UK: Making Bankers Accountable

Last Updated: 3 March 2014
Article by David N. Kirk

Section 7 of the Bribery Act 2010 has not yet been deployed in anger.  This is the section that makes it an offence for a commercial organization to fail to prevent bribery.  It remains to be seen how often the section is used.  A similar provision in the Money Laundering Regulations (reg. 45) has never been used, and that provision has been in place since 1993. Under section 7 of the 2010 Act, only a commercial organization can be prosecuted.  Senior managers can be prosecuted under reg. 45.

Attempting therefore to legislate against firms and individuals that make bad calls, or fail to prevent bad conduct in their organisations, is an uphill struggle. Recent events have, however, demonstrated that law enforcement is keen to make the attempt.

The Financial Services (Banking Reform) Act 2013 received royal assent in December.   Part 4of the Act relates to 'Conduct of Persons Working in Financial Services Sector'.  It includes, in section 36, a new criminal offence 'relating to a decision causing a financial institution to fail.'  A person commits an offence if, at a time when he is a senior manager of a financial institution he either (a) takes, or agrees to the taking of a decision by the bank as to the way in which its business is to be carried on, or (b) fails to stop such a decision being taken; and at the time the decision is made, he is aware of a risk that the implementation of the decision may cause the failure of the bank; and in all the circumstances, his conduct in relation to taking the decision falls far below what could reasonably be expected of a person in his position (i.e. a very senior position); and the implementation causes the failure of the bank. By section 38, this offence can only be prosecuted by the FCA or the PRA or the Secretary of State; or by or with the consent of the DPP.

The offence was prompted by one of the recommendations of the Parliamentary Commission of Banking Standards.  The PCBS had been set up in the wake of a number of banking 'scandals' which had emerged from the global financial crisis, including the Libor affair.  It remains to be seen whether it is a particularly useful addition to the statute book.  After much debate between politicians, Treasury and regulators, although the problems were recognized, it was included in the Act in order to show that show that some action was being taken to make it easier to bring bankers to account, and at the same time to deter those senior banking figures who might be tempted to take large risks with other peoples' money in future.

At almost the same time, the Director of the Serious Fraud Office, David Green CB QC, has proposed that a form of section 7 Bribery Act offence should be made available for all forms of corporate misconduct.  So, for example, if such an offence had been in place, the banks which permitted, knowingly or otherwise, the alleged excesses of their traders and submitters in Libor submissions, would find themselves criminally liable.

Both regulators and prosecutors have serious ambitions to bring proceedings against bankers whose reckless or negligent conduct brings a high risk of banking collapse, or serious detriment, or reputational damage, and consequent damage to the national economy.  The bricks were already in place in the regulatory rule book to allow the Financial Conduct Authority to fine and prohibit those found in breach of the high level principles for business, and the more detailed rules and guidance.  However, even these have proved difficult to litigate successfully against approved persons at any senior level within financial institutions in regulatory proceedings.  Fixing senior persons with a criminal liability for the failings of their financial institutions has so far not even been tried. 

However, while the section 36 offence will only come into focus when a large financial institution has failed because of a bad decision at senior level, and we must therefore probably wait until another downward lurch in the economy for all the elements of the offence to be evident, we can, nevertheless, expect the authorities to take any available opportunity to investigate misconduct at senior levels, and to ensure that the blame for poor ethical standards, and for lack of proper systems and controls, lies at board level. More clarity will be required about where the true responsibility for decisions lies, and it will therefore, in theory at least, be possible to identify those truly accountable for risky misjudgements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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