The Bank of England (BoE) has published PS1/24 – The Bank of England’s approach to enforcement. The policy statement provides feedback to responses to CP 9/23 and contains the BoE’s new consolidated approach to enforcement.

The new consolidated enforcement approach describes the BoE’s powers in connection with:

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

The document “draws together the BoE’s existing enforcement statements of policy into a consolidated document”. It includes some changes to the draft policy in response to the feedback received as part of the consultation process. The new enforcement approach took effect on January 30 2024 and will apply to all breaches from this date onwards.

In this article we provide a helpful summary of key changes connected to the PRA and financial institutions.

Changes to the PRA enforcement approach

The following are the key changes to the PRA enforcement approach:

• Introduction of and clarification on the application and operation of cooperation schemes.
• Introduction of a matrix as a starting point for the calculation of fines for firms.
• Amendments to the penalty policy for individuals.
• Expanded policy on prohibition orders.
• Removal of supervisory statutory notices.

Early Account Scheme (EAS)

The EAS represents a new option for early cooperation with the regulator.

Participation in the EAS is voluntary. A firm being investigated can apply to participate in the scheme and, if accepted, is required to provide a detailed factual account of the matter under investigation along with any related evidence. No negative inference will be drawn by the regulator from a firm’s decision not to utilise the EAS.

A request to participate should be received within 28 days of the receipt of the Notice of Appointment of Investigators with extensions granted only in exceptional circumstances.

The scheme will not be available in cases where criminal conduct is suspected. But it may be used in multi-party investigations of both firms and individuals. It is important to note that each party’s application will be assessed separately and on its own merits. The EAS may be available for firms under investigation by other regulators or enforcement agencies subject to their consent to its application.

Despite criticism from stakeholders the BoE has retained the requirement for a senior manager attestation considering it is a “key safeguard”, which is designed to provide assurance that the work has been conducted rigorously and that an identifiable senior manager has taken responsibility for it. The firm has made some tweaks to address some of the criticism however.

In particular, the requirements and scope of the attestation have been clarified. Also, while an attestation for a firm to which the SM&CR applies must be provided by an approved person (FSMA s59), attestation by a senior executive or board member is permitted for small firms or those to which the SM&CR does not apply.

Sanctions against the attesting manager will be considered in instances of misrepresentation or failure to meet applicable obligations in overseeing the production of the detailed factual account (and presumably the production of the relevant evidence).

Enhanced Settlement Discount (ESD)

By utilising the EAS and in return for cooperation and early admission of breaches, a firm under investigation could receive a settlement discount of up to 50%. This represents a premium of 20% on relevant settlement discount schemes, which is intended to incentivise firms to use the EAS.

The discount will be based on the level of cooperation received by the regulator with its full extent only available when a subject:

• participates in the EAS;
• provides a detailed an accurate account;
• makes an admission of fact; and
• makes a good faith and fulsome admission of misconduct and breaches at the time of account submission or within a specified timeframe.

Financial penalty policy for firms

	Seriousness (penalty in £millions)
Firm category at the time of the relevant breach(es)	Level 1	Level 2	Level 3
1	25-75	75-125	125+
2	15-45	45-75	75+
3	1-7	7-15	15+
4	0-1	1-2	2+

In the matrix the original designation of the breaches as ‘low’, ‘medium’ and ‘high’ has been replaced with levels 1, 2 and 3 to avoid confusion. Useful to note is the fact that FR1 and FR7 breaches will involve a rebuttable presumption that they fall within Level 3.

Financial penalty policy for individuals

For individuals the penalty will be calculated in reference to relevant income during the duration of the breach. Previously this was based on income for a 12-month period even in connection with breaches that extended over a period longer than one year.

The serious financial hardship thresholds have been raised to “broaden eligibility”. However, where the regulator considers the breach serious enough it will not reduce the penalty even in instances where it would constitute serious financial hardship for the individual.

Also, the net worth of an individual may be used for assessing the penalty “where income is not considered to be an appropriate basis for the calculation”. The BoA suggests that this alternative approach will be utilized in instances where there is concern that “the individual had structured their income in a way that would distort the application of the penalty policy during the relevant period.”

Prohibition orders policy

The PRA’s prohibition orders policy has been set out in the approach document. In effect any prohibition order and its scope will be entirely dependence on the facts and circumstances of each case.

A prohibition order may prevent an individual from performing all functions or specific functions only depending on the breach as well as a determination of their fitness and propriety.

Other key changes to the enforcement approach

The new consolidated approach also includes:

• Changes to the FMI penalty policy to better align this with FMI enforcement procedures.
• Introduction of a separate SoP, the PRA Supervisory Decision-Making Policy, which sets out:
  • allocation of decision-making regarding statutory notices;
  • decision-making process for statutory decisions that are supervisory in nature;
  • publication of regulatory action for such statutory decisions.
• Amendments to EDMC procedures.

Changes to the FMI penalty policy

The financial market infrastructure (FMI) penalty policy has been amended to clarify the procedures, policies as well as the penalty regime applicable to clearing houses, counterparties, central securities depositories, etc.

The BoE has confirmed that both the EAS and ESD are available in appropriate FMI investigations both in connection with firms as well as individuals. In the context of an EAS an attestation is to be provided by a senior executive or board member agreed on with the BoE.

PRA Supervisory Decision-Making Policy

This policy has been separated from the PRA Enforcement Approach with a  number of amendment made to give the PRA more flexibility in this area. The amendments include:

• the need to take into account practical factors when determining procedure applicable to supervisory decisions;
• permitting the reduction of the period of representations to less than 14 days for decisions other than warning notices where appropriate;
• aligning the PRA material disclosure rules with FSMA s394, which has the effect of reducing access to PRA material to a more limited number of cases; and
• clarifying that firms are to engage with decision-makers in connection with a decision only while continuing to engage with their usual supervisory contacts for other matters.

Some changes have been made to the document to reflect the operation of the Decision-Making Committees (DMC) in practice.

EMDC procedure

Some procedural rules have been amended “in light of practical experience of the EDMC in dealing with cases”. The amendments are material and include:

• Update of remit to include additional enforcement powers including:
  • imposing a financial penalty or censure against a financial holding company, mixed financial holding company or person;
  • adding power to require restitution;
  • affirming decision making power in contested enforcement cases involving a broader range of powers concerning FMIs.
• Increasing EDMC member three-year fixed term to five years renewable once;
• Clarifying that EDMC annual statement is to be published subject to disclosure restrictions;
• Highlighting the importance of associated statutory decisions;
• Adding a ‘Publication’ section to EDMC Procedures to consolidate processes, roles and responsibilities in connection with the publication of information;
• Giving the EDMC Deputy Chair the power to oversee arrangements in addition to the EDMC Chair; and
• Explicitly permitting a request to pause proceedings before an EDMC decision in order to allow for settlement discussions.

An important clarification around disclosure is that where section 394 is applicable both primary material relied upon and any secondary material which might undermine the decision will need to be disclosed by a DMC, but that discretion on what to disclose is available in cases where section 394 does not apply.

The document is essential reading for compliance, risk and legal functions within the firms being supervised by the BoE and PRA and requires careful consideration in the context of internal systems, processes and policies.

GRIP view

The consolidation of rules is always welcome, particularly where important regulatory areas such as enforcement are concerned. It is unsurprising therefore to see robust support for the BoE effort and the changes proposed as part of this.

In connection with the EAS settlement, the focus on detailed factual accounting is important to note. In order to take full advantage of this mechanism and the early settlement disclosure firms must be able to provide the regulator with solid evidence in support of their internal investigation narrative. This means having in place mechanisms to forensically examine a potential breach and being able to present that information to the regulator in a timely fashion.

It remains to be seen how precisely the attestation mechanism functions in practice, but it is part of a wider trend of regulators seeking to hold accountable not only firms, but also the individuals responsible for compliance failures. While the BoE is at pains to explain that sanctions will be applied only in instances of misrepresentation or negligence, it is clear that attesting individuals will potentially be on the hook for breaches unless they themselves exercise due care and professional skill.