Out-Law News | 19 Jun 2013 | 2:51 pm | 4 min. read
Banking litigation expert Michael Isaacs of Pinsent Masons, the law firm behind Out-Law.com, said that the "draconian" proposals could "make it less attractive to do business" in the UK if adopted alongside other recommendations by the Parliamentary Committee on Banking Standards (PCBS) in its final report.
"Criminal sanctions, and other recommendations such as deferring bonuses for 10 years, are likely to make it less attractive to do business here, by adding potential liabilities whilst removing incentives," Isaacs said.
"The unhelpful context of this report is references, like those from Lib Dem peer Lord Oakeshott, to people wanting to see 'banged up bankers', and that had more than a whiff of playing to the gallery. If implemented, this will almost certainly lead to another layer of compliance bureaucracy in banks which someone will have to pay for, most likely customers," he said.
Isaacs was commenting as the PCBS published its final recommendations for reform of the professional culture and standards of the UK banking industry. The PCBS, led by Treasury Select Committee chair Andrew Tyrie, was set up in July 2012 after allegations of misconduct in relation to LIBOR and other benchmark interest rates emerged against domestic and international banks.
In its report, the PCBS concluded that "misaligned" incentives and too little personal responsibility by those at the top had created a culture where "deep lapses in standards" had become commonplace. It recommended a new regime in which senior bankers became "personally responsible" for "failings on their watch", a reformed system of governance and stronger enforcement powers for market regulators.
"A lack of personal responsibility has been commonplace throughout the industry," Tyrie said. "Senior figures have continued to shelter behind an accountability firewall. Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace."
"Rewards for success should be better focussed on generating long-term benefits for banks and their customers. Where the standards of individuals, especially those in senior roles, have fallen short, clear lines of accountability and enforceable sanctions are needed. Governments need to get on with the job of implementing these reforms. Regulators and supervisors need rigorously to enforce them," he said.
The report proposes replacing the existing Approved Persons regime, under which those who perform certain controlled functions within a bank must be approved by the financial regulators, with a two-tier Senior Persons Regime and Licensing Regime, underpinned by a new set of Banking Standards Rules. The Senior Persons Regime would ensure that the main responsibilities within banks are assigned to specific individuals, who will be held to account for how they carry these out, while the Licensing Regime would apply to other bank staff whose actions or behaviour could "seriously harm" the bank, its reputation or its customers.
Senior Persons and licensed bank staff would be paid in line with a new Remuneration Code, under which incentives and disincentives would be tied more closely to longer-term risk. Under the new regime more remuneration would be deferred and for much longer periods, and more of that deferred remuneration would be in bail-in bonds and other forms which favour long-term performance. Senior Persons and licensed staff would lose their rights to deferred remuneration, unvested pension rights and loss of office entitlements should the bank require direct taxpayer support.
Under a new sanctions and enforcement regime, regulated responsibilities within the bank would have to be assigned to a specific individual, who would retain that responsibility even then the tasks themselves were delegated or subject to collective decision-making. Regulators would be able to use the full range of civil enforcement powers including fines, restrictions on responsibilities and industry bans against any person, senior or licensed, with the potential to cause "serious harm".
In addition, a new criminal offence would be created which would apply to Senior Persons who carry out their professional responsibilities in a reckless manner. This offence could carry a prison sentence and, following a conviction, any pay or bonuses received by that individual during the period of reckless behaviour should be recoverable through separate civil proceedings.
Banking litigation expert Michael Isaacs said that the creation of a new criminal offence was not without precedent. However, he said that any new regime would have to make it clear exactly what responsibilities would be placed on senior bankers, and suggested that a breach of those responsibilities would likely be hard to prove.
"Criminal sanctions focus minds and, whilst draconian, this proposal does have precedent," he said. "The introduction of the Corporate Manslaughter Act and the increase in the number of prosecutions against directors and managers did this in the Health and Safety world."
"However, we will have to look at exactly what responsibilities will be placed on senior bankers - they will have to be sufficiently well defined so that one can say clearly if they have been met or not. The idea of senior bankers being criminally responsible for 'recklessly' disregarding those responsibilities, removing the defence of ignorance, appears to be aimed at those who turn a blind eye - what the report calls 'donning the blindfolds'. There is likely to be a considerable burden of proof: merely miscalculating or being negligent in an assessment of risk most likely won't be enough," he said.
The PCBS report also called for more to be done to increase competition in the banking sector. This should include a full market study by the Competition and Markets Authority of the retail and SME banking sectors, to report back by the end of 2015, and a new competition objective for the Prudential Regulation Authority (PRA), it said. The Financial Conduct Authority (FCA) already has a statutory objective to promote competition "in the interests of consumers".