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The PRA
The PRA
On 27 February 2019, the PRA appointed investigators to see whether the Bank had breached Fundamental Rules 2 and 6 of the PRA Rulebook. Fundamental Rule 2 is that a firm conducts its business with “due skill, care and diligence” and Fundamental Rule 6 is that a firm organises and controls its affairs responsibly and effectively. In the course of the investigation, the PRA asked for a “teach-in” on the Bank’s governance and control framework and on the process it used to prepare regulatory reports. This was provided on 3 July 2019 by Mr Arden and Ms Gillan, together with Mr MacLean and Ms Iovino (“the Teach-In”). The Bank also shared with the PRA the scope of the work being carried out by Deloitte and its outcomes.
On 21 December 2021, the PRA imposed on the Bank a penalty of £5,376,000 (after a settlement discount) for breaching Fundamental Rules 2 and 6 of the PRA Rulebook. The penalty was based on detailed findings, which included the following:
The Bank had failed to ensure effective oversight and challenge of its approach to COREP reporting.
The Bank’s escalation routes to the ELT and the Board were unclear and failed to operate effectively.
The Audit Committee provided “limited detailed challenge”.
The Bank failed to establish and implement effective controls in relation to its interpretation of relevant regulatory rules and guidance relevant to its COREP reporting.
Its RWA calculation process remained largely manual, reflecting the Bank’s limited investment in systems.
The Bank’s front-end data capture and systems did not allow it to capture all relevant information that it needed accurately to classify exposures and calculate risk weights for its lending portfolio.
There was no dispute before us that points (5) and (6) above were factually correct, and we accept them as such. We consider the other points later in our decision, so far as relevant to this case.
- Heading
- Introduction
- The jurisdiction of the Tribunal
- The burden and standard of proof
- The PRA and capital requirements
- The Bank’s lending
- CRE loans
- CLIP loans
- PBTL loans
- COREP reporting
- The Authority
- Listing Rule 1.3.3R
- The MAR
- The evidence
- Approach to the evidence
- Mr Arden
- Mr Donaldson
- Ms Gillan
- Ms Roberts
- Mr Somers and Mr Dransfield
- Mr Sutherland
- Mr Lane
- Mr Brierley
- Individuals who were not called as witnesses
- Findings of fact
- The early years
- Linklaters
- Key personnel during the period from March 2018
- Relationship with the PRA and the Authority
- 2016 and 2017
- The COREP audit and the CRE loans
- Mr Arden, the Board and the committees
- KPMG appointed
- April to June 2018
- July 2018
- The 2018 capital raise and half year results
- August 2018: PBTL and CLIP
- Communicating with the PRA
- KPMG decision trees
- PBTL classification
- Annual Review of Commercial Lending
- September Audit Committee
- September NEDs meeting
- September Board meeting
- Engagement of Deloitte
- Internal work in support
- Communications with the PRA
- Meeting with Linklaters
- Disclosure Committee meeting
- Mr Somers’ email
- Meetings with Mr Hill and Mr Bernau
- The October CRPAC meeting
- RWA Report
- Business and Commercial Lending
- The October Audit Committee meeting
- The Q3 Update
- Accounting, reporting and control report
- The October ROC meeting
- Chief Risk Officer’s Report
- The RWA Report
- Business and Commercial Lending Review
- The October Board meeting
- Linklaters Governance Update
- Audit Committee Update
- The Q3 Update
- 2019 Budget Paper
- Whether the RWA issue was discussed
- Chief Risk Officer’s Report
- Response to PSM Letter
- The Q3 Update and analyst calls
- Deloitte’s reports
- Discussions with Linklaters
- Discussions with the PRA and the January announcement
- Subsequently
- The PRA
- The Authority
- Mr Donaldson’s and Mr Arden’s careers
- The common ground
- The Parties’ cases
- The Authority’s case
- The Applicants’ case
- ISSUE ONE: WHETHER THE BANK BREACHED LR 1.3.3R
- The PRA and the COREP Returns
- Findings of fact
- The Applicants’ position
- The Tribunal’s view
- The PRA and confidentiality
- Findings of fact
- The Applicants’ position
- The Authority’s position
- The Tribunal’s view
- Mr Lane’s advice
- Findings of fact not in dispute
- Who was at the meeting
- How long was the meeting
- Linklaters’ practice when giving advice
- Knowledge of the impending Q3 Update
- What was said by Mr Arden at the meeting
- Confidential matter?
- The Tribunal’s finding
- The purpose of the meeting
- Reasonable to rely?
- Overall conclusion on legal advice
- No breach if uncertain and under investigation?
- Mr Jaffey’s submissions
- Mr Stanley’s submissions
- The Tribunal’s view
- No material breach if unknown
- The knowledge issue
- Key findings already made
- The Authority’s overall position on the knowledge issue
- The Applicants’ overall position on the knowledge issue
- Rules on classification
- Data issues
- Nature of the data issues
- Extent of the data issues
- Effect on materiality
- SME supporting factor
- Residential property
- Conclusion on data issues
- The mitigants overall
- The AIRB application
- Pillar 2A Offset
- Submissions
- Findings of fact
- Conclusion on Pillar 2A offset
- Phasing in
- PRA discretion
- Taking all the above into account
- Overall conclusion on the Knowledge Issue
- The PBTL Loans
- Findings of fact
- Submissions and the Tribunal’s view
- Whether the alternatives were unreasonable
- The Applicants’ position
- The Authority’s submissions
- The Tribunal’s view
- Reliance on the board and the Committees
- Findings of fact
- September
- October Audit Committee
- October ROC meeting
- October Board meeting
- The position of the parties
- The Tribunal’s view
- The Audit Committee
- The Board
- Reliance on Ms James
- Findings of fact
- Submissions
- Discussion
- Overall conclusion on Issue one
- The legal principles
- The statutory provisions
- Burton v Bevan
- Scandex
- Capital Alternatives
- Avacade
- Ferreira
- Submissions on Ferreira
- The words of the provision
- The ratio of Ferreira
- The corporate veil
- Forster: meaning of “knowingly concerned”
- Forster: reliance on legal advice
- The Applicants’ submissions
- The Authority’s submissions
- The Tribunal’s view
- The principles summarised and the issues remaining
- Mr Arden
- Mr Donaldson
- The position of the parties
- The Tribunal’s view
- ISSUE THREE: PENALTIES
- The Tribunal’s approach
- The DEPP
- The Authority’s position
- The Applicants’ position
- The Tribunal’s view
- The penalty framework
- Applying the Steps
- Step 2(1)-(3): Earnings
- The Tribunal’s view
- Step 2(4)-(7): Seriousness
- Step 3: Mitigation
- DEPP
- Submissions and discussion
- Co-operation
- Remediation
- Compliance with the PRA’s requirements
- Communications with the Authority
- No negative factors
- Other consequences
- Difference between the Applicants?
- Conclusions