News of the imminent resignations of two HSBC board members has focussed attention once again on the tough stance adopted by the UK’s financial regulators, the FCA and the PRA. Alan Thomson and John Trueman are said to have been particularly concerned about the new criminal offence of “reckless management of a bank”, created by section 36 of the Financial Services (Banking Reform) Act 2013. The maximum sentence following conviction is seven years imprisonment, similar to other criminal offences of comparable gravity in the context of financial services (such as manipulating benchmarks).
Clearly, momentum – backed by political and public support – currently lies with those in favour of a bullish regulatory approach, but there is real concern within the industry that experienced and highly competent individuals will be reluctant to take up senior management positions which now carry the risk of personal criminal liability.
To give it its proper title, the “offence relating to a decision causing a financial institution to fail” can be committed only by “a senior manager” (as defined by the FCA or PRA under FSMA 2000) of “a relevant financial institution” (essentially, a UK incorporated bank or building society or a PRA-regulated UK investment firm) in respect of a management decision. The offence requires the senior manager to have been aware of a risk that implementing the decision may cause the failure of the bank. Further, the conduct must fall far below the standard that could reasonably be expected of a person in that position. The City is troubled by the FCA’s position that both executive and non-executive board members are “senior managers” for the purposes of section 36.
But just how effective is the new offence likely to prove in deterring misconduct? Certainly it has ruffled the feathers of the financial industry, though this may in time prove to be counter-productive. Professors Julia Black and David Kershaw of the LSA School of Law identify four factors which determine deterrence: the ease of detection; the cost of enforcement; the prospect of successful enforcement; and the effectiveness of any sanction.
The first two are largely resource-dependent, and while the government currently shows willingness to extend regulatory budgets there remains significant asymmetry between the resources available to the regulators and to the regulated bodies . Successful enforcement, even on a reckless standard (the original Treasury consultation mooted strict liability and negligence standards), relies on identifying an individual to be held liable. Any defendant would likely point to the presence of risk management procedures, and would argue that risk-taking is an inherent, rational and desirable aspect of a senior manager’s role. Even in the event of a successful prosecution, it is hard to envisage sentences at the top end of the available range being imposed. And of course a prerequisite for any investigation even to start is that an institution has to “fail” – an extreme and thankfully rare event .
The chairman of the Treasury Committee, Andrew Tyrie MP, has responded to Thomson and Trueman’s resignations by saying: “The crisis showed that there must be much greater individual responsibility in banking. A buck that does not stop with an individual often stops nowhere.” The public doubtless approves, but this approach also carries a number of risks: a dilution of quality at the highest levels, an encouragement of an overly-cautious and risk-averse culture, a risk of “pushback” in other areas from resentful banks and competitive damage to the UK (neither the US nor Europe has an equivalent offence) for one of the UK’s key industry sectors. Public approval will wane if the offence is not perceived to be effective and, more generally, an economic upturn may herald the return of “light touch” regulation with the influence of the regulator diminished accordingly.