UK Economy
Bankers guilty of reckless misconduct should be jailed -- UK report
By Finfacts Team
Jun 19, 2013 - 7:01 AM

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Senior bankers guilty of reckless misconduct should be jailed, a report on banking commissioned by the UK government, has recommended.

The Parliamentary Commission on Banking Standards was established in July 2012, in the wake of the LIBOR interest rate scandal, to conduct an inquiry into professional standards and culture in the UK banking sector and to make recommendations for legislative and other action.

The cross-party group's fifth and final report attacked the lack of accountability of bankers and also said some bonuses should be withheld for up to 10 years.

The UK Treasury on behalf of George Osborne, chancellor of the exchequer, welcomed the report and called it "a very impressive piece of work." It promised to provide a response before the summer recess.

"Where legislation is needed, we have said we will support it, and the banking bill currently before Parliament can be amended to ensure they are quickly enacted," a spokesman added.

The 571-page report also proposes that the government review alternatives for selling off the Royal Bank of Scotland (RBS), including breaking it up, and demanded action to make the banking market more competitive.

"Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility," the report says.

The report recommends that bust banks should be allowed to fail and also deals with regulation, the role of the Bank of England, bank governance and bankers' qualifications. Competition needs to be stimulated and customer service improved and there is the threat of a full competition investigation if change does not happen.

On accountancy rules, the report says the current standard is "not fit for regulators' purposes", but recognises the UK has little chance of reforming it, because it is enshrined in UK law under an EU directive. However, it recommends that banks provide a separate set of accounts drawn up on "prudent principles". This already happens in Portugal and Brazil, but the incoming governor of the Bank of England, Mark Carney, does not support the idea.

“Profound cultural change in institutions as large and complex as the main UK banks is unlikely to be achieved quickly. Bank leaders will need to commit themselves to working hard at the unglamorous task of implementing such change for many years to come,” the report says.

Report: Changing banking for good - Volume I [pdf]

Report: Changing banking for good - Volume II [pdf]

Commenting on the publication of the final report, the chairman of the Parliamentary Commission on Banking Standards, Andrew Tyrie MP, said:

"Recent scandals, not least the fixing of the LIBOR rate that prompted Parliament to establish this Commission, have exposed shocking and widespread malpractice.

“Taxpayers and customers have lost out. The economy has suffered. The reputation of the financial sector has been gravely damaged. Trust in banking has fallen to a new low.

“Prudential and conduct failings have many shared causes but there is no single solution that can restore trust in the industry. The Final Report contains a package of recommendations that, together, change banking for good.

“A lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall.

“Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace.

“The health and reputation of the banking industry itself is at stake. Many junior staff who may have done nothing wrong have been impugned by the actions of their seniors. This has to end.

“Rewards for success should be better focussed on generating long-term benefits for banks and their customers. Where the standards of individuals, especially those in senior roles, have fallen short, clear lines of accountability and enforceable sanctions are needed. They have both been lacking.

“It is not just bankers that need to change. The actions of regulators and Governments have contributed to the decline in standards.

“Governments need to get on with the job of implementing these reforms. Regulators and supervisors need rigorously to enforce them. We need better regulation: this may mean less, not more. And we need a better functioning and more competitive banking industry.

“High standards will strengthen Britain as a global financial centre. International co-ordination, while desirable, should not be allowed to delay reform. We must get on and do what is right for the UK.

Key points

  • Given the misalignment of incentives in banking, the Commission says it should be no surprise that deep lapses in standards have been commonplace. The Commission’s final report, ‘Changing banking for good’, contains a package of recommendations to raise standards.
  • The recommendations cover several main areas including: making senior bankers personally responsible, reforming bank governance, creating better functioning and more diverse markets, reinforcing the powers of regulators and making sure they do their job.

Key recommendations

  • A new Senior Persons Regime, replacing the Approved Persons Regime, to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks in these areas;
  • A new licensing regime underpinned by Banking Standards Rules to ensure those who can do serious harm are subject to the full range of enforcement powers;
  • A new criminal offence for Senior Persons of reckless misconduct in the management of a bank, carrying a custodial sentence;
  • A new remuneration code better to align risks taken and rewards received in remuneration, with much more remuneration to be deferred and for much longer;
  • A new power for the regulator to cancel all outstanding deferred remuneration, along with unvested pension rights and loss of office or change of control payments, for senior bank employees in the event of their banks needing taxpayer support, creating a major new incentive on bankers to avoid such risks.

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