UK: Weighing Up The UK PRA's Proposed ‘Early Account Scheme'

Credit to the UK PRA for looking at ways to speed up an enforcement investigation. Their proposed solution? The Early Account Scheme (EAS). Without explanation, the name doesn't give a lot away. So, what's the deal?

The What

The Bank of England's Consultation Paper 9/23 (CP9/23) is quite dense and covers a lot of ground, much of which involves tidying up and consolidating existing policies and procedures.

It also includes a proposed change to the basis of enforcement penalty calculations which is intended to better align with the PRA's statutory objectives and to provide more transparency and consistency (although, in reality, it may result in a fine which is wholly disproportionate to the breach in question). In short, rather than using revenue as a starting point for penalty calculation, the PRA will use its existing impact categorisation for the firm, which has been aligned with a set of indicative ranges based on the seriousness of the breach (with breaches of integrity and openness with regulators automatically assigned to the highest level of seriousness). In a number of recent cases the PRA has used alternative metrics to revenue as the basis of calculating penalty, so this appears to be an evolution and clarification of an approach already taken.

The most noteworthy proposal in CP9/23 is the introduction of a 'scheme' where, by agreement, the subject of an investigation (whether a firm or an individual) is compelled to provide a detailed factual account of the matter under investigation at an early stage of that investigation (the Account) as the basis for admissions, in exchange for the opportunity of receiving a discount of up to 50% of the penalty.

Oliver Dearie, Head of Enforcement and Litigation at the Bank of England, gave more detail on the Bank's objectives in a speech on 20 June 2023, focusing on the way in which the proposed changes, including the EAS, are intended to provide clarity and enhance the robust and successful enforcement record that the PRA has had to date.

The Why

The PRA's objective is to 'provide a route for early cooperation by subjects [of investigations]' and to 'expedite the initial information gathering stage'. In his speech, Mr Dearie acknowledged that there was common concern that investigations take too long, averaging 2.25 years each. The introduction of the EAS seeks to reconcile the desire to conclude matters as quickly as possible, with the requirement that the regulator fully considers all of the issues and facts before reaching a decision.

Mr Dearie noted that, in many respects, an Account may be similar to the factual, narrative responses that are already provided to the PRA in response to statutory requests in some cases. The EAS is therefore intended to provide an expedited and structured process to allow the narrative to be as comprehensive and timely as possible.

The Fine Print

It sounds appealing – giving the subject of an investigation the ability to take greater control of what can be a long and costly exercise at the beginning of an investigation.

The subject of the investigation has 28 days from receipt of the notice of appointment of investigators to inform the PRA they are interested in pursuing this route. It seems the Bank is open to discussing this proposed timeframe. The reality surely is that those under investigation would want to decide as soon as possible, the risk is otherwise that the PRA has proceeded with the investigation steps and the full benefit is lost as the PRA is unlikely to 'sit on its hands' for a protracted period waiting for a decision.

The EAS won't be available in all cases, only at the PRA's discretion. Specifically, CP9/23 says that it's not intended for criminal matters and unlikely to be available where it is suspected that a subject lacks integrity, has a history of repeating behaviour for which they have been sanctioned, or where there have been ongoing failures to cooperate with regulators in an open manner. It may be that these limitations will also mean that the scheme will be unavailable in instances where a lack of integrity is attributed to the firm by the actions of an individual, in line with the recent broad approach taken by the FCA in the Final Notice against Julius Baer, should the PRA adopt an expansive approach to attribution of breaches of Fundamental Rule 1.

The proposal is that the time period for producing the Account will ordinarily be no longer than 6 months. In most cases, we would expect this to be tight but it is of course consistent with the objective of speedy resolution, and the guidance seems to suggest that the EAS may not be suitable for complex investigations in any event.

The Account will likely be framed to address specific targeted questions and agreeing scope may well be similar to agreeing the scope of a s.166 FSMA skilled persons review.

As the Account will be compelled using investigatory powers, the normal sanctions for non-compliance and false or misleading submissions will remain in play.

Importantly, where a firm is under investigation, the EAS will require the provision of an attestation by an appropriate Senior Manager, along with the Account. The Senior Manager is to attest 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. Not a small ask, and the personal burden on Senior Managers may make decision makers within firms reluctant to commit to this process, particularly when a decision has to be made within 28 days of receipt of the notice of appointment, and the Account likely has to be produced within 6 months.

It is likely that most subjects under investigation will require some form of external support to conduct this exercise which may end up being akin to a s.166 skilled person review, and could be resource intensive – particularly if it is to be done speedily. This could lead to greater expense than would be incurred when conducting a defence which settles at Stage 1, particularly in the most complicated cases. With the position about exactly how much additional discount above 30% will be available in each case currently unclear, firms may take the view that it is not worth the money in some cases – even if it shortcuts a potentially lengthy investigation.

The Account is also to be accompanied by a pretty extensive array of supporting documents (also provided under compulsion), which includes all relevant contemporaneous materials and evidence, and transcripts of any interviews. In relation to interviews conducted as part of the EAS, the PRA may wish to be present or indeed to conduct the interviews themselves. It is not clear in what circumstances this would be the case.

Receipt of the Account does not prevent the PRA from requesting further information before deciding on how to proceed. Mr Dearie has made clear that the PRA is not outsourcing its investigation to the firm or individual, the intention rather is to ensure that the key facts are extracted and understood more efficiently.

It is not clear how the EAS will operate in the case of joint investigations. Will the FCA be onboard with this Scheme? Will they have a veto power? CP9/23 simply says: 'Where other regulators are investigating similar matters, we would discuss with those regulators before agreeing to the use of the EAS.'

When considering whether to engage with this process, subjects will need to have in mind issues with insurance coverage and compliance with terms of any relevant policies. As an initial practical point, subjects of investigations will need to appreciate the importance of engaging with insurers as early as possible in relation to any consents that may be required before asking the PRA to enter the EAS process, and potentially recoverable costs which may be incurred in producing the Account.

Moreover, complications may arise where there are concurrent investigations into a firm and individuals. Practically, it is likely to pose a number of issues both for firms and individuals around access to relevant documents. It is unclear to what extent the PRA will expect less of individuals preparing an Account without access to the same resources as firms. Mr Dearie acknowledged concerns that had been raised about the risk of employers being incentivised to make unfair allegations against individuals – he noted that this is not a new risk and that investigators are already experienced in establishing facts from competing narratives (although, as the regulators' track record in the Upper Tribunal shows, not always successfully).

Why bother?

Some of the fine print perhaps starts to make the EAS sound less appealing.

However, a key draw is likely to be the potential financial incentive (over and above any cost savings in accelerating the information gathering stage of the investigation), namely the 'enhanced settlement discount'. Increasing the currently available 30% discount for early settlement, the PRA will offer a 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 current 28-day settlement period. 'Well ahead' is not clearly defined.

The proposals require that the Account be produced prior to the PRA inviting the subject of an investigation to enter without prejudice settlement discussions, and CP9/23 states that the Account would be required to be provided on an open basis. As such, while any admissions in Stage 1 are to be made on a without prejudice basis, creating the Account may carry potential litigation risk, if it enters the public domain (either because it is published by the PRA in full or part in the Final Notice, or because it is disclosed in other proceedings) and is used as the basis for follow-on civil proceedings.

All in all, where available, it would be worth considering the EAS route, not least since it is commonplace for the subject of an investigation to carry out an internal review in any event and, since the premise is that the firm or individual is already under investigation, the alternative can be a tortuous and costly information gathering exercise.

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