At the time the disciplinary enforcement jurisdiction of the
Prudential Regulation Authority ("PRA") was introduced,
the PRA declared that its preference would be "to use its
statutory powers to secure ex-ante remediation", an approach
which the PRA anticipated, if successful, "should mean that
enforcement action will be relatively rare"1. Yet
less than four years later the PRA has already brought eight
enforcement actions and imposed six fines exceeding £40
million in aggregate, as illustrated in the chart below.
Confirmation of Enforcement Trend
In its latest decisions (February 2017)2 the PRA has
imposed a whopping £17.85 million fine on a bank branch (for
which international bank the PRA is not the lead regulator) and
£8.925 million fine on its UK broker-dealer affiliate, for
delaying disclosure to the PRA of sanctions imposed by the New York
Department of Financial Services (DFS) against the
New York branch of the bank (for improper processing of U.S.-dollar
clearing in breach of sanctions from 2002–2007) until shortly
after final settlement.
The PRA relied on its Fundamental Rules – 6: "A firm
must organise and control its affairs responsibly and
effectively"; and 7: "A firm must deal with its
regulators in an open and co-operative way and must disclose to the
PRA appropriately anything related to the firm of which the PRA
would reasonably expect notice."
The PRA gives short shrift to what appear to have been the
bank's concerns to comply with confidentiality restrictions
under New York State banking law, which as a consequence delayed
disclosures: the PRA may perhaps have been riled by the fact that
certain waivers were in fact requested and obtained by the bank for
disclosure to other U.S. regulators and the bank's lead
regulator but not the PRA.
Reliance on these Fundamental Rules may be conceptually
consistent with the PRA's exclusively prudential role, yet it
is tolerably easy to characterise many conduct issues as also
giving rise to failings in corporate governance/systems and
controls and thus of prudential relevance. The latest decisions may
foreshadow a willingness by the PRA to take an expansive view of
its prudential enforcement jurisdiction concerning banks and
perceived conduct failings.
The PRA cites no existing published policy guidance concerning
the policy expectation evidenced in these latest decisions that
banks will notify "at an early stage [all
relevant information] regarding the potential for material
sanctions to be imposed by an overseas regulator [and] matters
which may have a significant adverse impact on a firm's
reputation...[or are] relevant to an assessment of the fitness and
propriety of regulated individuals".
Having regard to the size of the international bank concerned
and the fact that the matters subject to DFS review had no direct
relevance to the UK businesses, there is a conspicuous absence of
any discussion as to why the DFS sanctions were considered quite so
significant or the obligation to notify was of such temporal
importance in order for the PRA to effectively supervise the UK
Given the recent trend of enforcement decisions and the size of
the fines imposed in the latest decisions concerning an issue upon
which there was limited existing regulatory policy guidance, the
PRA's declared policy that it does not intend to pursue a
policy of enforcement-led regulation has to be open to
Significance for PRA-Regulated Banks and Firms
Banks and firms should be alive to the prospect of
enforcement-led regulation by the PRA. That prospect requires a
considered and structured approach to cooperation with the PRA
within the context of the PRA Fundamental Rule 7 obligations.
Particularly in the case of international banks, conflicting
requirements of regulators in different jurisdictions can create a
minefield of potentially competing obligations. Enforcement-led
regulation further requires a considered and structured approach to
matters such as cross-border disclosure of documents and legal
privilege, which is an already challenging area for international
banks subject to numerous jurisdictions with an equal number of
differing rules, regulations and regulators. With its global
financial regulatory capabilities, Reed Smith is well placed to
assist with these issues.
1 The Bank of England's Prudential Regulation
Authority, "Our approach to banking supervision" (May
2 PRA Final Notice dated 9 February 2017.
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