Banking StandardsWritten evidence from the British Bankers’ Association

Sanctions for Bank Directors

We welcome the opportunity to provide input to the Parliamentary Commission’s consideration of criminal, civil and regulatory sanctions. Our response below is based principally on the response that we made on behalf of members to the 2012 HM Treasury consultation ‘sanctions for the directors of failed banks’. In this we aimed to give considered thought to the options set out, to highlight existing provision and to set out what we saw as some of the very real practical considerations involved in some of the options.

We also commented in our response to the initial call for evidence by the Parliamentary Commission that we view the enforcement of sanctions in the event of fraudulent or unprofessional behaviour as integral to the maintenance of professional standards. In writing to the Commission, we suggested that it should be borne in mind that the Financial Services Act 2010 enhanced the FSA’s enforcement powers. The FSA already had the power to fine authorised persons and approved individuals for misconduct. The 2010 Act extended these powers to enable the FSA to suspend or limit an authorised person’s permission or an approved person’s approval. It also enabled the FSA to impose a fine on an individual performing a controlled function without approval in addition to being able to prohibit the individual from working in the financial services industry. It also included provisions in respect of the disclosure by the FSA of decision notices.

We also commented upon the responsibilities of the Serious Fraud Office that the Government had outlined plans to improve the investigation and prosecution of fraud cases through the “Fighting Fraud Together” strategy. As a signatory to the strategy the banking sector is working closely with Government to support its delivery. In addition to the Fraud Act, the relevant enforcement agencies have powers available to them under the Proceeds of Crime Act, the Bribery Act or the Competition Act.

It is also the case that the Companies Act was updated in 2006 to provide that directors, including directors of banks, must act in a way most likely to promote the success of the company for the benefit of its members as a whole and in doing so must have regard to:

the likely consequences of any decision in the long term;

the interests of the company’s employees;

the need to foster the company’s business relationships with suppliers, customers and others;

the impact of the company’s operations on the community and the environment;

the desirability of the company maintaining a reputation for high standards of business conduct; and

the need to act fairly as between members of the company.

These changes are enshrined common law procedure and enables Court action to be taken where the directors are viewed as having been negligent or in breach of these Companies Act duties.

There has also been an increase in the FSA’s enforcement outcomes and penalties in recent years. The FSA has now become internationally acclaimed for being able to successfully investigate and prosecute highly challenging and large scale cases such as sophisticated criminal insider dealing rings, complex market manipulation cases and boiler room frauds. This success has in part been facilitated by the joint partnership approach adopted by the FSA with the industry.

Criminal Sanctions

On 3 July 2013, HM Treasury published a proposal to create a new criminal offence of serious misconduct in the management of a bank. The proposal considered four main possibilities for the kind of managerial misconduct by bank directors and senior management that might be subject to new criminal sanctions:

(i)Strict liability—being a director at the relevant time of a failed bank

(ii)Negligence—failure in a duty of care which leads to a reasonably foreseeable outcome

(iii)Incompetence—failure to act in accordance with professional standards or practices

(iv)Recklessness—failure to have sufficient regard for the dangers posed to the safety and soundness of the firm concerned or for the possibility that there were such dangers.

1. What are your views on extending criminal sanctions to cover managerial misconduct by bank directors?

2. What are your views on the possible formulations of a criminal offence based on options (i) to (iv)?

We commented as follows in response to the HMT consultation:

“Strict liability

The consultation explains that the introduction of a strict liability offence would incentivise bank boards to avoid bank failure but also recognises that there could be company boards which were well-intentioned and conscientious and took a wrong decision or happened to be in charge when the company was a victim of a combination of unfortunate decisions and outside events. It also recognises that imposing severe criminal penalties on individuals who “were plainly not at fault would be controversial”.

The consultation also sees further significant difficulties with strict liability in that the sanction could capture directors brought on board to try and rescue a failing bank, fail to capture directors who had ran the bank badly but been dismissed or resigned, and apart from questions of fairness, could deter people from taking up board appointments in rescue or recovery situations.

For all these reasons the Government considers that it would be more appropriate to focus on other types of criminal offence and not proceed with strict liability. Such offences would require the prosecutor to prove that the individual had failed to meet a required standard of conduct in some way -ie had engaged in managerial misconduct which could involve negligence, incompetence or recklessness. We agree that strict liability would appear the least appropriate for the reasons set out in the consultation.

Negligence or incompetence

The consultation explains that the introduction of a criminal offence covering negligence or incompetence would send a clear signal that society is not prepared to tolerate conduct of this kind but also acknowledges that it is already possible for the regulator to take action against individuals for negligence or incompetence and to take action against the firm if negligence or incompetence of an individual means that the firm failed to comply with regulatory rules or to satisfy the threshold conditions for authorisation.

Negligence and incompetence can already give rise to civil law actions for tort (delict in Scotland) or breach of contract which could be pursued against individuals by the company itself, its liquidator and possibly by shareholders by means of derivative action in company law. The consultation observes, however, that it is usually more difficult to mount a successful criminal prosecution than for the regulator to take action under the Financial Services and Markets Act 2000. For these reasons, it is not clear there would be any advantage in introducing a new offence which would enable the regulator or a criminal prosecutor to pursue an individual bank director or senior manager in a criminal court for conduct which could be subject to regulatory sanction.


The consultation next considers whether a criminal offence based on excessive risk taking or recklessness should be introduced. While it is already possible for regulatory action to be taken against individuals for recklessness in the same way as for negligence or incompetence it is nevertheless considered that the more egregious character of recklessness may make it more suitable for criminal sanction. Apart from sending out the clear signal that society will not accept such conduct, it is believed that it would make directors think twice about taking certain decisions and possibly take legal advice on whether a decision could be viewed as reckless. The consultation recognises that it can be difficult to decide whether someone was aware of a risk but wrongly decided that it was not significant, or to judge whether it was reasonable or not to take a particular risk. The Government nevertheless considers that recklessness would be the appropriate basis for a new criminal offence for misconduct in bank management.

While it is hard to suggest that a course of action or decision that could be described as ‘reckless’ should not be subject to sanction, the practical considerations outlined still apply to a considerable degree. Should the Government decide to proceed, then there would be a need to develop a clear and understandable definition of what constituted ‘normal or non-excessive risk taking’ and the factors that would deem an action or decision ‘reckless’. Similarly, the defences that would be available to directors should also be clearly set out in the legislation—one example might be that it would be a defence for the director to show they acted reasonably in all the circumstances. It must be recognised that banks are in business of taking risk—as with recent banking crisis, collective lack of appreciation of possible sub prime mortgage risks (by banks, sophisticated investors, regulators and politicians)—and it is important not to stifle competition within the banking sector. As the paper observes, this test would involve opining on business and investment decisions which by their nature are forward looking and judgement-based and as a result are more subjective than decisions made relating to natural sciences or engineering. The paper also rightly points out the need to determine the relevance to be placed upon a lack of risk awareness, on the one hand, and risk awareness on the other combined with underestimation or misjudgement.”

3. Do you think that an offence based on one of those options would be likely to discourage those considering positions of leadership within banks?

Our response would more be that we would consider the downside of any of the options other than a well thought through offence of recklessness to outweigh any perceived benefits.

4. Will the possibility of criminalising behaviour which can already be sanctioned under Financial Services and Markets Act 2000 (FSMA) act as a greater deterrent?

While there are both criminal and civil offences in FSMA, criminalising behaviour that is currently only a civil offence may in the case of recklessness act as a greater deterrence by focussing the minds of directors before a certain course of action is undertaken (as stated above)

5. Do you think that it is likely that the threat of criminal action will stifle perfectly legitimate activity and ultimately deter growth in the banking sector?

The threat of an unduly broad and poorly defined criminal action most likely would.

6. What are your views on the statement that there appears to be significant reluctance from regulators to take criminal prosecution against banks or individuals responsible for compliance functions? To the extent you agree with the statement, what, in your opinion, are the reasons for this reluctance?

While there may be grounds for saying that there was some reluctance historically—and not just since the formation of the FSA—we would not necessarily consider this to be the case currently. The FSA has regularly used both its civil and criminal powers since the credible deterrence strategy 2006.

Civil and Regulatory Sanctions

Rebuttable Presumption

On 3 July 2012, HM Treasury published proposals to amend FSMA in order to put in place a rebuttable presumption that a director of a failed bank is not suitable to be approved by the regulator as someone who could hold a position as a senior executive in a bank. The Government also proposed two groups of ‘supporting measures’, which could be taken forward by the regulators under existing FSMA powers:

(a)Introducing clearer regulatory requirements on individual responsibilities and the standards required of people performing certain key roles; or, in the alternative, a ‘firm-led approach’ (with the onus on the firm and individual to set out a detailed written statement of the responsibilities and duties of each role); and

(b)Requiring banks explicitly to run their affairs in a prudent manner, and requiring bank boards to notify the regulator where they become aware that there is a significant risk of the bank being unable to meet the threshold conditions for authorisation.

7. What are your views on the proposal to introduce a rebuttable presumption that the directors of failed banks are not suitable to hold senior executive positions in other financial institutions?

We commented as follows in response to the HMT consultation:

The regulator already has the ability to remove an individual’s approval to perform controlled functions and to prohibit an individual from performing functions in the financial services sector. BIS has powers to disqualify individuals as company directors and the UK has fully implemented EU remuneration standards with exceed international principles issued by the Financial Stability Board and endorsed by G20 governments.

Underpinning these measures with a rebuttable presumption that the director of a failed bank will not be viewed as suitable to be approved by the regulator as someone who could hold a position as a senior executive in a bank would be in keeping with other measures being introduced to ensure that bank executives and Boards place greater weight on avoiding downside risks. It is nevertheless right that, as suggested in paragraph 3.12, the provision should not be automatic since there may be circumstances in which a director can credibly show that their reputation remains intact and that they should not be viewed as having been culpable for the failure. In fact it may be that the alternative of more detailed regulatory guidance on regulatory assessment of suitability and competence, as suggested in paragraph 3.13, may suffice.

The measure will also need to be based on a suitable definition of both what constitutes failure—which we would say should be the triggering of the special resolution regime; also an understanding of the time period for which a rebuttable presumption would exist, in terms of both the extent to which past directors should be included and the extent to which current directors may be excluded on the grounds that they were more recently engaged with the aim of turning an ailing institution around (discussed further below).

Clarity would also be required as to what roles are covered by the rebuttable presumption. The consultation states it will apply to directors of failed banks, when those directors apply for a ‘senior executive’ position in another bank. Sufficient flexibility over the term ‘directors’ will be required to take account of different management models within banks, for example where the bank has executives, who are not directors, who play a significant role in decision making. Likewise, clarity would be welcome as to what senior executive roles will trigger the presumption when a ‘director’ of a failed bank applies for a new role.

When setting up the type of regime being proposed, it would be important to take into account issues that can significantly alter culpability such as:

The allocation of responsibilities to directors—some directors will be specifically responsible for certain areas of bank operations

Non-executive directors and the difference in nature of their responsibilities when contrasted with executive directors

The nature of the information that was available to the Board—if insufficient information was available to the Board, why that was the case

Whether events leading up to a failure were outside the control of the Board

If some directors have challenged the decision but have been overruled

There will be multiple Boards within each banking group—so if a subsidiary fails, culpability becomes more complicated.

There are also a number of practical matters that will need to be addressed, including the following:

If the presumption were to apply only to directors who were in post when the bank failed, directors who had left before then, and who may have been responsible for the decisions which led to the bank’s failure, would not be subject to the rebuttable presumption which would undermine the effectiveness of the proposed measures. It could also dis-incentivise directors of banks in distress from staying and trying to turn the bank around (contrary to the drive towards long term incentivisation)—similarly it could dis-incentivise directors from joining a bank in distress for the purpose of helping to turn it round.

On the other hand, for the directors who remain with the bank through the point of failure, it is unclear how the presumption would apply. In any event, this could be very disruptive for those directors and the bank at an important time.

If the presumption extends back in time that also raises a number of practical difficulties such as what would happen to a director who has since started a job at another bank—for example, would they then have to re-apply for approved person status which could be very disruptive for their new bank?

Directors could also face difficulties obtaining evidence demonstrating that they did not contribute to the failure when applying for a new post given they will likely no longer have access to the records of their former bank.

The rebuttable presumption therefore risks distracting directors, particularly during periods of difficulty for their banks. Of even greater concern is the risk that, in light of the rebuttable presumption applying automatically, directors of banks decide to leave the sector altogether (or potential directors don’t join the sector) which could be detrimental to the quality of directors, including non-executive directors in the banking sector.

8. Does the rebuttable presumption go any further than the current regulatory regime?

Yes, the nature of a rebuttable presumption will make it easier for the regulator to keep a director of a failed bank out of the industry as the regulator’s decision would be less open to legal challenge. It probably also increases transparency over the consequence of presiding over a failed bank.

9. Do you think that the introduction of the ‘rebuttable presumption’ could discourage skilled individuals from accepting key management positions?

Possibly. In our response to the HMT consultation we commented that the rebuttable presumption “risks distracting directors, particularly during periods of difficulty for their banks. Of even greater concern is the risk that, in light of the rebuttable presumption applying automatically, directors of banks decide to leave the sector altogether (or potential directors don’t join the sector) which could be detrimental to the quality of directors, including non-executive directors in the banking sector.”

10. Do you think introducing the presumption would send a clear message that bank senior executives and boards have a responsibility to ensure there is a strong focus on downside risks?

Yes; and as such we would consider a well thought through presumption that addresses the risks and issues we raise above to be a reasonable measure.

11. What are your views on the possible supporting measures aimed at clarifying management responsibilities and changing the regulatory duties of bank directors?

We believe that there is a great deal to be gained from clarity about management responsibilities and the emphasis to be placed upon changing regulatory duties.

Existing Regulatory Sanctions

The Financial Services Act 2010 provided the FSA with greater enforcement powers. The FSA has the power to fine authorised persons and approved individuals for misconduct. The 2010 Act extended these powers to enable the FSA to suspend or limit an authorised person’s permission or an approved person’s approval. It also enabled the FSA to impose a fine on an individual performing a controlled function without approval in addition to being able to prohibit the individual from working in the financial services industry. It also included provisions in respect of the disclosure by the FSA of decision notices.

12. Despite the range of enforcement powers currently available to the FSA, are additional powers necessary? If so, what would those powers be?

We consider the range of enforcement powers to be wider than often is appreciated.

13. What are your views on amending FSMA to include a power to prohibit an individual from performing a controlled function on an interim basis?

We can see that there would be logic in enabling interim prohibition in support of the regulatory authorities being able to act more swiftly and decisively than previously may have been the case. We see a case though for the circumstances in which such a facility could be utilised being well defined and the application of suitable safeguards including a high expectation that full prohibition will be the outcome once due process has been completed. We also see grounds for compensation in the event that the regulatory action subsequently proves unjustified.

14. Considering the current powers and measures, do you think the perceived shortcomings in being able to hold individual directors personally culpable are as a result of statutory or regulatory deficits or as a result of regulators and law enforcement agencies not utilising the powers already available to them as fully as they could?

We believe that, while historically insufficient emphasis may have been placed on enforcement action, this most likely is no longer the case.

15. What are your views on extending the limitation period for taking action against approved persons?

We would consider that providing three years for a case to be brought from the time of discovery should be viewed as providing suitable discipline upon the regulatory authorities to progress an action reasonably and would argue that if anything the timeframe should be shortened. While on the one hand it means that the regulators have less time, on the other there must be benefit to accrue from any enforcement action being concluded more closely to the time that any regulatory requirements were breached. There should also be consideration given to the significant impact such action can have over the livelihood of approved persons and their families, in circumstances where some will not be found to have been ultimately culpable.

Legislation Versus Regulation

16. In order to make bank directors more accountable (due to the adverse impact a large failed bank can have on the wider economy), what are your views on amending the approved persons’ regime under FSMA rather than the Companies Act 2006 and the Insolvency Act 1986. To the extent you consider changes should be made to the legal framework, please articulate how you think this could be achieved given the legislation would apply to all company directors.

FSMA is an appropriate vehicle if the Parliamentary Commission is convinced that it wishes the additional criminal sanction to apply only to banks. It should consider, however, that if eg a charge of ‘recklessness’ is deemed appropriate for banking, might there not also be circumstances in which it could apply in other sectors?

The Approved Persons’ Regime (APER)

17. The Upper Tribunal ruling in John Pottage v The FSA (FS/2010/0033) highlighted that enforcement action against senior managers is only likely to be successful where there is evidence of actual wrongdoing by the executive concerned. In your opinion, what changes could be made to some of the statements in APER about the standard of conduct expected of directors in order to make it easier to bring enforcement?

We would not consider a requirement for evidence to be an unreasonable test for finding someone guilty of wrongdoing providing that ‘evidence’ can include objectively showing that an individual materially failed in fulfilling the duties compatible with their specific Approved Persons registration.

18. In your opinion, has a lack of direct senior management accountability inside firms for specific areas of conduct contributed to the shortcomings in holding individuals personally culpable? Do you think APER should be revised to remedy this?

We have no difficulty with an expectation that job descriptions should be suitably clear about the nature of senior management responsibilities providing the expectations are based on a good professional standard and are capable of being met.

19. Would it be beneficial for the regulator to adopt a more intrusive approach to senior appointments as part of the Significant Influence Function (SIF) process? How could such an approach be adopted?

We would support this providing disproportionate bureaucracy was avoided and the regulators applied the right amount of resource in order to process appointments without undue delay. It needs to be borne in mind that there are risks to control systems from not being able make appointments in a timely and efficient manner.

20. Do you see merit in requiring the regulator to re-appraise SIF individuals at set intervals and on other occasions if it believes that circumstances justify it.

There may be a case for this. The alternative is to address the need to maintain professional standards through CPD requirements.

21. What are your views on extending APER so that it applies to all bank employees in order to enable the regulator to take disciplinary action against employees who are currently outside the scope of APER?

In supplementary evidence on professional standards provided to the Parliamentary Commission on 9th January, we acknowledge the possible case for extending APER principles to all employees; we did not however contemplate whether this should mean that the regulator would be able to take disciplinary action against these employees and instead proposed, as outlined in response to the following question, a Code of Conduct that would be enforced through employment contract.

22. Do you see merit in the establishment of an independent professional body with mandatory membership which has the power to impose civil and possibly criminal sanctions? In your view, could such a body provide a solution for the issue of global matrix management structures that can exist within universal banks?

The proposed approach set out by the BBA envisages a tiered approach in which:

The Approved Persons Regime is reviewed to ensure that all appropriate categories of staff are covered ie those with relevant customer-facing roles and responsibility for risk (and we have recommended a new approach to withdrawal notices where employees leave before the completion of a disciplinary process, not only for alleged regulatory breach but other ethical and professional shortcomings);

That all bank employees governed by UK regulation be subject to a Code of Conduct for which the Board and senior management of a bank would commit to embed in the bank’s systems, controls and incentives (and, again, breaches could be notifiable to what we have termed a ‘top-down’ ‘Banking Standards Review Council’); and

That the professional institutes uphold high standards for their members.

Under this model, the regulatory authorities would be primarily responsible for enforcement action against Approved Persons and the banks themselves, through employment contract, would be responsible for the disciplining of employees found to have not maintained appropriate standards of conduct. All employees would remain subject to criminal prosecution where they had committed criminal acts, whether in terms of fraud, proceeds of crime, bribery or competition legislation.

Together with other elements explored in our supplementary evidence, this adds a greater degree of assurance without creating a third regulator and undue overlap between the ethical and professional standards oversight mechanism which we have proposed and existing regulatory responsibilities, including for the policing of the Approved Persons Regime.


23. Understandably, there is considerable cost in pursuing individual actions. What changes do you think could be made in order to ensure that cost does not act as a deterrent in pursuing all but the largest cases?

Complex fraud trials are known to be extremely lengthy and thus expensive. Thought perhaps should be given to how Government can make prosecutions more effective and cost-effective. In our view more efficient processes and better coordination between the different agencies with responsibilities in this area may be needed. A review of the disclosure requirements on the prosecuting agencies under the Criminal Procedures and Investigations Act 1996 may also be needed for complex criminal trials such as fraud and insider dealing—we understand that this is one of the key reasons such cases take so long to investigate and prosecute.

The banking sector has worked closely with Government in recent years on such matters, including as a member of the committee for the Fraud Review in 2006 and more recently as a signatory to this Government’s strategy for tackling fraud. We will of course be prepared to provide any further input on these matters as requested.


24. Do you think introducing additional criminal, civil or regulatory sanctions would have an impact on the international competitiveness of UK banks?

If they are proportionate then they will raise the reputation of the UK as a place from which to conduct banking and financial services; if they are disproportionate then they will add to the belief that the UK is becoming an unattractive place in which an individual would choose to spend part of their career.

25. In your opinion, are there other legal or regulatory regimes that the Commission should be considering? Please provide your reasons for suggesting the applicable regime.

Though applicable to organisations rather than individuals, the planned introduction of Deferred Prosecution Agreements is an example of the UK authorities adopting an approach that appears to have worked elsewhere.


26. The regulator has an extensive range of enforcement powers but is arguably hesitant in using those powers. What are your views on the introduction of sanction(s) that could be imposed against the regulator to the extent they do not deploy their powers appropriately?

Enforcement actions should be seen as a positive duty on the Regulator. The Regulator should be encouraged to act proportionately, fairly and impartially. The introduction of sanctions against the Regulator could pose risks in these respects.

Parliamentary accountability over the regulator’s enforcement activity has grown in recent years as a number of reviews into past cases were conducted. Provided this enhanced scrutiny is not excessive, it can have beneficial effects on a regulator’s enforcement activity. However, excessive scrutiny can have a high cost in terms of significant essential resources being diverted away from front line activity, or encouraging the regulatory authorities to act disproportionately, unfairly or partially.

27. What are your views on applying different sanctions for different types of directors—for example, non-executive directors?

Sanctions should be relevant to the duties and responsibilities that can be reasonably expected in instances of people fulfilling their tasks to a professional standard. This necessarily varies from role to role and we would consider there to be a distinction in expectation placed upon executives and non-executives.

28. Are there any other measures or legal/regulatory changes that the Commission should consider?

We are aware that the introduction of Deferred Prosecution Agreements (DPAs) is now at an advanced stage. These have long been used in the United States. They allow courts to agree that prosecution of an organisation will be deferred generally in exchange for the payment of monetary penalties and compliance with the terms and conditions of the DPA. As a sanctioning tool DPAs are limited to financial crime breaches and are only applied to the corporate body, nonetheless it is conceivable that the use of a DPA may be undertaken in parallel to sanctions applied on individuals.

23 January 2013

Prepared 19th June 2013