Reckless misconduct is a headline grabbing novelty

August 2013  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

August 2013 Issue

August 2013 Issue


The Parliamentary Commission on Banking Standards report titled ‘Changing banking for good’ was released on 19 June 2013. It has been suggested that its aim is not to bring about whitewash regulatory changes but to tackle the underlying culture of the UK banking system; to address the “underlying causes of poor standards and culture” (Paragraph 32, Volume 1).

The Report states that this can be achieved through a wholesale revision of the way banks are managed, with a particular focus on greater transparency, greater regulatory and governmental oversight and perhaps most significantly, greater personal responsibility. One much trumpeted recommendation, intended to kick-start a new paradigm of individual responsibility in the banking sector, is the creation of a new criminal offence for ‘reckless misconduct in the management of a bank’. 

The financial and economic implications of such an offence have been much discussed and invoke the standard dichotomy between the need for greater control over banking on the one hand, versus the need for the City of London to remain a competitive global financial centre on the other. Indeed, the Report itself is very much framed within this debate. 

However, in relation to the ‘reckless misconduct’ offence, it is the likely legal complications which may prove insurmountable, regardless of the wider policy debate. There are a number of issues with the offence which are likely to prevent its development into statute. Even were the offence to someday become law, there are practical difficulties which would then need to be overcome for any future prosecution to succeed. 

The offence itself is clearly at an inchoate stage of development, with the Commission merely stating that there is “a strong case in principle” (Paragraph 243, Volume 1) for such an offence. However, even at this early stage an immediately obvious issue is its ambiguity, particularly given the nature of the industry it relates to. Critically, how is ‘reckless misconduct’ to be considered by a jury? And against what frame of reference should they compare the conduct which is said to be reckless? 

Investment banking is a world unto itself, fraught with complexity and risk, where fierce competition forces managers, traders and even CEOs frequently to make snap judgments with potentially huge consequences. Short of fundamentally changing the nature of investment banking (which would only have the effect of pushing risk further into the harder to regulate shadow banking and offshore industries) it is therefore very hard to see what will be deemed ‘reckless misconduct’ as opposed to reasonable action, at least until the results of such decisions become manifest. 

The parliamentary committee does appear to have foreseen this initial issue – and its solution seems to be that the offence will only be triggered in hindsight, i.e., if things go badly wrong. Andrew Tyrie, the chairman of the Committee, made this point clearly in an interview with the BBC: “remember that this can only be triggered – the reckless misconduct investigation – when there has been taxpayer support for a bank”. Clearly this would then make it much easier to determine what amounts to ‘reckless misconduct’ – it would, first and foremost, be behaviour which had caused a loss so large as to require taxpayer support in order to remedy it. 

However, all laws regardless of their context must provide some degree of certainty to potential offenders as the circumstances in which their conduct might be defined as criminal. Trial by hindsight, apparently being suggested by Mr Tyrie, offends this basic principle. Essentially it is the conduct involved in any action which must frame the consideration of criminality; not the consequences flowing from that action. 

This point is obvious in the context of the proposed offence, as on the basis of its current framing the same actions will either be capable of amounting to a criminal offence, if they require a taxpayer bailout, or would not qualify if no bailout takes place. Not only does that situation smack of injustice and seemingly amount to nothing more than a mollifying of the general public through a veneer of accountability, but more importantly it would create a highly invidious banking culture in exact contrast to the one the committee wants to inculcate. 

This is because the offence includes a universal escape route, available even to the most egregious offenders (and indeed, most likely to be used by them), to simply cover up the mess and, if necessary, let the bank collapse – because as long as taxpayer funds are not involved, the offence is not triggered. Less dramatically, the offence would undermine the very culture of transparency and improved reporting that the Report advocates as essential, as it would in effect drive a wedge between regulators and senior bank employees, driving them further apart and impacting adversely on the ability of government to guide and improve the industry through collaboration and open discussion. 

In short it provides a serious disincentive for bank managers to act in the public interest by inviting the authorities to provide assistance to prevent instability in the institution itself and potentially the banking system as a whole. In this sense, the proposed offence might prove counterproductive to the stated aim of the commission. 

The above holds true despite the various additional recommendations in the Report, aimed at increasing the power of regulators to oversee bank activity through a revised regulatory structure combining more specific objectives, greater accountability and additional responsibilities. This is because in reality, regardless of these changes, a lot will still depend on the cooperation of the big banks. This is particularly so given the prevalence of deregulated offshore finance in the current economic system, the complexity of financial derivatives and the huge sprawling infrastructure of major global banks.

In the event that the proposed offence did, despite the issues discussed, become law, prosecution under it would likely be fraught with difficulty. This is something the Report does broach, stating: “all concerned should be under no illusions about the difficulties of securing a conviction for such a new offence” (Paragraph 243, Volume 1).  

Such difficulties lie in the fact that the collapse of large financial institutions, at which the offence is explicitly aimed, are invariably the result of endemic system failures. And furthermore, each bank itself is permeated with layers of command, risk managers, financial officers and so on. Therefore, prosecuting any one individual within such a system, even allowing for the substantial success of the Report in increasing personal accountability and regulatory oversight, would prove incredibly difficult. 

Another practical problem concerns the strictures that a criminal process would place upon the civil aspects of any collapse, something which again the Committee has appreciated: “public disclosure of failings might be greatly limited until the criminal case is finished” (Paragraph 246, Volume 1). However, it provides only a cursory consideration of how this problem could be dealt with. 

Prompt civil investigation and resolution of banking failures is a vital ingredient of any healthy financial culture; and the introduction of a banking-specific criminal offence would have several inevitable and detrimental effects upon the civil process. 

Firstly it would severely impact on the willingness of individual employees to assist in civil enquiries for fear of subsequent criminal prosecution, greatly impeding the efficacy of any such enquiry. 

Secondly it would create a conflict between the rights of the criminal suspect to a fair trial, and the demands of society at large to a prompt and full resolution of the banking failure. This would create an untenable position sure to cause huge difficulties in both the civil and criminal processes. 

The Commission’s Report is to be commended as perhaps the best attempt to date to tackle the all consuming, pervasive culture of quarterly profits, fierce internecine competition and ever increasing opacity that has come to characterise global banking in recent years. Indeed, the Report’s principle distinguishing feature is its recognition of the importance of banking culture, as the underlying force behind all that is good and bad in big finance. The proposed new offence is, however, not the way forward.

 

Richard Cannon is a partner and Henry Campbell-Smith is an associate solicitor at Janes Solicitors. Mr Cannon can be contacted on +44 (0)20 7930 5100 or by email: rcannon@janes-solicitors.co.uk.

© Financier Worldwide


BY

Richard Cannon and Henry Campbell-Smith

Janes Solicitors


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