Prison Prospect Makes U.K. Bank Boards Less Appealing

Wanted: senior managers with banking experience who aren’t afraid of prison and don’t mind having their bonuses snatched back seven years after it’s paid.

As the U.K. prepares to introduce some of the world’s toughest rules on financial conduct, lenders may find it increasingly difficult to recruit senior executives amid regulators’ attempts to focus accountability on individuals. Bankers also face losing their bonuses and may even spend time in jail if found responsible for their firm’s failure.

“Serving on a bank board going forward will be a much less attractive proposition, even if it’s better remunerated,” said Stuart Willey, a London-based partner at law firm White & Case LLP, who specializes in financial regulation. “People will be concerned about individual risks they’re running, to their reputation in particular, and may not want to work in an environment where they will be constantly looking to defend their decisions.”

HSBC Holdings Plc director Alan Thomson quit the U.K. subsidiary’s board in protest at the Bank of England’s planned new rules that could see senior bankers jailed for “reckless misconduct” that contributes to a firm’s collapse. Lawyers say that even as the prospect of prison for bankers is remote as the burden of proof would need to be high, many will be wary of the industry as lawmakers seek to individualize blame for failures.

Toughest Requirements

Senior bankers in the U.K. are heading for some of the toughest global requirements after Royal Bank of Scotland Group Plc received the world’s biggest bailout, taking 45.5 billion pounds ($73.1 billion) from taxpayers in 2008 and 2009.

The BOE’s Prudential Regulation Authority and Financial Conduct Authority are planning an overhaul of standards for bank managers that would see executives made criminally liable for reckless behavior that results in the failure of the institution, the central bank said in a statement in July. Under the supporting legislation introduced last year, a person could be jailed for as much as seven years for this offense.

“The crisis showed that there must be much greater individual responsibility in banking,” Andrew Tyrie, chairman of the Treasury Committee, said in a statement yesterday, responding to reports of the HSBC resignations. “A buck that does not stop with an individual often stops nowhere.”

To be found guilty, the manager would need to have been aware that taking a particular risk could cause the institution to fail, the regulator said.

Second Departure?

“It will be difficult to prosecute in practice, as it’s hard to prove what the directors knew at the time,” Celyn Armstrong, a lawyer at Linklaters LLP in London, said in a telephone interview today. “It would be even harder to prove their conduct fell far below what can reasonably be expected for someone in that role. Regulators would have to persuade a jury that they weren’t just being wise after the fact.”

HSBC may soon have another departure. John Trueman, deputy chairman of its U.K. banking subsidiary, has also expressed dissatisfaction with the new rules, a person with knowledge of the matter said yesterday. Sky News, which originally reported the resignations, said Trueman is on the verge of quitting. Thomson and Trueman didn’t respond to attempts to contact them by telephone and via networking website LinkedIn. An HSBC spokesman also declined to comment.

‘Risk Aversion’

Chairman Douglas Flint warned in August that new rules from global regulators and greater focus on financial crime and conduct was contributing to “disproportionate risk aversion” among employees, which was damaging the business. He also said the bank has spent billions of dollars on toughening its internal controls and compliance staff.

“HSBC is becoming the self-selected spokesperson of the industry because it’s the only bank with a strong-enough balance sheet and is independent so can speak out about the regulator,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics who specializes in the governance of banks. “Two of the other big U.K. banks, Lloyds and RBS, can’t say anything because they are owned by the taxman.”

Banks are still able to lure top executives to their boards by offering higher pay packages than other industries. Barclays Plc is paying its new chairman John McFarlane 800,000 pounds a year, 149,000 pounds more than he received in the same role at Aviva Plc. RBS is searching for a chairman to replace Philip Hampton, who’s leaving to take charge of U.K. drugmaker GlaxoSmithKline Plc next year.

Bonus Clawbacks

“If somebody is pursuing reckless misconduct at a bank, complaining they might face jail terms is cynical,” Kirchmaier said. “Essentially they’re asking society to write a blank check on any criminal activity anyone commits. The level of proof would be very high for these kind of things; executives won’t end up accidentally in jail.”

Under the BOE’s pay requirements bankers could also be forced to pay back bonuses as long as seven years after they’re awarded if they exceed their risk limits or break financial-conduct rules, the central bank said, after taking responsibility for regulation last year. The U.K. measures go beyond minimum European Union standards, which require at least 40 percent of awards to be deferred for at least three years.

Brazil, Turkey

The rules, which come into force on Jan. 1, are part of a wider move by global regulators to hit bankers’ wallets if their risk-taking leads to large losses. While work at the international level has focused on clawback powers to recover bonuses, and on deferral rules that limit immediate payouts, the EU has also adopted a ban on awards valued at more than twice fixed pay.

Lloyds Banking Group Plc, which was rescued with a 20 billion-pound bailout during the financial crisis, dismissed eight employees and reclaimed their bonuses after the lender was fined 226 million pounds for rigging benchmark interest rates. The government still owns a 25 percent stake in Britain’s biggest mortgage lender.

In Brazil, some bank directors can be held personally liable for the losses incurred by their banks. Turkey stepped up penalties for market manipulation at the end of 2012, introducing laws that make influencing prices and investor decisions punishable by up to five years’ imprisonment.

“Those asked to be directors of banks, and therefore held legally responsible if anything bad happens, are seeing that potentially now the cons outweigh the pros,” said Chris Roebuck, a visiting professor at Cass Business School who’s held senior positions at HSBC and UBS AG. “If there’s a fuzzy set of regulatory criteria that could result in severe consequences like jail, then their response is going to be that the level of uncertainly is getting to the point where I could be blundering into the unknown.”