Plea bargaining, British-style – Bank of England introduces discounts for offenders | Wolters Kluwer Financial Services
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  • Plea bargaining, British-style – Bank of England introduces discounts for offenders

    By Selwyn Parker

    Published April 05, 2017

    As the scale of fines imposed by the Prudential Regulation Authority (PRA) attest, the watchdog says one thing and does another. When the PRA assumed its enforcement powers four years ago, it adopted a conciliatory tone. The key term it used was “ex-ante remediation”, which probably sent compliance officers scurrying to consult their legal dictionaries.

    In layman’s terms, ex-ante remediation means fixing something before the event. In the case of financial firms involved in enforcement procedures, it requires them to admit their misdemeanour when confronted with the evidence and thereby escape with a reduced penalty.

    At least that was the original idea. The PRA anticipated that “enforcement action will be relatively rare.”

    Fast forward to 2017, and the PRA has brought eight enforcement actions and imposed six fines totalling more than £40m in the last four years. Already this year the total penalties exceed the previous highest year, which was 2014. Indeed, at £26m to date, the 2017 total is nearly double that of 2014. (In 2015 fines hardly got off the floor and in 2016 they didn’t make £5m.)

    Now, while the 2017 total was turbo-boosted by the combined £26.77m fine imposed on Bank of Tokyo-Mitsubishi and its subsidiary, the circumstances of the fine, which I covered in a recent article, suggest the PRA has drifted from the principle of ex-ante remediation. As such, it’s a warning to the UK’s financial sector that the authority might be on the war path.

    Fundamental Rule

    As international law firm Reed Smith points out in a note in March, “banks and firms should be alive to the prospect of enforcement-led regulation by the PRA.” For the compliance function, that means learning the authority’s Fundamental Rule 7 off by heart. That’s the one that says: “A firm must deal with its regulators in an open and co-operative way and must disclose to the PRA appropriately anything related to the firm of which the PRA would reasonably expect notice.”

    This is how the Bank of Tokyo-Mitsubishi fell foul of the regulator, although under mitigating circumstances because it had been muzzled by New York regulators. Rule 7 is of, well, fundamental importance to international banks operating in the City, which by their nature must negotiate a tangle of rules. As Reed Smith explains: “Conflicting requirements of regulators in different jurisdictions can create a minefield of potentially competing obligations.”

    For example, which regulator requires what information? And when? As the law firm warns: “Enforcement-led regulation further requires a considered and structured approach to matters such as cross-border disclosure of documents and legal privilege, which is an already challenging area for international banks subject to numerous jurisdictions with an equal number of differing rules, regulations and regulators.”

    One principle can however be extracted from the PRA’s enforcement style -- firms looking for a bit of ex-ante remediation must be quick off the mark. The PRA expects to be notified without delay of any untoward event that may affect firms within its remit. Officially, banks should inform the regulator “at an early stage [of all relevant information] regarding the potential for material sanctions to be imposed by an overseas regulator [and] matters which may have a significant adverse impact on a firm's reputation...[or are] relevant to an assessment of the fitness and propriety of regulated individuals”.

    Fine tuning

    Just like the financial sector it oversees, the PRA is learning as it goes. Working with the Financial Conduct Authority (FCA), the PRA is fine-tuning the way it goes about enforcement. And there are a number of elements in the process that have a direct bearing on the way investigations are conducted. Probably the most important is that the regulators will involve the subject of the investigation much more fully as it proceeds. The firm will receive regular updates about how the investigation is running, both through reports and face-to-face engagement. There will also be closer cooperation between the enforcement and supervision functions of the authority as they dig deeper.

    In short, everybody should be in the loop in the updated enforcement process.


    Encouragingly for firms that hold their hand up, there are discounts available under a British version of American-style plea bargaining. If the firm under investigation believes it’s got a case to defend – or at least some elements of it, there will be an opportunity to reduce the amount of any penalties. The FCA will allow a person or firm “to agree certain elements of the case (whether penalty, facts, liability or a combination of these issues) and contest the other elements before the regulatory decisions committee”.

    However any discount laid on the table will depend on the firm or individual owning up in the early stages of the investigation – that is, before the official warning notice turns up. It will though be possible for a firm to qualify for the discount while still defending certain elements of a case.

    Obviously, the compliance function will need to dig into the finer print of all this, and the PRA will provide a kind of handy pack of its enforcement procedures later in the year which should also be compulsory reading.

    It’s all about transparency, promises the PRA. The purpose of these refinements to the enforcement process is to eliminate much of the opacity that has surrounded investigations in the past. “The PRA’s enforcement processes must be clear, transparent and reasonable,” explains Miles Bake head of the PRA’s legal regulatory action division.

    Committee in the middle

    In this sometimes tense process between the investigator and the subject, the intermediary is the regulatory decisions committee, an impartial body that acts, in chairman Tim Parkes’ words, as “the FCA’s decision-maker on certain contested regulatory matters.” Among other powers, the committee authorises the FCA to launch civil and criminal proceedings – or not.

    And it’s not afraid to exercise its prerogatives. For example, when the FCA wanted to go after certain individuals in the “London whale” forex-rigging case, the committee blocked it from doing so while allowing it to lay charges against others.

    An obviously important agent in investigations, the committee is a body that merits further study for compliance officers. A lot may be learned from the FCA’s 2016 annual report where the committee has for the first time a separate appendix all to itself.

    Ex-ante remediation aside, Britain’s financial sector should expect its misdemeanours to be made public. The regulators have learned that the public likes it this way. “Where appropriate, a full FCA investigation helps engender public confidence in the financial system and markets where wrongdoing is properly identified and dealt with,” the watchdog notes.

    The days of sweeping the dust under the carpet are long gone.  

    About the author: Selwyn Parker is an author of books on finance and business topics, a specialist in financial history, and regular contributor to newspapers and magazines. Based in Spain, France and the UK, he focuses mainly on European developments. His latest book, The Great Crash, is a new history of the Great Depression that among other things explains the rise of regulation in the form of the SEC and related authorities. Selwyn is a regular contributor to Wolters Kluwer Financial Services.

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