The FCA was criticised earlier this year for going soft on the banking industry after dropping a probe into banking culture and accusations that it is increasingly acting at the behest of the Treasury. The regulator would no doubt counter, however, that 2016 heralds a step-change in its regulatory approach to the UK banking sector.
Most obviously, the Senior Managers and Certification regimes come into effect today. But arguably less media attention has been devoted to the new criminal offence also now effective. Section 36 of the Financial Services (Banking Reform) Act 2013 creates a criminal offence of taking a management decision that results in the failure of certain types of financial institution, including UK banks and building societies. The maximum custodial sentence for an individual found guilty of the new offence is imprisonment for seven years or a fine (or both).
This has been introduced because, after the 2007-08 financial crisis, a consensus view formed that senior bankers had escaped personal responsibility for bank failures. The Parliamentary Commission on Banking Standards (PCBS) in its June 2013 final report, Changing Banking for Good, recommended a new criminal offence for bankers who behave irresponsibly.
The problem for many lawyers like me is that Section 36 is likely to be a damp squib and the risk of successful prosecution is remote. Indeed, the PCBS conceded in its final report that it would not be easy to secure convictions for the offence, but felt that it ought to be created to “give pause for thought to the senior officers of UK banks”. There are two main reasons to be sceptical about the efficacy of the new offence.
First, there is the matter of causation. In establishing liability, the senior manager’s conduct must cause or result in a specified consequence – i.e. bank failure. In any prosecution, establishing that the decision or act of a manager caused the failure of a bank will be difficult. Banks are complicated and large organisations, and a bank failure will arise for a variety of reasons. Indeed, determining these reasons after the event is a regular source of controversy. Establishing causation in fact and in law might prove insurmountable.
Second, there are the likely difficulties in proving that the senior manager was aware of the risk that the implementation of a decision may lead to bank failure, and also that in all the circumstances his or her conduct fell “far below what could reasonably be expected of a person in their position”. The concept of “reasonableness” will depend on the circumstances. In the context of an imminent bank failure, a senior manager is likely to need to take quick and difficult decisions under pressure. This will complicate proving the necessary mental element of the offence.
So Section 36 may prove to be a paper tiger, enacted more for symbolic than actual punitive effect. That said, senior managers and financial institutions should nevertheless be alert to it, make sure that record keeping procedures about decision-making are sound (since an investigation could come some time after any apparently culpable decision was taken), and should be prepared if necessary to defend themselves from prosecution. Maybe, if it gives the anticipated pause for thought to the senior officers of UK banks, Section 36 will do a job of sorts.