On 30 July and amid much fanfare the Bank of England’s Prudential Regulation Authority announced what is to be “the strictest industry regulation in the world” with a wide range of civil and criminal sanctions available to be applied against defaulting bank employees.
Headlines included a new criminal charge of “reckless mismanagement” which could lead to imprisonment if banks are not run properly. There is also the prospect of recouping bonus payments for up to seven years in respect of those who are found to have been “guilty of misconduct”.
Recoupments are to apply even if the money has been paid and spent.
Although cautiously welcomed by Anthony Jenkins, chief executive of Barclays, the general industry response has been swift and predictably negative. According to the British Bankers Association the new rules will place the UK banking industry at a competitive disadvantage. They have also trotted out the usual claim that City bankers are paid less than in other major financial centres and there might therefore be a dispersal of talent elsewhere.
Are the new rules really so severe? As far as criminal sanctions are concerned, they will require legislation so will first be subject to parliamentary scrutiny. It is likely to be very difficult to pin the criminal burden of proof – guilt beyond all reasonable doubt – on a specific individual or individuals. However, bankers can already be imprisoned and face unlimited fines for “causing a bank to fail” by taking a “reckless decision”. So is this really the “game changer ” that some have suggested?
As for civil penalties, there are obvious employment aspects. Significantly, although it was considered, the rules will not be applied retrospectively. This is no surprise since, to do so, would have the effect of imposing sanctions for breaches not identified as such at the time.
Also, there will have to be a thorough investigatory and disciplinary process. The rules have already envisaged one potentially significant problem which is identifying who is responsible for misconduct. Those with experience of disciplinary proceedings will know how difficult it can be to identify those “guilty” of misconduct where there has been collective recklessness and/or wrongdoing. Consequently, senior bankers are to be required to prepare lists of their key duties and responsibilities, akin to a job description. Forgive my cynicism but that is likely to be a gift for contract lawyers who will no doubt identify what they are not responsible for, rather than what they are.
There will also be an inevitable overlap between regulatory enforcement and employment rights. What will happen to employees who are sanctioned by the regulator but who are not in breach of contract? Will the bank pay fines on their behalf in such circumstances? Will there be a contractual obligation? Will it be possible to insure against civil penalties?
It seems to me that the two sure outcomes of the new rules will be a great deal of litigation and very few sanctions imposed