New criminal offence for senior bankers is a 'paper tiger'

New rules to improve individual accountability and professional standards in the banking sector have been described as ineffectual.

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have collaborated to make it easier to hold senior managers to account for mistakes made in their area of responsibility.

A new criminal offence has been created that could see bankers face prison for making decisions that result in a bank collapsing.

Commenting on the new law, the Chancellor, George Osborne, said: 'The new criminal offence, which becomes law today, is the latest milestone in my plan to ensure that the British banking industry operates to the highest possible standard.'

Osborne believes the strict new rules proved that the government had 'learnt from the lessons of the past' and that 'it was absolutely right that senior manager whose actions causes their bank to fails should face jail'.

However, Elly Proudlock, counsel in WilmerHale's UK investigations and criminal litigation team, said the new criminal offence is unlikely to be prosecuted.

'Not only is liability severely limited by the required mental element, in that the senior manager must have been aware at the time that the relevant decision may cause the institution's failure, but the relevant threshold - the failure of the institution - is very high.

'Causation will also be a substantial hurdle to overcome - it is difficult to imagine many cases, if any, where it will be possible to prove that the implementation of a single decision has caused the failure of an institution,' she said.

Louise Hodges, a criminal litigation partner at Kingsley Napley, echoed Proudlock's thoughts and labelled the new law a 'paper tiger'.

New regimes

In a further change, staff with high responsibility can be held accountable under the senior managers regime (SMR) if they are found to have committed serious misconduct (senior management functions (SMFs)).

Although individuals would be pre-approved by regulators, firms must have procedures in place to assess their fitness and propriety before applying for approval and each year thereafter.

Businesses should also set out statements of responsibilities for individuals carrying out SMFs.

Meanwhile, individuals considered to be 'material risk-takers' will be held to appropriate standards of conduct, including investment bankers or other senior staff who could pose a risk of significant harm to the firm or any of its customers.

While certification regime (CR) staff will not be pre-approved by regulators, firms must put procedures in place for assessing their fitness and propriety for which they will be accountable to the regulators.

SMR or CR individuals will also be subject to conduct rules set out by the firm outlining basic standards of behaviour to be met.

Firms have been given a year after commencing the new regime to prepare for the wider application of the conduct rules to other staff.

Julie Matheson, a regulatory partner at Kingsley Napley, believes the new rules represent one of the biggest regulatory changes for the financial industry since the 2008 financial crisis.

'Not only will firms need to invest to ensure they meet their new responsibility to assess fitness and propriety, they will also need to be flexible and reactive to change, updating responsibilities maps regularly in order to ensure that no responsibilities are left uncovered,' she said.

However, putting the onus on institutions to assess fitness and propriety could cause issues, added Matheson.

'One firm's consideration of what meets this standard may differ to another's; this will always be a matter of judgement for the senior managers involved in assessing issues raised.

'The FCA will need to keep a watchful eye to avoid a divergence of approaches and a lack of consistency across the sector.'

Adrian Crawford, an employment partner at Kingsley Napley, said responsibility maps should already be a priority for firms.

'We have been surprised more senior managers have not taken advice on banks' statement of responsibility maps a month ago. These will be used to pin blame on individuals where an issue occurs in their area of responsibility.'

Last year the government reneged on an initial plan to place the burden of proof on bankers to prove their innocence. Despite the burden of proof falling on the FCA, Crawford said bankers will remain on their guard.

'More senior managers might have been held to account for Libor, for example, if the senior managers regime had existed in recent years,' he said.

'The message is very clear that despite the removal of the "presumption of responsibility", those with important functions in banks will be expected to carry the can.'

Proudlock, added: 'Although the burden rightly remains on the FCA to prove its case, since these are non-criminal proceedings it only has to do so on the balance of probabilities.

'This means that, in reality, most individuals subject to enforcement action will want to put a positive case forward rather than simply put the FCA to proof.'

The new rules come after changes set out in the Banking Reform Act 2013, based on a parliamentary commission report setting out recommendations to improve professional standards in the industry.

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