New legislation which purports to clamp down on ‘reckless’ bankers smacks of sabre-rattling.
The Financial Services (Banking Reform) Act 2013 has been lauded by the Treasury as the ‘biggest reform to the UK banking sector in a generation’, which will ‘help to increase conduct standards among bankers’. This is a questionable forecast.
Under section 36 of the act, senior managers and directors of banks could face criminal proceedings for reckless decision-making (or the failure to monitor such decision-making), which leads to the failure of a financial institution. This new offence, due to come into force early this year, is introduced following widespread criticism of accountability in the financial services sector by, among others, the Parliamentary Commission on Banking Standards. In its June 2013 report, it found that ‘the regulatory authorities seemed almost powerless to bring sanctions against those who presided over massive failures within banks’.
The commission also found that there was ‘a strong case in principle’ for those managing banks to be held criminally responsible for certain types of misconduct. Both the government and the Financial Conduct Authority concurred. In parliament, meanwhile, members of the main parties issued emphatic endorsements of the new offence.
The commission considered four potential standards of liability for the new offence: recklessness, strict liability, incompetence and negligence. While the report did not lend unambiguous support to any one of these, it did cite evidence heard by the commission that a recklessness standard would be most appropriate. In addition, the commission stressed that where there was a criminal prosecution, it should be brought quickly to facilitate the public disclosure of serious shortcomings.
The offence eventually introduced is found at section 36, and the related sentences appear at 36(4). They include substantial terms of imprisonment for senior managers: on conviction in the magistrates’ court in England and Wales, senior managers are liable to 12 months’ imprisonment; in the Crown court, imprisonment for a term not exceeding seven years, or a fine, or both.
At face value, the new act provides a fairly wide jurisdiction to prosecute misconduct in the financial services sector, and to ensure accountability for managers presiding over the ‘massive failures’ lamented by the commission. The conduct elements of the offence are broadly and inclusively expressed, and it is plainly intended to deal both with positive mismanagement and acquiescence in reckless decision-making. It provides, too, the potential for a substantial criminal sanction.
However, any concerns (or hopes) that the act will give rise to a new raft of prosecutions are misplaced, as the act limits potential liability in a number of ways. Taking only one of several examples, the person being prosecuted must be a ‘senior manager’, or an authorised person carrying out a ‘senior management function’. This gives rise to definitional issues under section 19 of the act. Combined with the thorny issue of delegated authority, it is easy to see ways in which the reach of the legislation could be avoided.
As is evident from recent financial misconduct such as alleged Forex and Libor rigging, it seems managers of varying levels have regularly communicated preferences that give rise to a risk (or ‘decisions’ to use the language of the act) without actually directing subordinate employees explicitly. Notwithstanding that the act introduces a positive duty to take such steps to prevent such decisions (by, for example, such subordinate employees) the point at which the line has been crossed will be unclear. Moreover, issues of causation are also live. How the prosecution will prove, in anything other than a wholly exceptional case, that the act of a manager ‘caused’ the failure of the bank, is anybody’s guess.
The criminal sanction provided by the new act is meaningful and delivers an important message to the banking community. However, the extent to which the legislation will ever be deployed is an entirely different matter. All in all, it smacks of sabre-rattling and political point- scoring.
Christopher Coltart is a barrister at 2 Hare Court