PRA fines HDI Global SE and provides key insight into its expectations of EAS participants

The Prudential Regulation Authority (“PRA”) has fined HDI Global SE (“HDI”), the UK-authorised branch of a German-headquartered global insurer, £4,165,000 for repeated failures in reporting its Financial Services Compensation Scheme (“FSCS”) liabilities and fee tariff data over a three-year period from 13 August 2021 to 31 August 2024. 

The PRA found that HDI had breached Fundamental Rule 2 (due skill, care and diligence) and Fundamental Rule 6 (organising and controlling affairs responsibly and effectively), owing to inadequate systems, controls and governance around the accuracy of its regulatory data submissions. The decision also provides insight into the importance the PRA attaches to early admissions of breach by firms participating in its Early Account Scheme.

Background

The PRA’s decision concerns HDI's failure to submit accurate data on:

• FSCS liabilities — the amounts potentially claimable by eligible claimants from the FSCS in respect of protected contracts of insurance issued by the firm; and
• FSCS fee tariff data — used to calculate the amount of the firm’s FSCS levy.

FSCS liabilities are a key metric informing the PRA’s supervisory approach to relevant firms. Misreporting may hinder the PRA’s ability to identify material risks and to supervise firms appropriately. It may also result in a firm underpaying its applicable levy to the FSCS as part of the FCA’s annual fee collection process.

Between August 2021 and August 2024, HDI submitted incorrect FSCS liabilities data to both the PRA and the FCA on multiple occasions, including in purported remediation of previously incorrect submissions.

These errors arose and persisted undetected because HDI lacked effective written processes around its FSCS reporting. The PRA found no traceability to rule requirements, no documented challenge of the figures reported, no clear documented control of the relevant underlying spreadsheets, and no evidence that the process had been tested against the requirements of the PRA Rulebook or relevant guidance. HDI was unable to demonstrate that it had consulted the PRA Rulebook in relation to the calculation of its FSCS fee tariff data prior to summer 2023.

These shortcomings were compounded by a lack of effective governance. Neither the Finance nor the Compliance function had clear responsibility for ensuring accurate reporting of FSCS liabilities and fee tariff data, and there was no effective senior oversight of the calculation process. Senior management failed to identify that the figures had been calculated incorrectly, and HDI did not seek professional or legal advice on the application of the FSCS reporting rules until directed to do so by the PRA.

PRA decision

The PRA’s supervisory approach relies on firms submitting accurate data to inform its strategy and feed into prudential decisions. Inaccurate data prevents the PRA from identifying where a firm falls in relation to its risk tolerance. The level of FSCS liabilities is regarded as a particularly strong indicator of the impact of failure of a third-country branch on both policyholders and FSCS levy payers. The PRA found that the failings in this case were serious, going significantly beyond technical errors. Having determined that relevant revenue was not an appropriate indicator of harm, the PRA considered the following factors in arriving at a Step Two figure of £7 million:

• The breaches affected the PRA’s supervisory approach and the advancement of its objectives.
• The breaches were not considered deliberate or reckless.
• The breaches revealed weaknesses in HDI’s controls and governance.
• The PRA places considerable importance on accurate and timely data submission, and HDI submitted materially inaccurate data on multiple occasions during the relevant period.

Although HDI participated in the PRA’s Early Account Scheme (“EAS”), it was not judged to qualify for the enhanced settlement discount of up to 50% potentially available to EAS participants. While HDI made candid admissions of fact, the PRA determined that it did not make early admissions in relation to the potential breaches under investigation. The PRA instead gave credit for HDI’s co-operation under the scheme at Step Three of its penalty calculation, discounting the £7 million figure by 15%. A further 30% standard settlement discount was then applied pursuant to the PRA’s Settlement Policy, resulting in a final penalty of £4,165,000.

Key takeaways

This is only the second reported case in which a firm has participated in the PRA’s EAS. The decision makes clear that the enhanced settlement discount of up to 50% is available only where a firm makes early admissions in relation to the alleged breaches under investigation — a potentially challenging threshold depending on the nature and circumstances of particular cases. The EAS may accordingly be better suited to cases in which it is relatively clear from the outset that one or more breaches has occurred. Given the novelty of the scheme, future reported cases will play an important part in building a clearer picture of the PRA’s expectations.