The Regulator has responded to its September 2021 consultation on three draft policies relevant to how it will exercise its new anti-avoidance powers, which are intended to help protect defined benefit (DB) savings. The most recent policies follow on from the policy on the investigation and prosecution of the new criminal offences, which was published in September 2021 and provide further guidance on three specific areas: overlapping powers, the new GBP 1million civil penalty and information gathering. Separately, the Regulator has also issued a new consultation on two policies consolidating and updating certain existing policies on enforcement and prosecution.
- Overlapping powers policy
- High fines policy (avoidance)
- High fines policy (information requirements)
- Information gathering powers
- Consultation on new draft consolidated scheme management enforcement policy
- Consultation on updated prosecution policy
Overlapping powers policy
This provides guidance on how the Regulator will approach situations in which it could exercise more than one of its powers in relation to the same anti-avoidance type conduct. Since 1 October 2021, the Regulator has been given additional powers, which means that in addition to its pre-existing power to impose a contribution notice, the Regulator may also be able to either pursue criminal prosecution or impose a financial penalty of up to GBP 1 million. Further information on the Regulator’s new powers can be found here.
Concerns were raised in the run-up to the Regulator’s new powers coming into force that it was not clear where the Regulator had overlapping powers, which it would use and when. Despite clear messages from the Regulator that criminal prosecutions were intended to be reserved for the most serious anti-avoidance conduct, there was still significant uncertainty about how the Regulator would choose between a criminal penalty versus the new GBP 1 million civil penalty. There was also some uncertainty about whether the Regulator would seek to use its new powers in combination with its pre-existing power to issue a contribution notice.
Consistent with its approach in the criminal offences policy, the Regulator has been careful in this policy not to pin down its approach and stressed that this would very much depend on the circumstances of a particular case. The policy does, however, contain some pointers in terms of its general approach:
- The policy confirms that the Regulator’s “primary objective” when considering avoidance behaviour is to obtain funds for the scheme and/or protection of the PPF. In practice, this is likely to mean that a contribution notice will remain the main enforcement tool in most cases. Contribution notices require funds to be paid into the scheme, whereas criminal penalties and the new civil financial penalties do not. Given the Regulator’s prime objective to safeguard schemes and the PPF, it also seems likely that, in the more serious cases, where criminal or civil penalties are also potentially in play, these are likely to be sought in addition to, rather than as an alternative to a contribution notice (although the policy does not expressly say this).
- The Regulator is likely to pursue the new civil penalty of up to GBP 1 million, as opposed to criminal prosecution, “where the conduct is serious but not so serious as to justify prosecution”. Previously, the distinction between situations in which the criminal penalty versus the GBP 1 million penalty would be imposed had been implied but had not be stated expressly, so this is somewhat helpful. A big question remains, however, as to where the Regulator will decide in practice where the dividing line is between “serious but not so serious”, meaning that a fairly high degree of uncertainty will remain for targets about whether or not particular conduct gives rise to risk of a civil fine or a criminal prosecution.
- Although the Regulator cannot issue a GBP 1 million civil penalty and pursue criminal prosecution for the same behaviour, this does not prevent the Regulator from keeping its options open at the investigation stage. The Regulator has confirmed (elsewhere in the updated enforcement policies) that in cases where a combination of penalties is open to it that it may conduct dual-track investigations. This is something that the FCA does fairly routinely but has not been something that the Regulator has frequently undertaken to date.
The final form of the overlapping powers policy is now contained in the draft scheme management enforcement policy (see below).
High fines policy (avoidance)
This sets out the Regulator’s approach to setting the level of penalty where it is using its new power to issue a civil penalty of up to GPB 1 million (referred to as “high fines” by the Regulator). The Regulator can use this new power in a number of situations: this policy covers situations where the conduct in question relates to anti-avoidance type behaviour. A separate policy covers situations where a high fine is being issued because someone has breached information provision requirements (see below).
Broadly the approach will be first to determine which of three bands (from lowest to highest) the conduct falls into based on a combination of the culpability of those involved and the degree of harm caused. The Regulator has stuck with a wide view of what constitutes harm in the final policy, viewing this as encompassing not only harm to the scheme but wider harm, including whether the act may undermine public confidence in pensions.
The starting point for the amount of any penalty will be the middle of the relevant band. The Regulator will then adjust the placement within the band, taking into account any aggravating or mitigating factors such as the extent of co-operation with the Regulator (mitigating), previous acts or breaches (aggravating) and the timing of any mitigation provided. A key message across the policies is that the Regulator views mitigation provided contemporaneously with any detriment caused to the scheme much more favourably than mitigation provided further down the line after the event.
The policy confirms that where a high fine is being issued in relation to anti-avoidance type behaviour the starting point (i.e., the lowest financial penalty that the Regulator will seek to impose) will be GBP 100,000. This is perhaps not surprising given the serious nature of the conduct that the fines in this context are seeking to address.
The final form policy has been published as a free-standing policy and can be viewed here.
High fines policy (information requirements)
This sets out the Regulator’s approach to setting the level of high fines where the behaviour relates to breaches of the notifiable events regime or where false or misleading information has been provided to either the Regulator or the trustees. A similar approach has been adopted to that in the high fines anti-avoidance policy, although the quantum for the bands is different. The policy will be of particular interest, both to trustees and employers, in the context of their duties to notify the Regulator of certain scheme-related and employer-related events and it will assume even more importance for employers once the scope of the notification regime for employers is expanded. There is no firm timing for this but will possibly happen in October this year.
Whilst trustees and employers can perhaps take some comfort from the fact that breach of information requirements includes options for fines at the lower end of the spectrum, even within the lowest band (GBP 0 to GBP 100,000), this still leaves a big range of potential financial liability.
Of particular interest in relation to breach of the notifiable events regime is the statement that the Regulator expects the lowest band to typically only be used “where the breach(es) only caused minimal harm to the scheme”. This suggests that any breach of the notifiable events regime resulting in more than minimal harm is likely to be put in a higher band.
The example of a breach of the notifiable events regime included in a policy – a failure to notify an employer-related event through lack of care, but in relation to an event in which the Regulator was already fully engaged with the employer – could suggest that the Regulator intends to adopt a fairly strict approach to breach of the notifiable events framework. The example is used to illustrate a situation in which the Regulator is likely to assess culpability on the lower end of the spectrum (leading to placement in a lower band), rather than providing any express comfort that minor breaches won’t attract a fine (or a minimal fine), even in relation to situations where there is a good argument that no adverse impact has been caused.
The final form policy has been published as a free-standing policy and can be here.
Information gathering powers
This provides guidance on the approach the Regulator will take where it is using its information-gathering powers, a critical tool for the Regulator in enabling it to determine whether there has been any wrongdoing in relation to a pension scheme and if are grounds for it to use its enforcement powers.
The policy provides guidance on the approach which the Regulator will take when it is seeking information from potential targets. It will be of interest to employers and trustees faced with an information request for the Regulator, particularly in relation to the newer aspects of its information-gathering powers, such as the power to compel individuals to attend an interview.
In practice, trustees and employers dealing with an information request from the Regulator should seek immediate legal advice to ensure that the risk of subsequent enforcement action is mitigated as far as possible whilst ensuring that the Regulator does not have grounds to issue penalties for failure to comply with the request which can, in some circumstances, include criminal penalties.
The final form of the information gathering powers policy is contained in the draft scheme management enforcement policy (see below).
Consultation on new draft consolidated scheme management enforcement policy
In an attempt to address concerns raised during the consultation that the overall package of enforcement policies was becoming overly complex, the Regulator has tried to rationalise and streamline the content a number of existing enforcement policies. It is consulting on a new consolidated policy – called the scheme management enforcement policy – until 24 June 2022.
The draft policy is made up of existing content from three separate policies: the defined benefit funding regulatory and enforcement policy, the DC compliance and enforcement policy and the public service pension schemes compliance and enforcement policy. It also includes the final overlapping powers policy and information gathering policy as separate sections (these are final and not subject to the consultation). The consolidated policy does not include the enforcement policies for automatic enrolment or for master trusts, which are being kept separate.
The attempt to rationalise policies is welcome, as is the streamlining of the content, which makes the overall approach clearer for readers in a number of areas. Even if the policies are adopted as envisaged in the consultation, however, the enforcement policies will not be a “one-stop shop” and employers and trustees will still need to be aware of other relevant policies, such as the criminal investigation and prosecution policy, which remain separate.
The draft scheme management enforcement policy can be found here.
Consultation on updated prosecution policy
The Regulator has also taken the opportunity to update its prosecution policy, which it is also consulting on until 24 June 2022.
The draft prosecution policy can be found here.