Criminal Sanctions for Reckless Bankers

19th April 2016 Business Crime

The Financial Services (Banking Reform) Act 2013 ('the Act') received Royal Assent on 18th December 2013 and the provisions of the Act continue to be progressively implemented. The scope of the Act seeks to amend the provisions of the Financial Services and Markets Act 2000 and put into place the recommendations of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards. The Act has and will continue to significantly reform the regulation of UK financial services.

March 2016 saw the implementation of Sections 36 38 of the Act come into force, which create a new criminal offence of reckless misconduct on the part of senior managers in UK banks and building societies, if their actions result in the collapse of an institution. This offence was created out of the recommendations put forward by the Parliamentary Commission on Banking Standards in a bid to increase accountability for those in positions of power and consequently restore trust in the UK banking system.

When will an offence be committed?

An offence will be committed by a senior manager if the following circumstances are satisfied:-

  1. He takes a decision or fails to prevent a decision being taken relating to the carrying on of the financial institution which causes the financial institution to fail; and
  2. When making the decision, or failing to prevent a decision being taken, he was aware of the risk that the decision could cause the institution to fail; and
  3. In all the circumstances, his conduct in relation to the decision fell far below what could reasonably be expected of a person in his position.

Who will be liable to commit an offence?

An offence will only be committed if the individual making the decision is a 'senior manager' within the scope of the 'Senior Managers and Certification Regime'. A person will be a senior manager for the purposes of the offence if he performs a senior management function under an arrangement with the financial institution. A senior management function could include for example a Chief Executive function, a Chairman function or a Compliance Oversight function.

It is important to note that the offence may only be committed by an individual and does not apply to corporate bodies. The offence therefore seeks to reach the individuals directly responsible for the collapse of the institution in order to ensure direct accountability.

What are the sanctions if an offence is committed?

A person found guilty of an offence under Section 36 of the Act will face up to 7 years' imprisonment or an unlimited fine, or both. The sanctions for a breach of the Act are therefore significant and will no doubt go some way towards deterring those in senior positions from reckless decision making during the course of their management.

Who can bring proceedings?

Proceedings in respect of a breach of Section 36 of the Act can be brought by the Financial Conduct Authority, the Prudential Regulation Authority, the Secretary of State or the Director for Public Prosecutions.

Regulators have discretion in determining whether or not to bring proceedings against a senior manager for reckless misconduct and will do so if it appears appropriate in all the circumstances.

As with all new legislation, it will be important to observe the way in which the Judiciary interpret and enforce the provisions of the Act in due course. Developing case law will provide a clearer view of the likely sanctions that senior managers can expect to face if found guilty of an offence.

If you have any queries in respect of the new offence of reckless misconduct resulting in the failure of an institution as created by Section 36 of the Act, please do contact us.

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Evan Wright is a Partner located in Manchester in our Business Crime & Regulation department

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