A version of this article was first published on Post Online.
Amongst the mass of regulatory measures introduced in recent times to prevent a repeat of the 2008 financial crisis, perhaps the most potent is that provided by section 36 of the Financial Services (Banking Reform) Act 2013, headed “Offence relating to a decision causing a financial institution to fail”. It comes into force on 7 March 2016.
The measure makes it a crime for “senior managers” of financial institutions to:
(i) take a decision about the way in which the business is carried on, which
(ii) results in the failure of the institution, if
(iii) the manager is aware of a risk that the decision may result in the failure of the institution, and
(iv) in all the circumstances his conduct “falls far below” what could reasonably be expected of a person in his position.
If found guilty, the manager is liable to up to seven years imprisonment.
An obvious precursor to this provision is the common law offence of gross negligence manslaughter, which criminalises acts of negligence resulting in death where the breach of duty is so heinous as to justify a criminal sanction. Why, one might ask, should grossly "negligent" business decisions not also attract a criminal sanction?
The real problem of the measure, however, lies in its interpretation and enforcement. A requirement of the offence is that the implementation of the manager’s decision causes the failure of the financial institution. Proving this to the criminal standard of proof (i.e. beyond reasonable doubt) will be rife with difficulty. The failure of a financial institution is likely to be the result of a number of interwoven causes. Tracing it back to a single decision by a senior manager may prove an impossible task.
Moreover, even if it is possible to pinpoint a particular decision, how is the judge or jury to decide that the conduct of the decision-maker falls far below what could reasonably be expected of him? The law would surely require that the conduct is assessed without the benefit of hindsight. The conduct must therefore be assessed in light of what was known to the manager at the time.
A topical political issue is the scope of the individuals capable of committing the offence, namely those who fall within the definition of “senior manager”? Section 37, the relevant interpretation provision, defines “senior manager” as someone who performs a “senior management function”. The section does not, however, define “senior management function”: rather, it leaves it to the FCA and the PRA to designate what functions fall within the definition.
The FCA and PRA have yet to release a final version of the rules specifying the various senior management functions, however various consultation papers, available on the FCA and PRA websites, have given a flavour. As one would expect, the functions are high-level ones, and include "Chief Executive", "Chief Finance", "Chief Risk", "Head of Internal Audit", and "Head of key business areas" amongst others.
More controversial was the proposal to include non-executive directors within the scope of the offence. This prompted feedback that the measure may make it difficult for firms to attract quality non-executive directors, who might see the risk of personal liability as overly burdensome. Recognising the force of these objections, in February 2015 the FCA announced that only "non-standard" non-executive directors would be treated as performing a senior management function: i.e. those with responsibilities for chairing certain board sub-committees.
While it remains to be seen what the final draft of the rules designating senior management functions will say, one thing is for sure: the regulators will be keen to see that the new regime is followed. One wonders how long before the first prosecution under section 36 is made.
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