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  • Apr 18, 2014
  • Updated: 1:54am
BusinessBanking & Finance

Britain says reckless bankers could face jail

Many people in Britain blame bankers’ risk-taking for the 2008 financial crisis and subsequent economic slump

PUBLISHED : Thursday, 20 June, 2013, 10:40am
UPDATED : Thursday, 20 June, 2013, 10:56am

Bankers who are reckless with customers’ or taxpayers’ money could face criminal charges and have bonuses and pensions clawed back, according to proposals backed by Britain’s prime minister on Wednesday.

Many Britons blame bankers’ risk-taking for the 2008 financial crisis and subsequent economic slump and were furious when the former boss of RBS left the bank with a pension of almost 17 million pounds (HK$206 million) even after a state rescue.

He later agreed to a cut and was stripped of his knighthood but it was one in a series of banking scandals that increased pressure on Prime Minister David Cameron to get tougher on a sector contributing billions of pounds to the British economy.

The parliamentary commission on banking standards he set up last year after Barclays was fined for manipulating interest rate benchmarks said on Wednesday the law should be changed so that bankers found guilty of “reckless misconduct in the management of a bank” could face jail.

The UK Treasury said the new rules could be in place before the end of 2015 but lawyers said it would be hard to prove when a banker had taken too much risk or simply made a mistake.

Asked in parliament whether he supported the report’s recommendations on criminal penalties and pay, Cameron said: “Penalising, including criminal penalties ... bankers who behave irresponsibly, I say yes.”

Lawyers doubted that new laws would be effective.

Senior bankers who seriously damage their banks or put taxpayers’ money at risk can expect to be fined, banned from the industry, or, in the worst cases, go to jail
Andrew Tyrie, PCBS chairman

“There is likely to be a considerable burden of proof - merely miscalculating or being negligent in an assessment of risk most likely won’t be enough,” said Michael Isaacs, head of banking litigation at law firm Pinsent Masons.

The commission also recommended a new pay code to better balance risk and reward, with bonuses deferred for up to ten years with the aim of preventing bankers taking risks for short term reward, one of the factors blamed for the crisis.

It also proposed that the UK financial regulator would be granted a new power enabling it to cancel all bonuses and pension rights not yet paid out to senior executives in the event of their banks needing taxpayer support.

Banking industry sources said banks were likely to accept many of the proposals in principle, including the threat of criminal sanctions, but will lobby for some to be watered down, including the 10-year deferral on bonuses.

“The commission’s conclusions contain many constructive proposals to help fix the issues which have afflicted the industry, most importantly in the emphasis on personal responsibility and accountability,” said HSBC Chairman Douglas Flint.

The cross-party commission, which includes former British finance minister Nigel Lawson and Justin Welby, head of the Anglican church, recommended senior bankers are held personally responsible and regulators granted greater powers.

Commission member Pat McFadden said it would be “pressing the government very hard in the coming weeks” to make sure the proposals are implemented. The government has set itself a four week deadline to give a formal response.

“I think all of us who were engaged in this process over the last year very much hope this is not a report which is going to gather dust,” he told Reuters.

I think jail sentences would be suitable. It’s fraud a lot of what they’ve done
Ben Stewart, a 34-year-old cabinet maker

The British Bankers Association, a lobby group, said it would work with government and regulators to take forward proposals from what it described as the “most significant report into banking for a generation”.

Bankers are deeply unpopular in Britain where the economy has narrowly avoided a triple-dip recession and is expected to show tepid growth at best through next year.

“I think jail sentences would be suitable,” Ben Stewart, a 34-year-old cabinet maker said in Whitechapel, not far from the City of London, the traditional financial heartland.

“It’s fraud a lot of what they’ve done. Even if it’s not legally fraud, I think by most people’s moral compass, they’d find it quite distasteful.”

The commission recommended the industry adopt two new registers for senior bankers and other employees to make sure the most important responsibilities within banks were assigned to specific individuals.

The ‘Senior Persons Regime’ would enable those responsible for failures to be identified more easily and provide a stronger basis for action to be taken against them, the report said.

The Financial Conduct Authority, the financial services industry watchdog which took over regulation of banks in April, said it was “learning from the regulatory mistakes of the past”.

The commission also urged the government to immediately consider a range of strategies for RBS, which is 81 per cent state-owned, including a possible break-up.

Some commission members, including Lawson, have advocated hiving off RBS’s toxic loans into a ‘bad bank’ leaving the remaining ‘good bank’ better able to lend to British businesses and households. But Finance Minister George Osborne said such a move would be complicated, time consuming and costly.

The report said the government had interfered in the running of RBS and Lloyds Banking Group, in which it holds a 39 per cent stake, and said RBS was being held back by having the government as its main shareholder.

The level of the government’s influence over RBS has come under scrutiny since Chief Executive Stephen Hester was ousted last week with the Treasury’s approval.

Osborne is set to lay out strategies for returning RBS and Lloyds Banking Group to full private ownership in his annual speech to financiers in the City of London on Wednesday.

The Parliamentary Commission on Banking Standards, tasked with improving standards in banking, said recent scandals had exposed “shocking and widespread malpractice” in the industry and made the following proposals:

 

JAIL TIME?

The commission recommends a new criminal offence of “reckless misconduct in the management of a bank” which would carry a jail sentence for the most serious cases.

“Senior bankers who seriously damage their banks or put taxpayers’ money at risk can expect to be fined, banned from the industry, or, in the worst cases, go to jail,” said Andrew Tyrie, chairman of the PCBS.

Following any conviction, pay received by an individual during the period of reckless behaviour should be recoverable through civil proceedings.

 

PAY AND PENSIONS

The commission recommended that the industry adopt a new remuneration code to better balance risk and reward with more pay deferred over longer periods of time.

The regulator would be granted a new power enabling it to cancel all bonuses and pension rights not yet paid out to senior executives in the event of their banks needing taxpayer support.

Bonuses should be deferred for up to 10 years and there should be more use of instruments like bail-in bonds.

The report says there are advantages to a significant part of pay being variable rather than fixed. “We are not convinced that a crude bonus cap is the right instrument for controlling pay,” the report said, putting it on a collision course with the EU’s plan for a bonus cap.

 

REGISTER

A new approval process is needed for senior bankers and there should be another licensing regime for a broader set of bank staff. The report said the new system would ensure the most important responsibilities within banks were assigned to specific individuals and ensure higher standards.

 

OTHER PROPOSALS

Promoting competition should be an objective of the new Prudential Regulation Authority.

Bank chairmen should be full time.

The Competition and Markets Authority should immediately start a study of competition in the retail and small business banking sectors to be completed by the end of 2015.

The government should carry out a technical feasibility study for a common utility platform to be used by all banks, to make it easier to switch accounts and boost competition.

RBS SPLIT?

The government should immediately consider strategies for its 81 per cent stake in RBS, including hiving off its toxic loans into a ‘bad bank’ leaving the remaining ‘good bank’ better able to lend to businesses and households.

A feasibility study should report by September.

“The current strategy for returning RBS to the private sector has been allowed to run for five years. Progress has been made but it is time to look at this afresh,” the report said.

GOVERNMENT INTERFERENCE AND UKFI

UK Financial Investments, which looks after the UK’s stake in banks, should be scrapped and reversed into the Treasury.

The government had interfered in the running of RBS and Lloyds, in which it holds a 39 per cent stake.

“Whatever the degree of interference, UKFI will increasingly be perceived as a fig leaf to disguise the reality of direct Government control,” the report said.

The level of the government’s influence over RBS has come under scrutiny since Chief Executive Stephen Hester was ousted last week with the Treasury’s approval.

 

LLOYDS OK

The Commission said Lloyds has suffered far less than RBS from the effect of public ownership and political interference and appeared better placed to return to the private sector without more restructuring.

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