Out-Law News | 13 Oct 2014 | 4:52 pm | 2 min. read
Financial enforcement expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the comments made by Mark Carney at an event hosted by the International Monetary Fund (IMF) illustrated the "desire at a political and regulatory level to be able to take action against senior management" should conduct following the 2008 financial crisis be repeated.
However, Ruck said that the new rules' "clear statement of intent" could discourage the best candidates from senior management roles in leading banks, or result in further 'leakage' of experienced staff as reported by Deutsche Bank's co-head of investment banking in a recent interview with the Financial Times (registration required).
"The Banking Reform Act criminalises senior management involved in a decision, or that fail to be involved in a decision, which leads to the failure of their financial institution," Ruck said. "The Prudential Regulation Authority (PRA) is further proposing that bonuses could be deferred for seven years and subject to clawback for 10 years, and it appears to be only a matter of time before these proposals are enacted - giving a clear message to the rest of the financial services industry that similar provisions will be made applicable to the wider industry."
"Whilst it is clear that the regulators do not intend to back down on this, the danger of the same regulators applying new information and hindsight when considering the actions of senior management may well lead to more highly-experienced board members resigning their positions. Only time will tell if financial institutions will be able to recruit senior management when they are faced with the increased likelihood of criminal prosecution for any mistakes," he said.
The 2013 Financial Services (Banking Reform) Act will introduce major reforms to the structure and professional standards of the UK banking sector, including the retail and investment banking 'ring fence' first proposed by the Independent Commission on Banking in 2011. The new criminal offence of reckless misconduct that leads to bank failure is set out in section 36 of the Act, and was first proposed by the Parliamentary Commission on Banking Standards in its review of banking professional culture and standards.
Banking regulator the PRA plans to introduce a new regulatory regime for 'senior persons', as well as new remuneration rules designed to increase the alignment between risk and reward over the longer term, on 1 January 2015. The new regime would require regulated firms to defer payment of bonuses for a minimum of five or seven years depending on seniority, and would allow them to claw back variable pay for seven years from the date of the award if risk management or conduct failings come to light at a later date. A consultation on the proposed new rules closes at the end of this month.
Speaking at the IMF's annual meeting, Bank of England governor Mark Carney said that new remuneration measures were not enough to prevent risky behaviour alone.
"If you're chair of an audit committee, you have responsibility for the activities of an institution," he said. "And if you don't think you can discharge that responsibility, you shouldn't be on that board."
"One of the legacies of the crisis in the US and by and large in the UK was that the individuals who ran the institutions got away. They got away with their compensation packages, they got away without sanction. Maybe they were not at the best tables in society after that, but they're still at the best golf courses. That has to change," he said.