The calls for legislation to rein in the banks have been lengthy since the banking collapse over a decade ago. Now, we have Section 36 of the Financial Services (Banking Reform) Act 2013, which makes it an offence for those performing a senior management function to bring down a financial institution through their reckless acts or omissions. This came into force on 7th March 2016.
It could be called some kind of progress as it does, after all, seek to hold people to account. Yet it still remains to be seen on whether it will be a truly effective piece of legislation or a sop to those who demanded something be done to prevent the recklessness of the past.
Financial penalties and sentences of up to seven years do indicate that it has the power to punish those who fall foul of it.
Section 36 makes it clear that, for a prosecution, an act or omission by an individual must have caused the failure of a financial institution. The individual, it must also be proved, has to have been aware at the time that their act or omission could cause the institution to fail.
What makes a person liable under Section 36 of the Financial Services (Banking Reform) Act 2013?
For example, we need to know how bad the act or omission has to be to make a person liable under Section 36. The defendant’s behaviour must presumably fall below that of someone in a senior management role and recklessness has to be involved. Yet if incompetence is not enough for a prosecution – while, surprisingly, dishonesty does not have to be proved - there appears very narrow scope for a likely conviction.
It has to be asked, therefore, does Section 36 go far enough? Has it the teeth to be effective or is its bark worse than its bite?
For a start, a successful Section 36 prosecution will not have to merely show that a decision contributed to the failure. It has to be proved that it caused the failure.
This throws up all manner of difficulties when it comes to securing a prosecution. Financial decisions are often made by committee, many are agreed over time following lengthy collaboration and the input of many people. Pinning an institution’s failing on one person could be difficult: isolating one senior employee for blame and then finding the evidence to show recklessness may take huge amounts of both skill and good luck on the part of investigators.
Mountains of information, hours of witness statements, the need for forensic accounting and the possibility that no one involved wants to be seen to “spill the beans’’ are all factors that can all make securing a Section 36 conviction incredibly difficult.
Many in the banking industry have said that they have learned their lessons. The argument goes something along the lines of “Yes, we made mistakes and yes, we weren’t prosecuted for them but everything is just fine now. Leave us to it.’’ In such a climate, it is hard to see how the banks and the people running them are going to make full and frank disclosures about any wrongdoing in the future.
It may be the case that those who drafted this piece of legislation hope its main value will be in deterring recklessness rather than prosecuting it. That remains to be seen.
In a financial world that has seen numerous scandals in recent years, Section 36 appears well intentioned but inadequate. It may well prove to have deterrence value. But it is hard to see how it can possibly lead to the prosecutions that many commentators feel we should already have witnessed due to Libor, forex and so many other examples of wrongdoing in the banking sector.
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