirms that where the relevant period spans the old and new penalty regimes, the penalty policy in place at the time of the breach will apply.^{footnote [34]} The PRA clarifies where a firm has changed category during the relevant period, the PRA will use a starting point figure reflecting the lower category but has discretion to increase the penalty, if necessary, under Step 3 and/or Step 4.

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

2.57 The PRA proposed amending the penalty calculations for individuals so that relevant income (for the purposes of determining a starting point) is based on the duration of the breach and raising the serious financial hardship (‘SFH’) thresholds to broaden eligibility. Two respondents were supportive of the proposed change to defining relevant income. However, one respondent suggested that calculating the starting point by reference to the individual’s income for the period of the breach and taking duration of the breach into account when determining seriousness of the breach gives rise to a risk of double counting. The same respondent queried the fact that the PRA penalty policy allowed net worth to be used as an alternative to income in appropriate circumstances.

2.58 Four respondents were generally supportive of the proposals to raise the income and capital thresholds below which the PRA may reduce a penalty proposed to be imposed on an individual due to a claim of SFH. The thresholds the Bank proposed are based on Office for National Statistics (‘ONS’) data. Three respondents suggested regularly revising the SFH thresholds or pegging them to the latest available ONS data. Some of that data related only to Great Britain, leading one respondent to request that the Bank ensure it considers comparatively lower salaries and property values, and higher levels of multiple deprivation, in Northern Ireland when setting the SFH thresholds. Another respondent suggested specific amendments to the Bank’s SFH policy to clarify its operation, including a possible interpretation that the Bank would only grant a claim for SFH in exceptional circumstances.

2.59 One respondent stated the burden of proof being used by the Bank should be specified, and in the case of penalties issued to individuals may be most appropriately aligned to criminal proceedings i.e. beyond reasonable doubt with an initial presumption of innocence.

2.60 The Bank has considered these comments and provides the following feedback.

2.61 The Bank does not consider that calculating the Step 2 starting point for individuals by reference to the period of the breach will result in double counting as a result of the Bank also having regard to the duration of the breach when determining seriousness. Rather, this corrects a distortion that occurred in breaches of longer than 12 months, where previously the PRA based the penalty only on income for a 12-month period.

2.62 The Bank does not consider that the standard of proof in regulatory cases should be aligned with criminal proceedings. This would require the Bank to hold itself to a different standard to that imposed by the statutory regime. The Bank confirms, with regards to the presumption of innocence, it keeps an open mind when investigating subjects until it reaches a point in the evidential and legal analysis stage where evidence supports findings of regulatory misconduct. Nothing in the PRA Enforcement Approach (or the wider Bank Enforcement Approach) will change this aspect of how the Bank conducts its investigations.

2.63 The Bank has amended the SFH policy to remove the implication that where an individual claims SFH, the Bank may reduce the penalty only ‘in exceptional circumstances’.^{footnote [35]}

2.64 The Bank has also added further guidance about the factors it would take into account in considering an SFH claim. The Bank recognises there may be cases where, even though the individual has satisfied the Bank that payment of the financial penalty would cause them SFH, the Bank considers the breach to be so serious that it is not appropriate to reduce the penalty.^{footnote [36]}

2.65 The PRA’s current penalty policy states that the net worth of an individual may be used where income is not considered to be an appropriate basis for the calculation. A footnote referring to this was inadvertently deleted from the draft PRA Enforcement Approach and has now been reinstated. The Bank may use an individual’s net worth figure in circumstances where the Bank has concerns that the individual had structured their income in a way that would distort the application of the penalty policy during the relevant period.

2.66 The Bank has amended the SFH policy to peg the SFH thresholds to the latest figures available from the Office for National Statistics (‘ONS’) data at the time the relevant sanction is imposed to minimise the need for regular revision.^{footnote [37]}

2.67 The Bank's new thresholds for SFH include a capital threshold based on ONS data for individual wealth in Great Britain. Presently, there are no equivalent figures available for Northern Ireland. However, the Bank uses income and capital thresholds as the starting point for considering claims for SFH by individuals. If the imposition of a penalty would cause an individual to fall below those thresholds, the Bank would be likely to reduce the penalty or possibly not impose it at all, subject to the terms of the SFH policy. For this reason, individuals with lower levels of income and capital in Northern Ireland are unlikely to be disadvantaged if the Bank’s thresholds reflect higher incomes and levels of wealth in Great Britain.

PRA’s policy on prohibition orders

2.68 The PRA proposed setting out the PRA’s policy on prohibition orders and set out the circumstances under which the PRA would consider revoking a prohibition or partial prohibition order.

2.69 One respondent was of the view that the Bank should expressly convey that a prohibition order is not to be considered as a proxy for a disciplinary sanction in circumstances where a disciplinary sanction cannot be imposed against an individual either because (i) they were not an approved person at the relevant time; or (ii) where they were an approved person, the relevant limitation period had expired.

2.70 The Bank does not consider it necessary to make these statements. It confirms that it carefully exercises the prohibition power, taking into account its statutory objectives and all relevant circumstances pertaining to the case at hand. The Bank will take action in the form of seeking a prohibition order where this is necessary and proportionate to advance those objectives.

Changes to the FMI policies

2.71 The Bank proposed to amend the FMI Penalty Policy to reflect that the Bank may reduce a proposed penalty to take into account early settlement and to increase the thresholds for SFH for individuals. The Bank also proposed to adopt the EAS procedures set out in Chapter 2 of the PRA Enforcement Approach subject to any adaptations necessary to take all relevant circumstances into account.

2.72 Six respondents expressly referred to the FMI changes. However, three of these provided no comments. The remaining three supported the Bank’s proposals to provide greater clarity around policies and procedures applicable to FMIs. One respondent asked the Bank to make it clearer that the EAS also applied to FMIs in Annex 2 of the Bank Enforcement Approach.

2.73 The Bank confirms the use of the EAS and, where applicable, that the ESD is available in appropriate FMI investigations.^{footnote [38]} The Bank also confirms that for FMIs (for which the SM&CR is not applicable), the attestation accompanying an EAS should be provided by a senior executive or board member, with the individual being agreed with the Bank.^{footnote [39]}

Other policies relating to governance and decision-making

Changes to supervisory decisions of the PRA

2.74 The PRA proposed to create a new statement of policy covering the PRA Supervisory Decision-Making Policy, separating out the relevant sections from the current PRA Enforcement Approach. The PRA also proposed a number of minor amendments to supervisory decision-making, with the aim of giving the PRA more flexibility during the decision-making process. These amendments included:

• Clarifying 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.
• For decisions other than warning notices, stating that there may be circumstances where the PRA considers that a period for representations of less than 14 days is appropriate.
• Aligning the policy with section 394 of FSMA on the disclosure of material upon which decisions are made. This would provide rights for the subject of a decision to have access to PRA material in a more limited number of cases.
• Updating the policy to note firms should engage with decision-makers for matters relating to the decision itself but continue to engage with usual supervisory contacts for matters not relating to the notice.

2.75 This section of the CP received two comments both of which focused on the proposal to remove the commitment to always give a period for representations of at least 14 days. The respondents were of the view that the period for representations should only be shortened in extreme circumstances.

2.76 The PRA recognises the concerns raised. While it is difficult to be specific around representations timeframes, given the range of circumstances that may result in the issuance of supervisory notices, the PRA reiterates that it would normally expect a period for representations of no less than 14 days. The PRA will always consider a range of factors, most notably fairness, when deciding on an appropriate time period for recipients of supervisory notices to make representations. This will continue to be the case following removal from the policy of the 14-day minimum period where FSMA does not provide for this. Therefore, the PRA does not propose to make any changes to the PRA Supervisory Decision-Making Policy as a result of responses received to the CP. However, the PRA has made a small number of clarificatory changes from the draft included in the CP to reflect the operation of DMCs in practice.

Changes to EDMC Procedures

2.77 The PRA proposed amendments to the EDMC Procedures to update the remit of the EDMC, to reflect how the procedures have operated in practice and to clarify the roles and responsibilities of the EDMC, in light of practical experience of the EDMC in dealing with cases. These amendments included:

• Updating the EDMC remit to include in the schedule of statutory provisions set out in in the table in section 2.2 of the procedures various enforcement powers available to the PRA and/or the Bank under FSMA including: (i) adding 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); (ii) adding section 384 of FSMA (power of the PRA to require restitution); and (iii) clarifying that the EDMC can take decisions in contested enforcement cases involving a broader range of powers concerning FMIs.
• Increasing the term for new EDMC members from the current three-year fixed term to five years (renewable once) and giving current EDMC members the opportunity to increase their current terms to five years so they could serve eight years in total. Additionally, where an EDMC member is working on a live matter and their term is coming to an end, allowing that term to be extended until the matter they are working on has come to a resolution.
• Making clear that the statement required to be submitted, at least once a year, by EDMC to Court will be published subject to applicable disclosure restrictions.
• Given their importance, including the explanation of ‘associated statutory decisions’ throughout the main body of the EDMC Procedures instead of as a footnote. Additionally, making clear that associated statutory decisions include the statutory decisions on publication of notices and related details.
• Creating a new section of the EDMC Procedures called ‘Publication’. The new section will consolidate the processes, roles and responsibilities in relation to whether it is appropriate to publish information about the matters to which a warning notice or a decision notice relates, where the EDMC is the decision-maker.
• Adding that the EDMC Deputy Chair is able to oversee arrangements, in addition to the EDMC Chair, to ensure the panel is quorate should the Panel Lead and other panel members become unavailable.
• Making clear that it is open to the recipient of a warning notice and/or relevant Bank staff to request the EDMC to pause proceedings to enable settlement discussions to take place if they would like to settle the matter before the EDMC takes a decision.

2.78 Six respondents commented on this section of the CP, and most were supportive of the proposed changes. One respondent questioned whether the PRA would be open to permitting subjects of an investigation to refer only the sanction that the PRA is intending to impose on it to the EDMC. Another respondent requested greater clarity over how the EDMC will decide which materials will be disclosed to firms, noting that they would expect subjects to have access to the materials being relied upon. The respondent also highlighted concerns over the proposed changes to EDMC members’ terms, noting potential inconsistencies with the direction of travel on corporate governance issues, such as regulator rotation of audit partners, audit firms and non-executive directors.

2.79 The response referencing partial referral of only the sanction to EDMC is addressed under the ‘Enhanced Settlement Discount’ header of Chapter 2 of this PS.

2.80 Regarding how the EDMC will decide which materials will be disclosable to firms, we make a distinction between cases where section 394 of FSMA (access to FCA or PRA material) is applicable to certain warning and decision notices and cases where it is not. Where section 394 is applicable, the DMC (EDMC or otherwise) will be required to disclose both material relied upon and any secondary material which might undermine the decision. Beyond this, the DMC will have discretion to decide what is appropriate to disclose in each case. However, in doing so, the DMC will take into account factors such as the specifics of the case, whether any material in addition to the statutory notice served may be required to enable effective representations and the need to be fair and transparent.

2.81 The PRA acknowledges the challenge raised regarding the EDMC members’ terms. However, the proposed amendment would be consistent with the Governance Code on Public Appointments, which advises a maximum tenure of two terms totalling no more than ten years in post. While EDMC members are not bound by the Governance Code on Public Appointments, it is considered to be a useful reference point. Additionally, the relatively low throughput of EDMC cases means that concerns about independence are far lower in comparison to auditors and other NEDs, who likely have much greater interaction with firms than EDMC members would have with the PRA.

2.82 For the reasons set out above, the PRA is not proposing to make any changes to the EDMC Procedures as a result of responses received to the CP.