PRA Early Account Scheme – what factors will stop firms from wanting to participate?

The Prudential Regulation Authority (PRA) is currently consulting with the industry on its proposal to shake up its approach to enforcement investigations (CP 9/23). As outlined in our previousupdate,这个标题吸引了关注ed on the ability of firms and individuals to get discounts on financial penalties of up to 50% for those choosing (and being accepted) to participate in the PRA's Early Account Scheme, and who then proactively put their hands up to regulatory breaches.

A key point for firms in particular to be aware of is that participation in the Early Account Scheme does not necessarily mean that any regulatory breach will follow. The Early Account Scheme is simply a report on the relevant facts (and not an assessment of whether regulatory breaches have been committed) and is therefore similar to internal investigation reports that are regularly shared with the regulators following discovery of potentially significant issues. The PRA's proposals make clear that following receipt of the Early Account Scheme report, it will consider whether a discontinuance is appropriate and, if so, it will notify the firm of this decision. Where serious issues are identified in the report, the firm will be free to decide whether or not to communicate to the PRA that it may be willing to accept regulatory beaches. This would be on a without prejudice basis and subject to agreement on the wording of the Final Notice and level of financial penalty.

So why wouldn't a firm always participate in the Early Account Scheme?

The cost of conducting the internal investigation may be one negative factor, although when weighed against the cost of responding to an Enforcement investigation, this is unlikely to be a driving factor for many firms.

The report will need to be accompanied by an attestation by an independent SMF at the firm, confirming that there are no other related matters, relevant information or potential breaches of which the firm is aware that the PRA should be notified of (relating to the matters under investigation). However, if an external professional firm has conducted the investigation, the risk for the SMF is likely to be managed in practice by seeking appropriate reassurances from the investigation team.

There may be concerns as to whether the firm's investigation will be able to gain access to a sufficiently broad evidence base, if relevant witnesses are beyond its reach (such as former employees, clients or counterparties) and/or relevant documents are held by third parties and are outside the firm's control. If it is inevitable that the report will be materially incomplete, the firm may take the view that it would be more sensible for the PRA to lead on the evidence-gathering work.

Perhaps the most significant factor, in our view, will be the approach to witness interviews that the firm will be required to adopt in undertaking its Early Account Scheme investigation. Hidden in the detail at Annex 1 to Appendix 1 of the PRA's consultation paper, it is clear that the PRA will require copies of transcripts (rather than summary notes) of interviews with witnesses to be provided to the PRA as supporting evidence, together with the Early Account Scheme report. The PRA may also call for the recording of the interview itself. Furthermore, the PRA states that it may decide that it wishes to sit in on the interviews, and in some cases may wish to conduct the interviews itself.

We consider that this approach to the conduct of interviews in the context of a firm's own internal investigation is likely to be a significant risk issue for firms and individuals alike, and will cause firms to think carefully about whether or not to participate in the Early Account Scheme. Similarly, individuals who may otherwise be comfortable participating in an internal investigation interview may well be more reluctant to participate if they know that a transcript will be provided to the PRA (and then shared with other regulators), against which they may subsequently be cross-examined in the course of defending regulatory action against them personally.

These are key issues that firms will need to assess in weighing up the PRA's proposals and responding to the consultation, which closes on 4 August 2023.

You can read the full consultation paperhere.

Authors:Nathan Willmott, Partner and Jonas Weissenmayer, Associate