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PRA fines bank for outsourcing failures

10 December 2015

Last week, the PRA announced that it had imposed a fine of over £1.2 million on R. Raphael & Sons plc.

The PRA, which is becoming an increasingly significant enforcer, said Raphaels had potentially put at risk its safety and soundness by failing properly to manage its outsourcing arrangements.

Raphaels is an ATM company, and in April 2014 owned over 300 ATMs across the UK. In September 2006, it had outsourced its ATM finance function to a team within another company in its parent's group (Company B), but did not have appropriate controls around this outsourcing arrangement. Specifically, it did not enter into suitable written agreements or undertake suitable due diligence.

Between 2007 and 2014, employees at Company B were improperly transferring funds from Raphaels to Company B without Raphaels' knowledge or consent, and took active steps to conceal their actions. No evidence was found that anyone else within the parent group was aware of these actions. The funds were transferred for the purposes of dealing with cash flow problems at Company B. The PRA concluded that had Company B become insolvent, Raphaels would have been exposed to severe financial repercussions.

As a result of the failings, the PRA concluded that Raphaels had inadequate oversight and control of its regulatory position. Specifically, for part of the period, the firm failed to understand and accurately report its capital requirement, and failed to recognise it had a large exposure to its parent group of more than 25% of its capital resources.

The PRA warned that whilst regulated firms can delegate or outsource work, "you cannot delegate or outsource responsibility".

Raphaels agreed to settle at an early stage of the PRA's investigation, and therefore qualified for a 30% stage 1 discount under the PRA's settlement policy.

This is the fourth PRA enforcement case in the last two years, and highlights not only the regulators' continued focus on outsourcing but it also illustrates that, contrary to many people's expectations, the PRA is itching to use its enforcement powers.

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