At the time the disciplinary enforcement jurisdiction of the Prudential Regulation Authority (“PRA”) was introduced, the PRA declared that its preference would be “to use its statutory powers to secure ex-ante remediation”, an approach which the PRA anticipated, if successful, “should mean that enforcement action will be relatively rare”. Yet less than four years later the PRA has already brought eight enforcement actions and imposed six fines exceeding £40 million in aggregate, as illustrated in the chart below.
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In its latest decisions (February 2017) the PRA has imposed a whopping £17.85 million fine on a bank branch (for which international bank the PRA is not the lead regulator) and £8.925 million fine on its UK broker-dealer affiliate, for delaying disclosure to the PRA of sanctions imposed by the New York Department of Financial Services (DFS) against the New York branch of the bank (for improper processing of U.S.-dollar clearing in breach of sanctions from 2002–2007) until shortly after final settlement.
The PRA relied on its Fundamental Rules – 6: “A firm must organise and control its affairs responsibly and effectively”; and 7: “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.”
The PRA gives short shrift to what appear to have been the bank’s concerns to comply with confidentiality restrictions under New York State banking law, which as a consequence delayed disclosures: the PRA may perhaps have been riled by the fact that certain waivers were in fact requested and obtained by the bank for disclosure to other U.S. regulators and the bank’s lead regulator but not the PRA.
Reliance on these Fundamental Rules may be conceptually consistent with the PRA’s exclusively prudential role, yet it is tolerably easy to characterise many conduct issues as also giving rise to failings in corporate governance/systems and controls and thus of prudential relevance. The latest decisions may foreshadow a willingness by the PRA to take an expansive view of its prudential enforcement jurisdiction concerning banks and perceived conduct failings.
The PRA cites no existing published policy guidance concerning the policy expectation evidenced in these latest decisions that banks will notify “at an early stage [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”.
Having regard to the size of the international bank concerned and the fact that the matters subject to DFS review had no direct relevance to the UK businesses, there is a conspicuous absence of any discussion as to why the DFS sanctions were considered quite so significant or the obligation to notify was of such temporal importance in order for the PRA to effectively supervise the UK businesses.
Given the recent trend of enforcement decisions and the size of the fines imposed in the latest decisions concerning an issue upon which there was limited existing regulatory policy guidance, the PRA’s declared policy that it does not intend to pursue a policy of enforcement-led regulation has to be open to question.
Significance for PRA-Regulated Banks and Firms
Banks and firms should be alive to the prospect of enforcement-led regulation by the PRA. That prospect requires a considered and structured approach to cooperation with the PRA within the context of the PRA Fundamental Rule 7 obligations. Particularly in the case of international banks, conflicting requirements of regulators in different jurisdictions can create a minefield of potentially competing obligations. 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. With its global financial regulatory capabilities, Reed Smith is well placed to assist with these issues.