The Reckless Senior Banker by Peter Doyle QC
SECTION 36 FINANCIAL SERVICES (BANKING REFORM ACT) 2013
Take a good measure of banking scandal. Add an ample quantity of public outrage. Fold into the mix some political will-power and you get section 36 of the Financial Services (Banking Reform) Act 2013 which came into force on 7 March 2016.
On its face the bake appears to be worth the wait but whether it serves to bring reckless bankers to book remains to be seen. As they say “the proof of the pudding is in the eating”.
Served up is a new criminal offence targeted at senior managers or those performing a “senior management function” as defined, who bring down a financial institution through their reckless acts or omissions. In addition to the financial penalties, the price of guilt ranges from a maximum 12 months imprisonment in the magistrates court to 7 years in the crown court.
The ingredients of the offence require proof that a senor manager (i) took or agreed to take a decision on behalf of a financial institution as defined or (ii) failed to take steps that he could have taken to prevent such a decision from being taken and (iii) his proven conduct caused the failure of that financial institution or another in the same group.
It is essential to prove that (i) it was the act or omission for which the individual is being prosecuted that caused the failure and (ii) the individual must have been aware at the material time that the alleged acts or omissions may cause that failure.
The relevant financial institutions are UK institutions which have permission to carry on the regulated activity of accepting deposits (other than insurers and credit unions) and UK investment firms authorised by the Prudential Regulatory Authority. In other words banks, building societies and PRA-authorised investment firms.
What does fail mean? It is defined by section 37(9) and (10). A financial institution is to be regarded as failing where (i) it enters into insolvency or (ii) any of the stabilisation options in Part 1 of the Banking Act 2009 is achieved in relation to it or (iii) it is taken, for the purposes of the Financial Services Compensation Scheme, to be unable or likely to be unable to satisfy claims against it.
Insolvency includes bankruptcy, liquidation, bank insolvency, administration, bank administration, receivership, a composition with creditors or a scheme of arrangement of its affairs.
How bad must the act or omission be? The defendant’s behaviour must have fallen far below that which could reasonably be expected of a person performing the senior management function. Dishonesty is not required. However, incompetence or negligence will not suffice. Nothing short of recklessness will do.
For the first time senior managers will have personal criminal responsibility for any reckless decision-making on their part or their reckless failure to monitor such decisions taken by others.
So far so good but what are the challenges to a successful prosecution?
The hurdles are many. Start with causation. What does causing the failure of a financial institution mean? It will not be enough to prove that the decision in question significantly contributed to the failure- it must have caused it. In reality how many senior banking decisions are made by one senior manager? What of the decisions taken over time with the input of others – the collaborative or delegated decision? How do you prove who was responsible for the decision in question? Beyond the decision itself, what other factors if any may have contributed to the failure of the institution? How do you actually identify the decision and when it was made particularly if the investigation commences a long time after the decision was taken. What if at the material time the institution kept inadequate records of its major decisions? How does the investigator see his way through decision-making processes that lacked transparency? The list may prove endless.
The bankers say that lessons have already been learnt and the senior management mind is more focused than before on the need to take appropriate decisions in the interests of the institutions they manage as well as monitoring the decision-making process itself. It has taken over two years for the offence to come into force. In the interim, improved decision-making practices and the need for transparency have been high on the banking agenda.
Prosecuting is likely to prove an uphill if not thankless task. It seems unlikely that a prosecution will be mounted save in an exceptional case supported by unequivocal evidence.
Perhaps the politicians have calculated that it is the threat to prosecute and the serious consequences of a conviction that will, alongside other measures in place, suffice to keep the bad bankers at bay. We shall have to wait and see.
Peter Doyle 25 Bedford Row