The Prudential Regulation Authority (PRA) has imposed a financial penalty on Standard Chartered Bank (SCB) of £46.55 million for failing to be open and cooperative with the PRA and for failings in its regulatory reporting governance and controls. SCB agreed to settle during the discount stage of investigation and benefitted from a 30% settlement discount.
SCB is a category 1 firm, meaning that it has the capacity to cause significant disruption to the UK financial system if it were to fail. In 2017, the PRA was concerned about a heightened risk in relation to SCB's dollar outflows and asked SCB to meet new expectations in respect of its liquidity. This included a requirement to submit daily regulatory returns (which had previously been submitted weekly).
SCB complied with its daily reporting obligations, but during a 15 month period identified five accounting errors which resulted in periods of misreporting of the liquidity metric. One error resulted in underreporting liquidity (i.e. portrayed the position as less favourable than it actually was) but four errors resulted in overreporting such that the USD liquidity position was weaker than reported.
The PRA has decided that SCB breached fundamental rule 6 – "A firm must organise and control its affairs responsibility and effectively."
The PRA decided that:
- SCB failed to ensure that it had a framework for properly escalating miscalculations and misreporting within the finance function. Although SCB did maintain a risk management and oversight framework, errors were not properly logged and escalated to senior management.
- SCB did not have a policy for PRA notification. Although there was an understanding within SCB that errors were to be notified to the PRA, this was not documented. Accordingly one error was not notified to the PRA for several months.
- SCB did not have adequate controls testing. In particular testing of this particular USD liquidity metric was not subject to the same level of rigour as other metrics.
- SCB had inadequate human resources to assist with the process. Staff in the relevant function of SCB had been depleted and management of the bank had approved new hires. The PRA reports that despite "conducting many interviews and making job offers, no external hires with the necessary expertise could be found before the end of the Relevant Period"
The PRA also decided that SCB breached fundamental rule 7 – "A firm must deal with its regulators in an open and co-operative way, and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice."
The PRA were concerned that despite an issue being identified on 28 November 2018, one of the errors ("Error 4") was not notified to the PRA until 1 April 2019. The PRA considered this breach to be particularly serious because:
- The potential size of the error when first identified was $10 billion and there was a risk that SCB was therefore in breach of the PRA's liquidity expectations.
- The error occurred following the discovery of three other errors (which had been reported promptly to the PRA).
- There were meetings which took place with the PRA during that time, when the error could have been disclosed but wasn't.
The issue was confirmed as an error in mid-February but not reported until 1 April 2019. SCB waited until it had completed its investigation and root cause analysis before reporting.
Comment
Real time reporting of banks' accounting data is a highly specialised and technical process and it is inevitable that sometimes mistakes are made. In this case, it was not the fact of the initial errors which prompted the PRA to take action, but rather failures in escalation, controls and PRA reporting.
The PRA's criticism of SCB for late reporting of Error 4, highlights the dilemma that Firms face when they identify a potential regulatory failure. By reporting before the firm is able properly to establish and investigate any breach risks inaccurate reporting. However, leaving too late risks disciplinary action for failure to be open and cooperative. Nevertheless, the PRA was at pains to point out that "understanding how the error had occurred was ancillary to knowing that the error had potentially occurred." In the present case, it is of note that senior management at SCB were not notified about Error 4 until after the PRA was notified. The PRA were of the view that had senior management been aware, it would likely have been notified of the error earlier. Given that SCB senior management includes a former CEO of the Financial Conduct Authority (FCA), this view holds weight.
There is an increasing tendency for both the PRA and FCA to cite inadequate resourcing as contributing to regulatory failure in their notices. However, in this case, SCB might feel aggrieved that they were criticised for having inadequate human resource, given that they had approved new hires, conducted interviews and made job offers in a highly competitive labour market. Nevertheless, Banks are expected to have contingency plans in place for key staff departures and in some cases that might necessitate short term measures such as utilising contract staff at high cost.
SCB might note with some irony that it is not the only victim of a shortage of specialist staff. Earlier this month, the Financial Times reported that the PRA's fellow regulator, the FCA, has record vacancy levels and according to one commentator is "dangerously understaffed in certain key areas".