The U.K.’s plan to jail “reckless” bankers and defer bonuses for as much as 10 years needs more than the enthusiastic support of Chancellor of the Exchequer George Osborne.
Prosecutors will struggle to prove criminality beyond a reasonable doubt and firms will still be able to decide for themselves how long bankers will be required to defer their bonuses, according to lawyers.
“Maybe it’s seen as like treason -- it’s right to have on the statute books, but it’s very unlikely we’ll see it prosecuted,” Carlos Conceicao, a regulatory lawyer at Clifford Chance LLP, said in reference to the prison plan. “No one’s going to say that treason shouldn’t be an offense, though.”
Jailing reckless bankers is part of a program of sweeping change proposed by the Parliamentary Commission on Banking Standards, a cross-party group of lawmakers set up last year by Osborne after a series of scandals and five years of poor returns for the financial industry. Critics said the plan was a populist gesture that would dent competition in London’s finance industry.
Osborne yesterday backed calls to defer part of bonuses for the highest earners at banks for up to a decade and said the government may introduce legislation later this year to criminalize managerial recklessness.
Rescues of Northern Rock Plc, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc undermined confidence in London’s finance industry. Lawmakers and regulators have targeted banker pay for incentivizing risk-taking and sought higher civil and criminal penalties to hold individuals accountable.
“Most people who’ve been thinking about it have been wracking their brain as to what circumstances would this offense be used, and trying to come up with historical examples,” Conceicao said. “None come to mind.”
Proposing that reckless bankers will go to jail “undoubtedly chimes with public opinion,” said Alistair Graham, a litigation lawyer at Mayer Brown LLP in London. It “will be incredibly difficult” to prove reckless misconduct in the management of a bank.
Nicholas Stretch, a lawyer at the law firm CMS Cameron McKenna LLP, said the 10-year deferral proposal for bonuses “is expected to be rarely implemented at this stage.”
The proposals are “misguided” and driven by “politics and populism rather than sound business reasons,” said John Purcell, chief executive officer of Purcell & Co., a London-based executive-search firm. “A three-year deferral period plus clawback is sufficient to engender the behavior changes required.”
British Bankers’ Association Chief Executive Officer Anthony Browne called the reforms “challenging” and said “there has already been a huge amount of change in the industry since the financial crisis.”
The U.K. markets regulator, the Financial Conduct Authority, has also rejected the proposal of a reckless management offense, saying that it doesn’t need the power to prosecute executives at banks that fail or take bailouts because such matters are unlikely to be criminal.
Bank failures are most often due to mismanagement rather than deliberate wrongdoing, the regulator said in February in a written response to questions from the parliamentary committee.
The FCA said it’s “not convinced” that bankers would act more cautiously in taking risk if the authority had the power to criminally prosecute them because the sanction would rarely be used.
The regulator, previously known as the Financial Services Authority, has only fined one banker over management failures since the finance crisis. The burden of proof is far lower in civil cases than in criminal prosecutions.
The fine was a 500,000-pound ($743,000) penalty against Peter Cummings, the former head of HBOS Plc’s corporate banking unit, over the aggressive expansion of corporate lending that led to its near-collapse. The regulator is also trying to give a 100,000 fine to Chris Willford, former group finance director at nationalized lender Bradford & Bingley Plc, for risk management failures. The penalty still faces legal challenges.