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FSA & Bank of England - CP 12/39 - PRA approach to enforcement

We are broadly satisfied with the proposals but would like to suggest a greater emphasis is placed upon the need for considerations of proportionality in respect of firms’ size, complexity and risk to the wider financial system so that small firms, such as credit unions, do not suffer disproportionate harm from enforcement action.  Proportionality is needed in relation to the firm as well as to the seriousness of the breach.

In this respect we would in particular suggest that special consideration be given to the significantly detrimental impact that the publication of enforcement notices might have on small, community deposit-takers such as our members.  Likewise, we would urge that considerations of size and proportionality be given due regard when considering whether or not to provide extra flexibility in the time limits for making representations against enforcement action.

Consultation questions

Q1. Do you have any comments on the proposed policies and procedures contained in the consultation?

In broad terms we are satisfied with the proposed approach to PRA enforcement action.  We do, however, have some comments in respect of the proposals’ provision for the proportionate and appropriate treatment of small firms, such as credit unions.

In a general sense, it is vitally important that considerations of proportionality are central to dealing with small firms such as credit unions since the benefits of intervention are likely to be significantly reduced, and the costs for a firm significantly increased, relative to the same action against a larger firm.  The position of credit unions as probably the smallest set of firms within the PRA’s regulatory remit brings these issues into sharp relief since we feel that there is a potential risk that, in focussing on financial stability and the prudential soundness of major systemically-important firms, the needs of a small sub-set of deposit-takers, like credit unions, might be compromised inadvertently.  

To combat this risk, we urge consideration to be given to highlighting the importance of proportionality in all statements of policy relating to regulatory enforcement decisions. As such it is concerning that the word “proportionality” at present does not appear at any point in the draft “Statement of PRA policy on statutory notices and the allocation of decision-making under the Act”. Likewise, we are concerned that the only references to proportionality written into the draft statements on the imposition of financial penalties and the imposition of suspensions and restrictions relate to enforcement action being proportionate to the breach and not proportionate to the firm in question, the risk it poses, and its possible social or other goals.  Such references should be included as a matter of course to ensure that only action appropriate to the firm is pursued.

There are two areas in particular that we would like to highlight in relation to this need for proportionality.  The first is the potential for the publication of enforcement notices to have a significant detrimental effect on the credibility of a small firm, such as a credit union, in its local community.  As small, deposit-taking institutions, credit unions face a constant battle in building and maintaining trust and credibility in the eyes of the local community as a prerequisite to their trusting the credit union to manage their personal funds.  Augmenting these pressures, is the relatively precarious position a credit union occupies in relation to vulnerability to a loss of confidence becoming a “run” or undermining a its financial position.  It is relatively easy for rumours of instability or mismanagement resulting from a notice publication exacerbating a credit union’s difficulties and this must be a consideration when determining whether to publish.

Another area of concern in this respect is the Financial Services Act’s reduction of the time limit to make representations against an enforcement decision from 28 to 14 days.  While we appreciate that this is a decision that has been taken by Parliament and is therefore outside of the consultation’s scope, we also recognise that the PRA has been afforded flexibility in permitting extra time for firms to make representations where it considers appropriate.  Given the particular difficulties that small firms face in making representations to the regulator, we feel that considerations of proportionality in respect of a firm’s size should be written into the considerations that the PRA should make when deciding whether or not – and how much – flexibility to grant a firm in making representations.

Q2. Do you have any comments about the proposed policy and procedure, including providing the PRA with discretion to set a financial penalty it considers appropriate?

We are broadly in agreement with the policy and procedure as set out in the consultation. We would suggest, however, in line with our comments above, that considerations of proportionality in relation to the position of and risk from the firm in question should be required alongside those in relation to the seriousness of the breach.

Q3. Do you believe the PRA should have a policy on settlement and enforcement cases?

We have no strong views on this.  We would however support the position that any settlement policy should give ultimate discretion to the PRA and that settlements that are considered to conflict with the PRA’s regulatory objectives ought not to be pursued.  Similarly, there may be a case for (where possible and appropriate) providing the opportunity for injured parties or representatives of consumers to make representations in respect of any proposed settlement.

The full response is available to download on the right hand side.