Discounts for Cooperation in Financial Services Regulation

This note is intended to summarise the approach taken by the PRA and the FCA to discounts for cooperation with an investigation and provide some guidance on when cooperation is advisable.

The Prudential Regulation Authority

The PRA adopted the Early Account Scheme (the ‘EAS’) in 2024, in an apparent attempt to make the enforcement process quicker, and to shift some of the burden of investigating from the regulator to the regulated. The scheme broadly requires the subject to produce an “account” for use by the PRA.

The PRA do not strictly limit the circumstances in which the EAS can be used but make clear that it is “more likely to be available in specific investigations commenced under section 168 of FSMA than section 167 investigations”,[1] and that it will not be available where criminality or a lack of integrity is alleged.

The process is as follows:

1. The subject of an investigation must express interest in the EAS in writing within 28 days of receiving notice of the appointment of investigators (subject to an extension being granted in “exceptional circumstances”).[2]
2. The PRA will consider the request, a non-exhaustive list of factors they will consider includes:[3]
   1. The amount of material already obtained by the PRA, in circumstances where there is little left to investigate the PRA are less likely to accept a request to use the EAS;
   2. The nature of any potential breach, the EAS is not intended to be used in circumstances where a lack of integrity or criminality is alleged; and
   3. The number of subjects in an investigation, and the extent to which they could produce information collectively.
3. The PRA will scope the account with the subject of the investigation, including timings, the approach to interviews, and other practical matters.[4]
4. Production of the account is compelled by the PRA, using its statutory powers,[5] circumventing any confidentiality issues (but note there is no power to compel one to waive privilege).[6] The PRA may terminate the EAS prior to the production of the account, and state that where a statutory requirement has been issued they will rescind the requirement.[7] What happens where a subject attempts to withdraw late in the EAS process is not explicit, 2.15(a) suggests that the PRA does not have to comply with such a withdrawal request, and may still rely on a statutory requirement to compel production of the account/associated material even where a subject has asked to withdraw.
5. Where the subject is a firm there is an expectation that a senior manager will attest as to the process followed in producing the account, and that nothing has been held back. Note, the language used in the document states this is an expectation, not a requirement. One must assume that where no senior manager is willing to attest, the EAS will not be available.[8]
6. The PRA will consider the Account, and decide what action to take including discontinuing, further investigation, settlement, or referring the matter to the EDMC.[9]

Considerations for subjects and practitioners

There are a number of factors to consider when deciding whether to request to participate in the EAS.

The principal reason to utilise the scheme is to obtain the maximum discount available. One can only obtain a 50% discount by using the EAS.[10] However, it should be noted that a 50% discount is not guaranteed where one uses the scheme, it can be as low as 30%, depending broadly speaking on the level of cooperation. It should also be noted that one will still obtain a 30% discount if a case is settled, even if the subject “has done no more than to meet their legal obligation to comply with statutory information requirements”.[11] In other words, a sizeable discount will always be available to a subject if they settle the case.

Firms may also be attracted by the expediency of the scheme; the account is supposed to be produced within six months.[12] Whether that is possible in reality remains to be seen, given the average duration of an investigation undertaken by the PRA is well over two years.

The PRA will not draw an adverse inference against a party that fails to request to use the scheme. Further, and perhaps more significantly, the PRA will not take such a failure into account when “considering co-operation or aggravation in the context of determining any disciplinary measure”. In other words, while there is a carrot, there is no stick.

The attestation element is also a factor to consider. It should determine how an investigation is run, as the relevant senior manager is exposing themselves to personal liability, and as such they should have considerable involvement in the investigation to ensure that their attestation is accurate.

Overall, the scheme may be attractive where a party wishes to draw a line under an investigation quickly, and to potentially have more control over the ultimate narrative. However, the cost of producing the account, which may be considerable, is borne by the subject. Given a 30% discount is available where the subject does the bare minimum, if obtaining a 50% discount will require a considerable investment of time and resources it may not ultimately amount to a saving.

The Financial Conduct Authority

The Financial Conduct Authority has a different approach to their “discount scheme”, which is contained within the Decision Procedure and Penalties Manual (the ‘DEPP’) at 5.1 and 6.7.

The DEPP has many more permutations than the PRA policy, but by way of summary, the maximum discount of 30% is only guaranteed if there is full agreement of at least the facts and breaches at stage 1.[13] Stage 1 is the reasonable period given to a subject to consider a penalty once the FCA has a sufficient understanding of the nature and gravity of the breach to assess the penalty, and communicated that assessment to the subject of an investigation.[14]

Where the subject fails to settle before the end of Stage 1, there is no discount for settling. As such, the FCA scheme strongly encourages early settlement.

Where the subject does not agree all the issues, including the penalty, any settlement agreement will be considered a ‘focused resolution agreement’ and accepted at the discretion of the FCA. That is not to say that if a focused resolution agreement is rejected that the subject has lost any chance of a discount. The ‘settlement decision makers’ may invite the subject and the relevant FCA staff to enter into further discussions to reach a settlement that is acceptable to them.[15]

Where a focused resolution agrees only the facts but not whether those facts amount to a breach, the discount will be between 15% – 30%.[16] Where the agreement does not fully agree the facts the discount will be between 0% and 30%. The RDC will settle on a final discount figure based largely on the difference between the position of the subject and the ultimate findings made by the Committee, and the extent to which the focused resolution saved time and expense.

If a focused resolution agreement is accepted the remaining issues between the FCA and the subject will be contested in the usual way.

As such, the FCA requires both timely and fulsome cooperation to guarantee a discount, although their scheme arguably places less of the investigative burden on the subject when compared with the EAS.

It is difficult to see why the subject of an investigation would not seek to enter into a focused resolution agreement, unless the subject wants to go straight to the Upper Tribunal. Entering into even a limited agreement at least preserves the possibility of a discount, even if the areas of agreement are very narrow.

Daniel Mullin

[1] PS1/23, at 2.13

[2] The Bank of England’s approach to enforcement: statements of policy and procedure, at 2.14(a)

[3] Ibid, at 2.9

[4] Ibid, at 2.14(b)

[5] Ibid, at 2.14(c)

[6] PS1/23, at 2.23

[7] The Bank of England’s approach to enforcement, at 2.15

[8] Ibid, at 2.14(b)(vi)

[9] Ibid, at 2.14(d)

[10] Ibid, at 8.40

[11] Ibid, at 8.41

[12] Ibid, at 2.14(b)(ii)

[13] The DEPP at 6.7.3 onwards

[14] Ibid, at 6.7.3G(1)

[15] Ibid, at 5.1.8CG(2)

[16] Ibid, at 6.7.3AG(2)(a)