The Bank of England’s approach to enforcement: a decade in the making − speech by Oliver Dearie

Speech

Good evening, everyone. Let me start by thanking the Financial Services Lawyers Association for hosting tonight’s event.

I am here to speak to you about the Bank of England’s (Bank) proposed changes to its approach to enforcement, which we set out in a consultation paper published in May 2023.^{footnote [1]}

These are the most comprehensive revisions to our enforcement policies and processes since the Bank became responsible for prudential regulation and financial market infrastructures (FMIs) supervision ten years ago. In structuring my remarks, I have focused on the key messages I want to leave you with this evening:

• first, we have a record we are proud of - enforcement plays a key role in advancing the Bank’s statutory objectives^{footnote [2]} of financial stability and safety and soundness, and upholding the high standards required for a robust regulatory framework;
• second, the proposals reflect the lessons we have learned over the last decade and are guided by five principles:
  • our enforcement policies should be clear, transparent and accessible;
  • we should learn lessons from past investigations;
  • we can and should seek to maximise efficiency in our investigations, and we can do so without compromising rigour or fairness;
  • our enforcement policies must actively further our statutory objectives; and
  • we should further cement the importance of individual accountability; and
• finally, our commitment to enforcement is undiminished and I am confident we will continue to build on our strong enforcement record.

What we mean by our enforcement record

In the last decade, we have demonstrated the valuable role enforcement can play in holding firms and individuals to account, investigating misconduct, and complementing supervision. Since April 2013, the Bank has launched more than 70 investigations enforcement investigations and published 25 outcomes against 14 firms and 11 individuals.^{footnote [3]}

This has included:

• prohibiting five individuals from working in PRA-regulated firms or from the financial services sector entirely;
• imposing fines totalling more than £221 million^{footnote [4]}; and
• taking action under the senior managers regime with fines imposed for both breaches of the Individual Conduct Rules and the Senior Manager Conduct Rules.^{footnote [5]}

Further, our enforcement outcomes have related to a broad range of misconduct covering risk management, operational resilience, outsourcing, governance, regulatory returns and prompt notifications or disclosure to the regulator.

It is with the benefit of this experience - and feedback from past cases and more generally - that we reviewed our approach to enforcement and are proposing substantial policy changes.

An overview of the key policy changes

The key proposals from the package we announced in May include:

• creating a consolidated package of enforcement policies in our proposed ‘Bank Approach to Enforcement’;
• clarifying the approach and procedures the Bank would adopt in FMI enforcement investigations;
• creating a new early account scheme (EAS) for appropriate cases. In brief, the EAS would provide a mechanism for subjects of FMI and PRA investigations to provide a full account, and all relevant material, to us at the outset of our investigation;
• incentivising early admissions by subjects through the introduction of an enhanced settlement discount in appropriate cases of up to 50%;
• changing how we calculate the financial penalty for PRA firms to provide more consistency, and to better align our approach with the PRA’s approach to supervising firms; and
• updating the serious financial hardship thresholds at which we will consider a reduction in fines for individuals.

So how have the guiding principles fed into the detail of these policy proposals?

Let’s start with guiding principle 1.

Guiding Principle 1 – Enforcement policies should be clear, transparent and accessible

For the first time, we are proposing to create a single enforcement approach document which will set out the full suite of the Bank’s enforcement powers across its remits with respect to:

• Prudential regulation;
• Regulation of FMIs;
• Resolution; and
• The Scottish and Northern Ireland Banknotes regime.

In doing so, we hope not only to make the policies easier to understand but also to underscore the breadth of the enforcement powers at our disposal and signal to the broader community our preparedness to use the full suite of enforcement powers in question.

This clarity, transparency and accessibility are particularly important as our enforcement powers are likely to grow if the Financial Services and Markets Bill, which is currently in its final stages of Parliamentary passage, is enacted. Indeed, the Bill proposes additional enforcement powers for the Bank including in relation to the proposed statutory regimes for critical third parties, Central Counterparty resolution, FMI Senior Managers and digital settlement assets. A single consolidated document will make it far easier to update as those new powers are added to our toolkit.

We are also proposing to take the opportunity to clarify the distinction between supervisory and enforcement powers.^{footnote [6]} Currently despite being distinct, both sets of powers are set out in our published ‘PRA Approach to Enforcement’. To make the distinction clearer, we are proposing to create a new separate document on PRA decision making with respect to supervisory powers.^{footnote [7]}

As I mentioned, in the past decade, we have amassed significant investigatory and enforcement experience and have learnt lessons from each investigation. Which leads me to guiding principle 2.

Guiding Principle 2 – We should be willing to learn lessons from past investigations

As we have meticulously built up our enforcement capabilities over the last ten years, we have secured regulatory outcomes that seek to better inform the markets about our expectations of regulatory behaviour and standards. And we have learnt many lessons, the fruits of which are reflected in our proposals.

In line with most peer regulators, the PRA has since its creation operated a settlement scheme which encourages subjects to reach agreement with respect to findings. However, until now, we have not clearly set out how the Bank would approach settlement in an FMI case. Our proposals seek to address this.

The ability to reach an agreement and resolve an enforcement case without expending a disproportionate amount of regulatory resource is an important tool to have in the arsenal of any regulator. In almost all cases in which the PRA has taken enforcement action, this has resulted from reaching agreement with the subject in relation to the findings.

That does not mean that the Bank is willing to settle cases on any terms. Far from it – it is, a reflection of the quality of the robustness of our investigatory approach which results in the Bank reaching such a high proportion of settled resolutions, even on complex cases.

If, from our perspective, settlement would result in the wrong regulatory outcome or present an inaccurate or incomplete picture of the misconduct, the Bank would not agree to a settlement. We are fully prepared to defend our findings in contested cases.

Notwithstanding our successful record, we do not operate in a vacuum, and we are aware that stakeholders have aired frustrations regarding our processes:

• Firstly, that subjects of our investigations do not always know how they can most effectively assist us in our investigations; and
• Secondly, with our investigations taking on average 2 ¼ years, the common refrain is that this is too long.

Investigations are resource intensive. Inevitably there will be a tension between the interests of the participants. On the one hand, a subject of an investigation will want an investigation to be rapidly concluded. On the other, a regulator will want to examine and interrogate all the pertinent facts before reaching a forensic conclusion.

That tension cannot be fully eradicated – and nor would it be prudent for a regulator to fully seek to do so. However, we have reflected on the feedback concerning the length of our cases and the lack of clarity amongst the regulatory community as to how to best assist our investigations. We think that the introduction of the EAS and an enhanced settlement discount for early admissions could increase efficiency.

This brings me on to guiding principle 3.

Guiding Principle 3 – We can, and should, maximise efficiency and we can do so without compromising rigour or fairness

Each investigation will of course turn upon its own facts. However, we have found that the early stages of most of our investigations tend to follow a similar process.

The “standard” Bank investigatory life-cycle

First, we notify the subject that they are under an investigation and set out the matters upon which the investigation is based.

Then we commence the initial fact-finding stage. To build up a comprehensive picture of what has occurred, we usually compel the production of information via statutory information requests, for example relevant board papers, emails and recordings. It can often take multiple information requirements and interviews to obtain sufficient visibility of the issues under investigation to determine the next investigative steps.

This process can be frustrating and laborious for both the subjects and the investigators. Where feasible, we would like to compress it. Indeed, we have been told that firms and individuals who are subjects of an investigation are keen to have further guidance on how they can better support our investigations. And from our perspective we are keen to use our resources as efficiently and effectively as possible.

The proposed Early Account Scheme and enhanced settlement discount

We consider the proposed EAS will address this by giving those under investigation the opportunity and the incentive to address the information asymmetry inherent to investigations from the outset. Under the EAS, participating firms, FMIs or individuals would be compelled to provide us a detailed factual account of the matters under investigation (the Account) together with all relevant materials/evidence at the initial stage of an investigation.

In many respects, an Account may be similar to the factual, narrative responses we already receive in response to statutory requests in some of our cases. However, the idea is for the EAS to condense this process and provide a structure which enables a subject to provide as comprehensive a narrative as possible, as soon as possible.

The EAS also picks up on previous feedback that some subjects may be willing to admit breaches at an early stage. At present, there is no additional incentive to do so as settled cases receive a flat 30% discount, irrespective of when the subject accepts that breaches have occurred. That is why we are introducing an enhanced settlement discount of up to 50%. This would potentially be available to a subject who both participates in the EAS and provides early admissions on a “without prejudice” basis. 

Safeguards

There are several key safeguards built into the proposed scheme to ensure a robust approach to our investigations: 

• Firstly, the EAS will not be available in all circumstances and will only be accessible with our explicit consent. It will not be offered to subjects in cases where there is suspicion of criminal conduct nor where we have concerns about integrity.^{footnote [8]}
• Secondly, as I mentioned earlier, it is important to note that the Account itself will be compelled using our investigatory powers. In other words, it will be subject to potential sanctions for non-compliance or provision of false or misleading information. 
• Thirdly, it will need to be accompanied by all relevant contemporaneous evidence.
• Fourthly, we will interrogate thoroughly any Account provided. We will judge what further investigatory steps are required and take them. If necessary, we will consider whether another approach to the investigation is merited.

Some of the commentary on the proposed EAS has queried whether complexities might arise in investigations into multiple parties, whose interests may not align. For example, there have been queries as to whether employers might be incentivised to make unfair allegations against an individual. These are not new risks. Investigators frequently have to establish the facts amongst competing narratives. We will continue do so rigorously and fairly.

Moreover, we will also continue to be guided by the facts and our statutory objectives in determining the appropriate action, which seamlessly leads me on to guiding principle 4.

Guiding Principle 4 – our policies must align with our statutory objectives and supervisory approach

Our statutory objectives are our guiding lights in deciding what cases to open, whether to take enforcement action, and if so what type. For FMI cases, our objective is protecting and enhancing the stability of the UK financial system. For PRA cases, our primary objectives are promoting the safety and soundness of the firms that the PRA regulates and contributing to securing appropriate protection for insurance policyholders.

A core part of the PRA’s supervisory approach is the firm’s potential impact assessment – namely, its potential to adversely affect the stability of the UK financial system by failing, coming under stress or through how it carries out its business.

The PRA currently divides all firms into four ‘categories’ of potential impact.^{footnote [9]} This is a holistic supervisory assessment, reflecting the PRA's more informed, nuanced approach to risk to its objectives and not just revenue as an indicator of the firm's size and financial position.

By contrast, in PRA enforcement cases, our policy currently defaults to using revenue as a key input to determining the penalty calculation starting point. We then apply a percentage to that revenue reflecting the seriousness of the breach. This does not always align with the PRA’s supervisory approach, where, as I have said, revenue is not the determining metric for calibrating our assessment of a firm’s significance.

Having considered how our policies works in practice, for PRA-regulated firms, we therefore are proposing to move to a framework which better fits with the PRA’s proportionate supervisory approach.^{footnote [10]}

The proposed framework will involve determining the starting point for calculating a fine by reference to indicative ranges, having regard to the impact categorisation of the relevant firm and the seriousness of the breach. These are set out in Table 1 below. The draft policy sets out the matters we will take into account in determining seriousness. However, these are, in substance, the same factors set out in the PRA’s current penalty policy.

Proposed starting point for PRA firm penalty calculations - indicative ranges

In some quarters there is a misconception that a move to a new basis for calculating the starting point for our fines for PRA firms will reward poor conduct and/or allow firms to calculate enforcement costs as a cost of doing business. That view ignores several vital points:

• The starting points are indicative but substantial – with a starting point of in excess of £125 million for the most serious breaches for the most systemically important firms;
• Breaches which imply a lack of integrity or openness with the regulator will automatically be categorised as being of high seriousness; and
• We are only proposing changing the starting point for calculating fines which is one step within a five-step process – we will retain all other steps in our existing methodology, including the ability to disgorge profits (Step 1) and to increase for aggravating factors (Step 3) and/or for deterrence (Step 4).

Which leads me to our final guiding principle.

Guiding Principle 5 – Our enforcement activity should continue to reflect the importance of individual accountability

One of the key elements of the Bank’s Financial Stability Strategy is to continue to ensure appropriate individual accountability in financial services.^{footnote [11]} Senior managers – by that we mean the people who are responsible for running the firms we regulate - often set the tone and shape the culture within their institutions. Part of their job is to exercise judgement, including with respect to the systems and controls required for effective management of the broad spectrum of risks faced by a firm. The consequences of getting that wrong can be enormous.

The consultation further underlines the importance of individual accountability in a number of key ways:

• First, for the first time it provides clarity as to where we already have powers in relation to individuals outside of the context of the PRA – for example in relation to those in management positions at certain FMIs^{footnote [12]};
• Second, it sets out further guidance on when we will consider using prohibition powers; and
• Third, and finally, our proposals recognise the vital role key individuals at firms play in ensuring that subjects engage in investigations in a due, timely and appropriate manner, including providing full and expeditious access to the materials, individuals and information needed. As a result, any Account provided by a firm through the EAS will need to be supplemented by an attestation from a senior manager providing due assurance that all relevant matters have been brought to our attention.

Therefore, it should be clear that the Bank continues to consider individual accountability to be critical to maintaining a robust regulatory framework. Indeed, we expect that the Bank will need to consider individual accountability in a much broader range of cases, given the proposed extension of the Senior Managers Regime to FMIs under the Bill. The architecture of the proposed Bank Approach to Enforcement document will assist us with developing and communicating our policies in this regard when that time comes.

Closing

I hope I have helped clarify the thinking behind the proposals in our recent consultation. Far from representing a weakening of our enforcement approach our changes are designed to provide clarity and further enhance our robust and successful enforcement record.

I mentioned that the proposals have in part reflected informal feedback we received over the last decade. We remain keen to hear feedback. I would, therefore, encourage you to engage with the consultation and send your views before it closes on 4 August 2023. We are also hosting roundtable sessions on 27 June and 4 July to provide a further forum for participants to share views.^{footnote [13]}

We want to hear different views, and this is your opportunity to share them so please do.

I am grateful to Sonya Branch for her comments, to Lici Inge, Noreen Rana, Shobi Galassi, Laurie Coleman, Zara Coe and other colleagues for their assistance in helping me to prepare these remarks and developing the proposals on which we are consulting.