Blog 6th Jan 2014

Prosecuting bankers under the banking reform act 2013: Political puff or criminal clout?

On 18th December, the Financial Services (Banking Reform) Act 2013 received its Royal Assent, and was lauded by the Treasury as the “biggest reform to the UK banking sector in a generation”. Further, the Treasury says it will “help to increase conduct standards amongst bankers.” There must be a real question mark, however, as to the accuracy of this particular forecast.

Under the new legislation, senior managers and directors of banks could now 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 in early 2014, is introduced following widespread criticism of accountability in the financial services sector by, amongst others, the Parliamentary Commission on Banking Standards. In its report of June 2013 it said that there was “a strong case in principle” for those managing banks to be held criminally responsible for certain types of misconduct, a view endorsed by government, the main political parties, and the FCA.

The offence eventually introduced can be found at section 36 of the Act, and the related sentences appear at section 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 7 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 s.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 without actually directing subordinate employees explicitly. Notwithstanding that the Act introduces a positive duty to take such steps to prevent such decisions, the point at which the line has been crossed will not be easy to divine. 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 it no doubt 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 points scoring, whilst its status as a meaningful contribution to the statute book is seriously open to doubt. To that extent, it follows a depressing pattern of recent legislative additions.

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