At the Financial Services Lawyers' Association meeting last week, Miles Bake, Head of Legal at the Enforcement & Litigation Division of the Prudential Regulatory Authority (PRA) discussed the PRA's approach to enforcement, gave an overview of recent PRA enforcement actions/investigations and explained the Enforcement Division's (ED) future agenda.
Rationale and Approach of the ED
Upon the PRA's creation in 2013, it was endowed with broadly the same enforcement powers as the Financial Conduct Authority (FCA). The PRA has subsequently developed how it deploys these powers in the context of its prudential supervisory remit. In addition to its arsenal of practical supervisory tools, the PRA recognised that it needed a "hard backstop" for serious breaches.
The ED's approach is guided by the PRA's primary objective of promoting the soundness of the firms the PRA regulates, securing protection for insurance policyholders and its secondary objective of facilitating competition. Mr Bake noted that the ED "...work[s] with the grain of the PRA's supervision-led approach" which is forward-looking and judgement-based supervision, focusing on areas of greatest risk. The ED's targeted enforcement action supplements this.
Mr Bake explained that the PRA's strategic goals are embedded in the ED's investigation Referral Criteria (published in March 2019) and the ED liaises with its supervision and policy colleagues on key decisions e.g. opening investigations. Further, the ED uses its Referral Criteria to consider whether there are legal grounds to investigate and whether or not to do so. Any alternatives are explored in combination with supervisors. The ED also recognises that certain situations may call for a response from multiple regulators/enforcement agencies. It therefore aims to strengthen links with other regulators/agencies e.g. via secondment arrangements.
Mr Bake noted that the ED operates transparently and that this is shown by its publications e.g. the Referral Criteria, the Regulatory Investigations Guide and the ED's statutory policies.
Independence and scrutiny of the ED's enforcement actions was further enhanced in 2018 by the creation of the Enforcement Decision-Making Committee (EDMC), which operates at arm's length from the PRA in contested cases. Mr Bake also highlighted that following an investigation by the ED's lawyers, senior PRA executives make a decision regarding settlement – the ED does not make this decision.
Mr Bake further explained that the liability of firms is balanced with the importance of driving accountability amongst senior individuals, however, the ED will always have regard to representations from the subjects of the investigations their legal representatives.
The ED's Enforcement Actions
Mr Bake stated that since the PRA's inception, it has investigated 17 firms. Seven have concluded with a settled outcome, two have closed with no enforcement action and eight are ongoing. The PRA has also investigated 32 individuals into individuals. Of these, 19 are ongoing, seven have been closed with no enforcement action and six have resulted in a formal sanction. Mr Bake emphasised that there is no 'enforcement travellator' where an PRA investigation will automatically lead to a sanction.
The ED's cases fall into two categories.
Firstly those where the conduct of a firm/individual may impair the PRA's ability to supervise, or represents unacceptable behaviour. An example of this type of PRA action is the £1.4m fine levied against the Qatar Islamic Bank in 2016 due to its failure to identify its capital requirements and to report its large exposures to the FCA. This severely hampered the PRA's ability to supervise properly.
Secondly, where there has been a crystallised risk, action or public event that could directly impact the PRA's statutory objectives. For example, the £14m fine levied against the Royal Bank of Scotland Plc due to failures that led to an IT outage affecting 6.5 million customers.
Mr Bake also discussed the Senior Managers Regime (SMR) and emphasised that Senior Managers fall squarely within the ED's "...appetite and interest" and have done so prior to the inception of the SMR. It would therefore be a mistake to think that, for the PRA, the SMR's impact lies primarily in enforcement. It also lies in many other aspects of the SMR e.g. the duties on firms to assess fitness and propriety of senior staff etc.
Agenda of the PRA and Conclusion
Mr Bake emphasised that the ED working agenda is not distinct from the PRA's agenda. In fact, enforcement is an aspect of the PRA's supervisory approach and "...focuses on investigations which buttress the PRA's objectives and strategic goals."
Mr Bake explained that his priorities are operational e.g. safeguarding the PRA's independent operational capability to pursue the cases it needs to, and ensuring (from a public law perspective) that the EDMC and settlement decision-makers interpret the PRA's rules and policies consistently. It is for this reason that the PRA have proposed changes to the settlement policy to include provision for the EDMC to review settled cases after the event. This will ensure that the EDMC and PRA executive remain independent but aligned.
Mr Bake concluded by explaining his final priority, which is to foster understanding of the ED's approach amongst the organisations most directly affected, i.e. firms and their legal advisers. Mr Bake considered that this engagement is mutually beneficial as the ED's enforcement actions have more impact when they are understood by the PRA's subjects and firms' lawyers are also better placed to advise their clients accordingly.
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