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Impact of the Banking Reform Bill on Senior Managers

 

01 October 2013

On 1 October 2013, details of the proposed amendments to the UK Financial Services (Banking Reform) Bill 2013-14 (the Banking Reform Bill) were published by UK HM Treasury.

The published amendments to the Banking Reform Bill are intended to, among other things, implement some of the recommendations given by the Parliamentary Commission on Banking Standards (PCBS). The following sets out some of the key amendments:

Reckless misconduct in the management of a bank

The PCBS’s final report (published 19 June 2013) recommended the implementation of a new criminal offence of reckless misconduct in the management of a bank and this has now been covered by the amendments. The offence will cover banks and building societies but not credit unions and will be applicable only to individuals covered by the new Senior Managers Regime.

A senior manager will commit an offence if he:

(a) takes, or agrees to the taking of, a decision by or on behalf of [the bank] as to the way in which the business of a group bank is to be carried on, or fails to take steps that [he] could take to prevent such a decision being taken;

(b) at the time of the decision, [he] is aware of a risk that the implementation of the decision may cause the failure of the group bank;

(c) in all the circumstances, [his] conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in [his] position; and

(d) the implementation of the decision causes the failure of the group bank.

The proposed clauses are intended to “strengthen individual accountability for senior bankers, and act as a deterrent against misconduct” and the offence carries a maximum sentence of seven years in prison and/or an unlimited fine. In order for the offence to apply, the senior manager’s behaviour has to fall “far below” the standard reasonably expected of a person in that position. This is a similar test to that used for corporate manslaughter and should ensure that the offence only applies in cases involving “the most serious of failings, such as where a bank failed with substantial costs to the taxpayer, lasting consequences for the financial system, or serious harm to customers”.

Senior managers and banking standards

In its final report, the PCBS also recommended the implementation of a new framework comprising a senior persons regime, a licensing regime and banking standards rules in place of the existing approved persons regime under FSMA. The amendments to the Banking Reform Bill will make the following changes so as to implement some of the PCBS recommendations:

–– a “reversal of the burden of proof ” to ensure that senior managers in building societies, banks and credit unions can be “held to account for contraventions of regulatory requirements in their areas of responsibility unless they can demonstrate they took all reasonable steps to prevent the contravention occurring or continuing”;

–– the ability to bring: (i) disciplinary proceedings for breaches of conduct standards; or (ii) regulatory enforcement action for breaches of the rules or for being knowingly concerned in a breach of regulatory requirements by the bank, building society or credit union, against employees of banks, building societies and credit unions even where the employee is not an approved person; and

–– an increase in the time limit for taking regulatory enforcement action against senior managers, other approved persons and employees from three years to six years.

Summary

These will clearly be substantive new powers for the FCA’s armoury and will be particularly important given the FCA’s continued drive to focus on individuals who hold senior positions in banks. Whilst the cases in which the FCA pursue the new criminal offence of reckless misconduct in the management of a bank may be rare, the additional amendments will cast the FCA’s enforcement net even wider.

The committee stage for the Banking Reform Bill in the House of Lords commenced on 8 October 2013.

 

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