The fine relates to an outsourcing deal struck by the bank in 2006 with a third party identified by the PRA as 'Company C', and involved financing arrangements for Raphaels' fleet of 334 cash machines and mobile ATM services.

The PRA says that from 2007 to 2014, Company C employees in the team responsible for managing the outsourced functions improperly transferred funds without the knowledge or consent of Raphaels and took steps to conceal their actions. The funds were used to cover cash flow problems at the outsourcer.

Says the PRA: "This meant that Raphaels was exposed to Company C, which would have led to severe financial repercussions if Company C had become insolvent."

The regulator says Raphaels entered into the deal without any suitable written arrangements in place and without undertaking due diligence on the outsourcing. As a result of these failings, from May 2011 to November 2013, Raphaels failed to understand and accurately report its capital requirement to authorities and "failed to understand that it had a large exposure to the Group of more than 25% of its capital resources".

Andrew Bailey, deputy governor for Prudential Regulation and CEO of the PRA says: “You can delegate or outsource work but you cannot delegate or outsource responsibility. Raphaels put its safety and soundness at risk by failing to have adequate controls in place over their outsourcing. The lack of controls meant that Raphaels did not know what its capital position was or who it was exposed to. This behaviour could have had severe consequences for Raphaels which is why the PRA has taken the relatively unusual step of levying a fine in this case.”

Raphaels qualified for a 30% discount on the penalty levy by agreeing to settle at an early stage of the PRA’s investigation. Were it not for this, the watchdog would have imposed a financial penalty of £1,825,950.