The Pensions Regulator's criminal sanctions policy: a delicate balancing act

• United Kingdom

• Pensions

30-09-2021

The Pensions Regulator (the Regulator) issued its finalised criminal offences policy (the Policy) on 29 September 2021. This provides guidance on its approach to the investigation and prosecution of two new criminal offences, “avoidance of an employer debt” and “conduct risking accrued scheme benefits”, in the Pension Schemes Act 2021 (the Act). The timing is down to the wire, as these new criminal offences come into force on 1 October 2021.

In summary, the finalised Policy is a clearer and more balanced document than the draft version published for consultation in March 2021 (see our previous speedbrief). It also includes more informative examples of what could trigger action under the offences and what could form a reasonable excuse. However, it is still almost completely silent on how dividends will be treated, and it can only do so much to give comfort around the extremely wide underlying legislation. 

Given the uncertainties which remain, and the broad reach of the new criminal sanctions, the Policy should interest both trustees and employers, as well as anyone else involved with defined benefit (DB) schemes. 

The new criminal offences: a quick recap

The Act adds a number of new criminal offences, including “avoidance of an employer debt” and “conduct risking accrued scheme benefits” at new sections 58A and 58B of the Pensions Act 2004.

Both offences relate to DB schemes only and are punishable by up to seven years in prison or an unlimited fine. They apply to any person, including trustees, employers, professional advisers and anyone else (including lenders). Only insolvency practitioners are excluded. They can also apply to “secondary offenders” who help or encourage someone to commit an offence.

Very broadly, both offences apply where:

• someone does or fails to do something which meets the relevant “act element”
• the person had the relevant “mental element”, and
• they did not have a reasonable excuse for acting in the way that they did.

It will be for the prosecution to prove the absence of a reasonable excuse. There will be no Regulator clearance process for the new offences as there is for contribution notices (CNs) and financial support directions.

For more details about the Act, please see our Guide to the Pension Schemes Act 2021, which we plan to update soon to take account of recent developments.

What are the key points in the Policy?

The Regulator’s approach

The Regulator says that (despite the wide drafting of the offences) it does not intend to prosecute actions that it considers to be ordinary commercial activity. They are aimed at “the most serious examples of intentional or reckless conduct that were already within the scope of [its CN] powers”.

Actions before 1 October 2021

The law says that the new criminal offences will not be retrospective – they will only apply to acts which take place after 1 October 2021.  However, the Regulator notes that facts pre-dating that may be taken into account, for example if they indicate someone’s intention. Similarly, those being investigated may rely on such facts in their defence.  

Limitation period

The Policy highlights that there is no limitation period for these powers, so the threat of criminal sanctions will potentially remain indefinitely after an event.

Action: Check your insurance policies and indemnities to assess what cover is provided. Criminal penalties are likely to be outside their scope but cover may be provided for criminal defence costs.

Reasonable excuse

The Regulator will expect those it investigates to explain their actions and put forward sufficient evidence of a reasonable excuse. It expects the basis for this to be clear from contemporaneous records, such as minutes of meetings, correspondence and written advice.

Each case will depend on its facts but the Regulator points to three key factors in deciding whether someone had a reasonable excuse:

• was the detriment to the scheme an “incidental consequence” of the act or omission?
• does any mitigation adequately offset the detriment?
• if not, was there a viable alternative that would have avoided or reduced the detrimental impact?

Other relevant factors may include communication with the trustees, whether any fiduciary duties were met and whether professionals acted in accordance with their duties.

The Regulator recognises that a party can have regard to its own interests. For example, if a lender is deciding whether to advance funds necessary for the survival of a business, the Regulator would not expect it to lend on uncommercial terms.

The Policy sets out some new examples of situations where the Regulator would generally expect a person to have a reasonable excuse. This includes entering into statutory easements under the Employer Debt Regulations and certain insolvency processes, such as restructuring plans and company voluntary arrangements. This is subject to caveats including complying with legislative conditions and being transparent with the Regulator/PPF. 

However, the Policy is almost completely silent on dividends. Given the tests set out by the Regulator, and their formulation of what amounts to a “reasonable excuse”, it seems that unmitigated dividends will – at least on paper – fall within the scope of the new offences. For business as usual / ordinary course dividends, sponsors will have to rely on Regulator’s general assurance that they do not intend to prosecute “ordinary commercial activity”. We suspect that many corporate sponsors would like a bit more clarity on this, and it is also unclear how far this general assurance will help with special or one-off distributions.

A welcome change in the finalised Policy is that the Regulator says it will take account of time constraints. This is particularly important in the context of restructurings of companies in financial distress, which often take place under significant time pressure. Also notable is a tempering of the Regulator’s previous language around all viable options having to be explored – it now acknowledges that this will be context (e.g. time and cost) dependent.

The Regulator says that clearance in relation to the Regulator’s CN powers will not automatically provide a reasonable excuse (and clearance can apply to a more limited range of people than the new offences). However, the circumstances described in the clearance application could be part of the basis of a reasonable excuse.

Action: Take written advice and keep a careful audit trail of decisions relating to corporate activity, borrowing, dividends, share buybacks, inter-company financing, other forms of covenant leakage and anything relating to section 75 debts – documents may be required to form the basis of a reasonable excuse defence in years to come.

When is the Regulator likely to prosecute and how may it go about it?

The Regulator emphasises that criminal proceedings are reserved for only the most serious types of conduct and that it will take a risk based approach, including considering the impact on scheme funding levels and its available resources.

Factors that may have a bearing on whether the Regulator pursues a criminal prosecution include significant financial gains made to the detriment of the scheme, the trustees/Regulator/PPF not being appropriately informed or “some other unfairness” in the treatment of the scheme. Cases may be selected for prosecution based not only on the Regulator’s policy approach and statutory objectives but also on whether prosecution could “deter future acts and signal to others…that this behaviour will not be tolerated”.

The Regulator’s enforcement resources, although substantially increased in recent years, are unlikely to support a large number of criminal investigations and prosecutions. It is likely, given the potentially significant consequences for those who are subject to criminal investigation and prosecution, that any criminal proceedings brought in respect of the new offences will be strongly contested (particularly in early cases).

Unlike for some other offences which may be committed by corporate entities, there is not yet any provision here for proceedings which may be pursued against corporates to be concluded by way of a deferred prosecution agreement. It seems relatively unlikely that this will follow.

In practice, this is likely to mean that the Regulator’s indications that prosecutions will be reserved for the most egregious cases will come to pass. One as yet unknown factor is the extent to which the Regulator, potentially as a consequence of heightened scrutiny in early cases, will seek to make proactive use of ancillary investigative and other powers commonly used by other enforcement authorities in criminal investigations. These include powers to compel the production of documents using criminal powers and/or to restrict access to assets under the Proceeds of Crime Act 2002.

One unintended consequence of the new offences may be that the Regulator is presented with significant numbers of possible investigations as a consequence of suspicious activity reports filed by parties seeking to discharge their anti-money laundering obligations. Money Laundering Reporting Officers are likely to be alive to these obligations and to the possibility that, without going through the necessary steps of reporting matters to the National Crime Agency and obtaining a defence by submitting suspicious activity reports, they and their organisations may be exposed to new risks of committing various money laundering offences.  

Further clarity on some of these points may emerge from a consultation the Regulator opened on 29 September 2021 on three new draft policies explaining its proposed approach in cases where both regulatory and criminal powers apply. Interestingly, the draft “overlapping powers policy” says that “our primary objective  when considering avoidance behaviour will be obtaining funds for the scheme and/or protection of the PPF. It is therefore likely we will prioritise regulatory proceedings seeking a  CN. However, there may also be grounds to pursue criminal proceedings or a financial penalty as an alternative, or a combination of both.” A priority for respondents to the consultation will be to seek clarity on what these grounds might be.   

Action: Familiarise yourself with the new offences and, once finalised, the new corporate notifiable events – training is a good way to start. Make sure appropriate processes are in place to comply with the obligations. Key staff should know which steps to take to respond appropriately to any use of criminal investigation powers by the Regulator and to escalate matters where anti-money laundering obligations may potentially be triggered.

Comments and next steps

It is clear that the Regulator has taken on board feedback, including our own, submitted during the consultation process. Inevitably grey areas will remain in relation to such broadly drafted offences but the finalised Policy is a now a clearer document that seeks to balance the interests of schemes and other parties in a more pragmatic way. In addition, new examples have been provided, including a particularly helpful case study in Appendix 3, which walks step by step through the Regulator’s likely approach in a realistic scenario involving multiple parties. However, there are many areas – including dividends and other corporate distributions – where the guidance is silent.

The Regulator’s guiding factors on how it will choose which cases to prosecute include to “deter future acts...and signal to others within the regulatory community that this behaviour will not be tolerated”. In our view, “example setting” is a reason that is better, and more fairly, linked to non-criminal sanctions.

The new draft policies on how the Regulator will approach situations where more than one of its powers could be engaged were also published in response to feedback. We plan to review these drafts in more detail and issue a briefing in due course. The consultation is open until 21 December 2021 and the Regulator expects to finalise the policies early in the new year.

Another significant and, as yet, incomplete piece of this jigsaw is the far reaching new corporate notifiable events regulations, which are currently subject to consultation. These are expected to come into force on 6 April 2022. See our recent speedbrief for more details.

Of course, it is ultimately up to the courts to decide on the interpretation of the law – a court’s view might differ from the Regulator’s stated policy. In addition, prosecution of the new offences can also be instigated by other bodies, including the Director of Public Prosecutions. They would be expected to consult with the Regulator but could adopt a different approach in terms of what behaviour merits investigation and prosecution. We understand there may be some developments in terms of future co-operation between prosecuting bodies but these are yet to be confirmed.

 

For more information, please contact your usual Eversheds Sutherland adviser or: