The Prudential Regulation Authority (PRA) has recently issued a consultation paper with proposals about enforcement processes and other related matters. Perhaps the most radical of these relates to the creation of the Early Account Scheme (EAS) and allied Enhanced Settlement Discount.
The proposal is that the EAS route could be requested by a subject in appropriate cases (not for example, in criminal matters), but that the route would only be followed if the PRA, in its discretion, agreed that it should be.
In short, the proposal is that, within 28 days of notice of appointment of investigators, the subject could request to participate in the EAS. If agreed to by the PRA, the subject would be compelled to provide a detailed factual account of the matters under investigation, supported by all relevant evidence such as contemporaneous evidence and the transcripts of interviews. Various aspects of the EAS would need to be agreed by the subject. For example, the subject would need to agree with the PRA the approach to interviews. If, for example, the subject proposed to interview witnesses, the PRA might indicate that it wished to attend the interviews or, alternatively, that it wished to conduct interviews itself using its investigatory powers. Assuming the EAS was agreed by the subject and the PRA, the account and all underlying relevant material and evidence would normally need to be provided within six months.
Following a presentation of the account and the evidence, the PRA would have various options:
- discontinue the investigation;
- continue the investigation, including requiring further information;
- invite the subject to enter into without prejudice discussions on the basis that the account was sufficient for the PRA to make findings; or
- refer the matter to the PRA's enforcement decision making committee (the EDMC).
As to the early settlement discount, the proposal is that a subject would be eligible for a discount of up to 50% on any proposed penalty in EAS cases. This would apply where it had cooperated with the PRA by providing a compliant EAS, had made early stage admissions on a without prejudice basis in relation to potential breaches, and in the PRA's view, it merited the discount with regard to various relevant defined circumstances.
The EAS would effectively outsource the early stages of relevant investigations to the subject. This would be a novel approach. Whilst the regulators have sometimes relied in part on the findings of internal investigations, this has never formed part of any formalised process and it is not difficult to see the incentives for the regulator in suggesting it.
First, it would potentially enable investigations to progress relatively quickly. Second, it would potentially enable such investigations to progress in a way that committed far less PRA resource than would have been required by the PRA conducting that part of the investigation itself. Third, allied with the Enhanced Settlement Discount, it has the potential to increase co-operation.
Our view is that that there are a number of potential issues with the approach. For example:
- It is not clear that the enhanced settlement discount will drive subjects towards the EAS, given the uncertainties around satisfying the PRA that the subject really did deserve that level of discount. In any case, the maximum level of the discount is perhaps not sufficiently significantly above the current 30% maximum discount.
- A subject would be required to decide relatively quickly (28 days) whether to suggest following the EAS. Whilst there may subsequently be wriggle room, a subject would want to be fairly certain that it was committed to the EAS route if it were to indicate to the PRA that was what it wanted to do. The initial period for decision making may be rather too short for it really to know whether it wanted to participate.
Beyond this, it is not difficult to see scope for problems when the EAS route is followed. For example:
- There may be real practical difficulties where more than one regulator is investigating the subject (although it should be noted that "the position of other regulatory authorities" is something suggested by the PRA it should have regard to in determining whether the EAS route is appropriate).
- Equally, there may be real difficulties where both a firm and an individual are involved. In such a case, there may be agreed facts by a firm in the EAS, which an individual not in the EAS does not agree. This of course is a feature that has reared its head in FCA cases. See for example, in the Julius Baer case where the firm settled on the basis of one set of facts, but the individuals contested the position, including the underlying facts. It is also a feature that is of course known in Deferred Prosecution Agreements (DPAs).
- There may be difficulties in firms undertaking investigations without the powers of the regulator. Whilst a firm can usually compel a current employee to cooperate in an investigation, unlike the PRA, it has no power to compel the cooperation of former employees.
In short, whilst the proposals are interesting, there are clearly a number of issues associated with them. We shall have to see how the industry responds to them and, if they go through, what level of take up there is subsequently.