Regulatory enforcement mini-series part 2: Pros and cons of the PRA's new Early Account Scheme

Nathan:

Hello, and welcome to the Ashurst Regulatory Enforcement podcast. I'm Nathan Willmott, and I'm joined here in the Fruit and Wool Exchange in London by two fellow specialists in FCA and PRA investigations, my colleagues, Laura Bell and Adam Jamieson. Thanks, Laura and Adam, for joining the podcast today.

Laura:

Thanks, Nathan. Delighted to be here.

Adam:

Thanks, Nathan.

Nathan:

Now, together, we have many, many years of grappling with regulators on enforcement matters, acting for financial services firms large and small, as well as their senior management, and our mission for this podcast series is to share with you the new approaches and strategies that we're seeing from the PRA and the FCA, to highlight areas of concern about how the regulators are conducting their investigations, and to suggest what they should be doing differently to ensure that they act fairly and effectively.

Our topic for today is the PRA's new Early Account Scheme that was introduced on the 30th of January 2024 as part of its new approach to enforcement, and this introduces a very different way of conducting enforcement investigations. So Laura, in a nutshell, what is this new Early Account Scheme from the PRA?

Laura:

So it's an entirely new scheme from the PRA which outsources the opportunity to firms to provide a narrative account, a factual account, of issues that are under investigation. It's a voluntary scheme, so firms don't have to choose to enter into it, and it's something that firms will have the opportunity to enter into 28 days after they receive the notice of appointment. It won't be appropriate for all investigations, and the PRA have outlined where they think it won't be available, for example, if there are criminal breaches under investigation, or if there are integrity issues, or issues relating to failure to be open and cooperative with the PRA. Having put in a report, those that put their hands up and make early admissions will then receive a 50% discount on their financial penalty.

Nathan:

And this is available, I think, for firms and individuals, but I think our view is it's pretty much focused on firms. Do you see individuals taking up that opportunity?

Adam:

I think it's hard to envisage scenarios where an individual would want to, because one of the major drivers of entering into the Early Account Scheme, I guess beyond having a certain amount of control over the investigative process, is that you probably envisage a scenario, given the nature of the issue perhaps, a crystallised risk, that you're going to be putting your hands up and getting the 50% discount. And for individuals, the idea of a settled outcome with a regulator, not withstanding you might get more money off your financial penalty, is going to be generally, I think, unpalatable, because, of course, the career damage to an individual as opposed to against a firm, which I'm sure most cases moves on, is very different for an individual, so I think it'll be less appealing. There's also the point as to how much of a detailed account will an individual be able to give in practise, and their access to documentation and information and witnesses is going to be far more limited than that of a firm.

Nathan:

Yeah, of course. And so, looking at that first stage, so a firm, a bank, or insurer, regulated by the PRA, has been referred to enforcement in relation to a suspected breach. What are the factors that it should take into account in deciding whether or not to participate, or to ask to participate, in the Early Account Scheme programme?

Adam:

I'd say at the outset, I think this policy is a good idea. It's quite innovative from the PRA to think about things in a different way, particularly the efficiencies that it can create by, as Laura says, this outsourcing of this preliminary investigation stage to a firm. There's a lot that a firm will be thinking about at the outset, and it's, of course, very fact-specific. But if you have had an incident, let's say a big operational disruption, where there has been a crystallised risk, it would appear that there's been some form of control failing perhaps, the firm's going to be thinking, "Do we apply to enter into the Early Account Scheme, or do we allow it to go down the normal investigation route?"

The reality is, I think, that assessment is going to be made, in a large part, by whether they do think they're subsequently going to be likely to hold their hands up that something's gone wrong and willing to pay a penalty. Whilst they're not required to do it at that stage, I think there will be, in the firm's thinking, some reverse engineering as to how likely is it that this is going to result in a regulatory outcome. Because if it is, then, obviously, we ought to probably go onto the scheme and benefit from the enhanced discount down the line if we choose to make admissions, which we think is likely. So I think that will be one of the major considerations.

Now, of course, you've also got to be in a position that you can do the account. You're only going to have six months to do it, there'll be cost involved, it's going to be an intensive process. But saying that, I think firms are capable of doing those types of exercises, it's certainly our experience, and they will value the control they'll have over the process, not withstanding some of the pitfalls and challenges that they'll have to overcome in carrying out the early account.

Nathan:

It's interesting that you say that firms will be thinking ahead about whether they're likely to be putting their hands up, because, obviously, there's that, as, Laura, you mentioned, the potential for a 50% discount off the financial penalty if you do the Early Account Scheme and then you proactively put your hands up. But surely there are also benefits to firms just by taking control of that narrative and presenting the facts in a way that they think is fair and justified. Do you think even if firms feel that they may not put their hands up, that there are benefits to firms in doing that Early Account Scheme process, rather than leaving it to the PRA to do its investigation?

Adam:

I think that will happen, and that must be right, but there's also the traditional view of some investigation processes, which is, well, the burden of proof is on the regulator to go out and get the evidence, if it exists, that supports a potential case for disciplinary action, and therefore, we'll wait for their requirements to come in for specific information, and if they want to talk to witnesses, then of course, they will. But ultimately, it's for them to go and do the investigation.

Laura:

But it does also give you an opportunity to get ahead if you're the one that's got the documents all lined up, you've agreed with the PRA who they want to interview first of all, but you're part of that conversation as well. I think there's still benefits in the firm having the opportunity to put their narrative forward, regardless of whether they think, "Yes, we have done something wrong here."

Adam:

Firms do have that opportunity to put their narrative forward as part of making representations during the course of an investigation anyway. They're providing information to the PRA, they can then put forward representations on what they think it amounts to.

Laura:

But that could be a number of months down the line, when it's not as fresh in people's memories. If you're carrying out interviews a couple of weeks after the event, that's got to be beneficial to the firm.

Adam:

I think it will send the PRA a signal, if you go to them early and you say, "We would like to do this under the Early Account Scheme," that perhaps your view internally is, "This may be something that we end up holding our hands up to," because of the nature of the issue.

Nathan:

I think that's really interesting, because I think it's going to be in firms' interest where it's the sort of matter where the firm has control of the evidence, i.e. its own employees are the relevant witnesses, all the documents are its own documents, that it's pretty difficult for me to think of circumstances where it wouldn't be in the firm's interest to say, "Yes, let's do an Early Account Scheme," even if they don't think they've done anything wrong, because they get the chance, Laura, as you said, to marshal that evidence early, but also to present it in a way that is fair and balanced, and also avoids that risk of the PRA becoming quite entrenched in its view of wrongdoing, where sometimes we find that representations can be quite challenging because you're trying to actually move them away from a view that they've come to. Whereas hopefully, with an Early Account Scheme, you are the first opportunity to influence them, and therefore, you can get that point across more clearly.

Adam:

In reality, in a lot of cases, there already will have been some root cause analysis done around the issue.

Nathan:

Yeah.

Adam:

There will have been communications with the PRA about the issue, what remediation might be required, remediation might already be on foot, and that, of course, also changes the dynamic somewhat in terms of how realistic is it that actually this may not end up with a disciplinary outcome if you've then been referred to enforcement, particularly if you then say, "We'd like to do this under the Early Account Scheme."

Nathan:

Yeah. And of course, the Early Account Scheme is a factual narrative, rather than a report giving views on whether or not there has been a breach of any regulatory obligation.

So then, looking at the second stage, so the idea is you go to the PRA, you say within 28 days of your referral to enforcement, "I'd like to do an Early Account Scheme," and then the PRA has discretion to say, "Yes," or, "No," depending on whether or not they think it's appropriate. If they think it is appropriate, then you get into a debate with the PRA about the scope of that investigation. How do you see those discussions going, Laura?

Laura:

I think it's going to be difficult with the first couple of these to understand what the PRA's expectations are, particularly with interviews. Are the PRA going to sit in on every interview? What's the approach to privilege going to be? And also, as we were just talking about before, any remediation that's happened before, documents that have been produced as part of that remediation exercise, will they be handed over to the PRA, do the PRA expect to see those? And that could be something that firms are particularly worried about. We'll need to agree key issues with the PRA, relevant period, and I suspect that might be something that could be a point of contention between the PRA and the firm.

Nathan:

And it's interesting, because it's going to be a compelled requirement from the PRA, with, I think, a lot of detail in terms of the steps that need to be taken as part of that investigation. The paper talks about interviews, and the fact that interviews are going to need to be recorded and transcribed, but equally, there's going to need to be some flexibility, isn't there, in terms of whenever you're conducting an internal investigation, you know who your core witnesses are at the outset and your core source of documents, but you need to evolve that depending on what you find as part of the investigation.

Adam:

Yeah, I agree. To work effectively and to achieve its purpose, I think there does need to be an ongoing dialogue with the PRA. It's challenging, actually, where you've got it, depending on the form of the wording of the compelled requirement, it may be challenging as to whether that needs to be amended over time, or whether that can just be done by agreement with the PRA without needing to formally reissue it. But you're right, investigations change, scope changes, and there's going to need to be that close liaison with the PRA in relation to those points.

Or it may be that you follow the initial plan, and then, as part of the follow-up, those additional items get swept up so as not to delay the timelines, because that's the other thing is there's going to be pressure for it to be done within the time period. Yes, maybe in exceptional circumstances, you might get an extension. But if the scope changes, then of course, that's going to be the major driver for pushing out the timelines, and the whole premise of the scheme is that it can be done quickly.

Nathan:

Yeah.

Laura:

Firms will also have to agree, with the PRA, which senior manager is going to provide the attestation.

Nathan:

And that attestation is something that I know a lot of firms are slightly worried about. So a senior manager, who has to both have knowledge of the area, but also be sufficiently independent, is going to need to give a personal attestation at the time that the report is handed in, that, in his or her view, the investigation has been robust and diligent, and that the findings of any investigatory work carried out by the firm has been accurately reflected in the account, and then, I think most controversially, that there are no other matters that are relevant to that investigation that need to be disclosed to the PRA.

Adam:

What assurance would you want, Nathan, as the senior manager to give that attestation?

Nathan:

Well, I think particularly if you've got an external firm who's effectively conducted that investigation on behalf of the firm, so typically a law firm, I would be quite reliant on the law firm in giving me the necessary comfort that the investigation's been conducted robustly, thoroughly, and that the report contains all relevant information. I think as the senior manager, I'd be quite reliant on the external law firm in that, albeit that it has to be the individual's own attestation, and that's what the PRA will be relying on.

Laura:

How do you think firms are going to get senior managers to agree to provide the attestation?

Nathan:

People will not be keen to provide those attestations, I think that's fair. I think it's likely to be someone like a head of compliance, or that sort of second line role, who is likely to be lent on in order to give the attestation. But most people, I think, will be keeping their heads down when it comes to looking for the relevant senior manager.

So then, once that investigation is finished, and the firm has prepared its report, it emails it off to the PRA, what happens next?

Adam:

Well, what happens next is they've got to decide, the firm, whether they're going to make early admissions in relation to those issues. I guess separately, it may be the case that the PRA might want further matters investigated as well. So the PRA are going to be reviewing the account, deciding how thorough it is, what their next steps are, both in terms of further investigation or whether they're minded to take action. But in an interim period, either at the time of giving the account or shortly thereafter, the firm needs to make a decision as to whether it wants to make early admissions and qualify for the enhanced settlement discount.

Nathan:

I think the dynamic at that point is really interesting, because as you say, the firm will hand over its report, and then the next step is the PRA to say, "Okay, we're satisfied that that investigation is full and thorough, and we don't need to go anywhere else to collect more information." But in order to qualify for your 50% discount, the PRA statement says that you need to, effectively, "Proactively put your hands up to substantive regulatory breaches at an early stage of the investigation, including, if appropriate, on production of the account." So there is this tension, I think, when a report goes in. And typically, as we know, these reports will be, "Yes, things didn't work perfectly, but they weren't disastrous." And there will be that debate within the firm as to, is this really bad enough to justify disciplinary action? Will the PRA's view be, "Oh, okay, that's not too bad, we don't need to take disciplinary action," as against the need to go in early and say, "Look, actually, yes, we accept that we didn't have adequate risk management systems, and therefore, we'll accept a fine"?

Adam:

Or the more nuanced question as to, well, what is the appropriate outcome? What breaches does this give rise to? For example, you might be quite happy to hold your hands up to a controls failing, but if there's an aspect around reporting to regulators whether you've been open and cooperative as part of the scope of the investigation, firms may be far less likely to want to accept that type of an outcome.

Nathan:

And I think that the policy statement also says, it refers to the admissions needed to be made, "Either at the point on which the account is delivered, or within a specified timeframe thereafter." Where's that specified timeframe going to come from?

Laura:

And are the PRA going to have to tie their hands and commit to providing feedback on the account?

Nathan:

Yeah. And I think in practise, firms are going to want to get some sort of initial feedback from the PRA before putting their hands up. In these sort of mid-cases where it's not abundantly clear as to whether disciplinary action is appropriate, I think they're going to need to engage with the PRA to say, "Well, what is the relevant timeframe? Are you happy that this is a comprehensive report? Do you need to do your own investigations?" And to find some way to get some sort of feedback from the PRA as to how seriously they see things. And I think that dialogue is going to be critical to how things play out.

Adam:

I agree.

Laura:

Hopefully, there will have been some dialogue, or open dialogue, with the PRA over the six-month period, so you have a bit of an idea of where things are heading.

Nathan:

And so, just stepping back, will this new schema make a real difference to how the PRA conducts its investigations, how many investigations it takes on?

Adam:

I think it will, in particular because if there is this outsourcing of some of these key investigative steps on what could be very large investigations, that previously would've taken up the time of a number of different investigators at the PRA, then they ought to have more time to spend on other cases. Whilst of course, they'll be overseeing the early account, it's not going to be as onerous for them. So I think from that perspective, it will change the landscape for them.

Laura:

I think it will if firms choose to use the Early Account Scheme, but it is voluntary and there's no saying that the firms under investigation will choose to enter into it. And I think firms will be particularly nervous to use it when it's in its early stages, so we might not see any change in recent months or years to come, it could be a bit further down the line.

Adam:

I do think that the first firm that does go onto the Early Account Scheme may be quite likely to end up with the enhanced assessment discount at the end of it, because there is some discretion as to what level of discount you get, which I assume is probably down to what level of admissions you make. But I think it's quite likely that the first Early Account Scheme that we see published will attract to 50% settlement discount, because of course, firms are going to be looking very closely at the first couple that come out, thinking about it, and if people aren't getting the full enhanced settlement discount, that might dissuade others from going onto the scheme.

Nathan:

Yes, absolutely. Well, thanks so much, Laura and Adam, for sharing your experiences and insights with us today. And a big thank you to you for listening to the podcast, we hope you found it interesting and useful. As always, if there's anything we've discussed that you have your own views on, then please do drop us an email or give us a call, we would very much like to hear from you. So it's goodbye from the Fruit and Wool exchange, and please do subscribe to be sure to catch the next edition of the Ashurst Regulatory Enforcement Podcast.