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Parliamentary Commission on Banking Standards (PCBS): changing banking for good

 

15 July 2013

Contributed by Bob Penn

In June 2012, as a result of the LIBOR scandal, the UK Chancellor of the Exchequer (the Chancellor) established the PCBS in order to conduct an inquiry into the professional standards and culture within the UK banking sector and make recommendations for legislative and other actions.

Over the course of 11 months, the PCBS held 40 public sessions, received copious amounts of written evidence and published five reports totalling almost 1,500 pages. The fifth and final report was published on 19 June 2013 (the Report) and totals almost 600 pages. For UK banks (and in particular their senior management), the Report makes harrowing reading: it makes recommendations on a diverse range of topics including competition, individual responsibility and accountability, bank governance, remuneration, regulatory approach, sanctions on those working within the industry and the direction of the future of the partly nationalised UK banks. These recommendations are likely to stimulate yet more (and tougher) UK regulations, and in a number of respects go well beyond international and European standards.

A number of recommendations made by the PCBS cover topics that are already being considered at a European and global level: –– unconvinced by the work of the Basel Committee on Banking Supervision, the PCBS does not believe that Basel III will address the weaknesses identified with Basel II by the financial crisis. The Report therefore recommends that the Bank of England reports on how Basel III addresses those weaknesses. In addition, the PCBS takes a contrary view on the approach to leverage, calling for a substantially higher ratio to the 3% minimum proposed under Basel III.

–– despite the intense negotiations regarding bankers’ remuneration as part of the Capital Requirements Directive IV (CRD IV) discussions within Europe, the PCBS has recommended that: (i) deferral periods be increased up to ten years where they are necessary for effective long-term risk management; (ii) that bonuses should be cancelled where banks are bailed out; and (iii) all staff that could “cause serious harm to the bank” be required to receive an element of variable remuneration that is subject to deferral.

–– although CRD IV will require national regulators to inform the European Banking Authority (EBA) of sanctions imposed under certain articles of that Directive and the EBA is empowered to provide access to a combined register on a confidential basis to other national regulators, the PCBS considered that, without U.S. involvement, the benefit of sharing this information would be negligible and, as a result, called for the global sharing of information relating to the application of sanctions on individual bankers.

–– the PCBS also considered bank governance and how the role of board members can improve standards and culture. Rather than building upon the corporate governance requirements in CRD IV, the recommendations appear unable to distinguish between the duties that directors owe to shareholders, as compared to those owed to the wider community.

Of particular concern are the reforms that the PCBS has called for on how responsibility is attributed to senior managers within banks and the circumstances in which they will be held liable for perceived failings. As well as recommending that the burden of proof be reversed in certain prescribed circumstances, the PCBS also recommends the introduction of a new criminal offence of serious managerial misconduct in the management of a bank.

Combined with the proposed changes to remuneration, the proposed senior management changes raise questions both about the willingness of talented individuals to perform senior management roles within UK banks in the future, and also the behavioural impact of greater liability on the discharge of senior managerial roles. It is hard to move forward while looking over one’s shoulder.

During his Mansion House speech, the UK Chancellor confirmed that he would respond in more detail in July but that if legislation was needed, the Financial Services (Banking Reform) Bill currently before Parliament will be amended to ensure a speedy enactment of the recommendations. We can only hope that this will draw a line under the UK policymakers’ efforts to re-regulate the sector.

 

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