06 July 2016 - Post by:
On the last day of June, the UK Prudential Regulation Authority (the PRA) published its Annual Report for 2015/16. Enforcement was certainly not the dominant theme in the Annual Report. However, the PRA did set out some information about its past – and future plans for – enforcement action and skilled person reviews.
Flexing its (enforcement) muscles
As we have previously reported, the PRA has started to flex its enforcement muscles more over the past year. In the PRA’s financial year 2015/16, it concluded six enforcement cases. Two of these cases were against firms and four of them were against individuals.
This may seem like a small number of enforcement actions, especially when you compare it with the Financial Conduct Authority’s (the FCA) enforcement track-record. However, considering that prior to 2015/16, the PRA had only concluded two enforcement cases in total, these figures for 2015/16 represent quite a significant uptick in PRA enforcement activity.
In the Annual Report, the PRA described its approach to enforcement action as follows: ‘While the PRA’s approach to supervision is forward-looking and seeks to prevent prudential risks from crystallising, it recognises the importance of taking robust and decisive action where firms and individuals fall short of its expectations’. Although the PRA will typically prioritise prevention over after-the-event enforcement action, the PRA’s commentary and enforcement activity shows that the PRA will not sit by and take no action if a firm breaches its rules.
The fines imposed by the PRA are still on the low side, especially when compared with the fines imposed by the FCA. The highest fine imposed by the PRA in 2015/16 was just over £2.8 million. The total amount of fines imposed by the PRA during 2015/16 was just under £6 million. During the same period, the FCA imposed just over £900 million in financial penalties, with the average fine imposed being around £20 million. However, recent figures suggest that the level of fines imposed by the FCA during the first half of 2016 has dropped quite dramatically.
Skilled person reviews
Although not officially an ‘enforcement power’, the PRA included some information in its Annual Report about how it uses skilled person reviews. In short, the number of skilled person reviews that the PRA commissioned in 2015/16 decreased by over 50%, to just 20 (it commissioned 42 the previous financial year). During the same period in 2015/16, the FCA commissioned 42 skilled person reviews.
The skilled person reviews it commissioned focused on risk management, systems and controls, capital adequacy and governance and culture. The average cost of a PRA commissioned skilled person review in 2015/16 was £245,000, down from £361,905 in 2014/15.
Late last year, the PRA also amended one of its Supervisory Statements to clarify its position that ‘the power to commission reports by skilled persons is a discretionary supervisory tool and the use of skilled persons in an enforcement context is extremely rare’.
As we reported in April, the FCA and the PRA have launched a joint consultation paper regarding their respective enforcement decision-making processes. In a number of the areas, the PRA is intending to do a fair bit of work to develop its enforcement decision-making processes. For example, in its Annual Report, the PRA confirmed that one of its ‘business aims’ for the coming year is to establish an independent enforcement decision-making committee. It is likely that this committee will play a similar role to the FCA’s Regulatory Decisions Committee in terms of handling contested enforcement decisions.