Bankers should be made accountable, says Commission

21 June 2013

DEMOTIX

Protest: a "Greedy Pigs" balloon at the Shift the Debt protest at Canary Wharf, London, last week

Protest: a "Greedy Pigs" balloon at the Shift the Debt protest at Canary Wharf, London, last week

THE "reckless" mismanagement of a bank should be a criminal offence, carrying a prison sentence, the final report from the Parliamentary Commission on Banking Standards says.

The Commission was set up last year to report on the standards and culture of the banking sector, in the wake of the Libor rate-rigging scandal ( News, 20 July 2012). The Archbishop of Canterbury is a member ( News, 18 January).

The report, Changing Banking for Good, says that there is "a strong case in principle for a new criminal offence of reckless misconduct in the management of a bank". It says that the threat of "a criminal conviction and a prison sentence" would "give pause for thought to the senior officers of UK banks".

It continues: "The Commission would expect this offence to be pursued in cases involving only the most serious of failings, such as where a bank failed with substantial costs to the taxpayer, lasting consequences for the financial system, or serious harm to customers." 

The report also recommends that "the remuneration received by an individual during the period of reckless behaviour should be recoverable through separate civil proceedings."

The report says: "Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility. Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making. They then faced little realistic prospect of financial penalties or more serious sanctions commensurate with the severity of the failures with which they were associated."

The report is severely critical of executive remuneration packages, which have "incentivised misconduct and excessive risk-taking, reinforcing a culture where poor standards were often considered normal.

"Many bank staff have been paid too much for doing the wrong things, with bonuses awarded and paid before the long-term consequences become apparent. The potential rewards for fleeting short-term success have sometimes been huge, but the penalties for failure, often manifest only later, have been much smaller or negligible. Despite recent reforms, many of these problems persist."

The Commission proposes a "radical reshaping" of remuneration for senior bankers, "so that incentives and disincentives more closely reflect the longer run balance between business risks and rewards".

Specific reforms would include more remuneration being deferred, in many cases up to ten years, and more of the remuneration in forms such as bail-bonds, which favour long-term performance.

The report also proposes reforms to address "serious flaws in governance" at banks. It also suggests that there may be "significant advantages" in breaking RBS up into "a good bank and a bad bank . . . including focusing the good bank on UK retail and commercial banking".

The report can be read at www.parliament.uk/bankingstandards.

Question of the Week: Does reckless banking deserve a prison sentence?

WHEN the Archbishop of Canterbury took to the stage on Wednesday evening last week to debate "What makes a good bank?", news had just hit the City that the banker he once took to task over his response to a similar question had stepped down, writes Madeleine Davies.

Stephen Hester, the banker, announced that he would leave his post as chief executive of Royal Bank of Scotland in order to comply with the Government's insistence that the bank return to private ownership by the end of 2014. As a member of the Parliamentary Commission on Banking Standards, the Archbishop once accused him of giving "motherhood and apple pie" responses to his questions about RBS's obligations to society (News, 22 February).

Archbishop Welby declined to say where RBS might find a "good man" to replace Mr Hester. But he said that "banks, to be good, need the fear of hell and the hope of heaven, not merely the fear of penury and the hope of a larger bank account."

Speaking in the debate at St Paul's Cathedral, organised by the St Paul's Institute, the Archbishop suggested that "the biggest weakness of all in the analysis of the failure of banks to be good banks has been around understanding about human beings. We have looked at banks as though sin did not exist and redemption and salvation were not possible."

He said: "At the heart of good banks are good people. And if we want to have good banks, we have to believe in fallible people. . . If we believe in fallible people, we will work on aspects of behaviour and training that is conditioning the body, that recognise that human beings are both more fallible than a systemic regulatory system will allow, and have greater potential than our pessimism might permit."

He began with a defence of capitalism. It had "lifted millions out of poverty", he said, and it was unlikely that the debate's venue could have been built without debt.

Nevertheless, he agreed with the Church Commissioners' verdict that Barclays had "repeatedly let down society with its conduct" ( News, 17 May). Banks had become "too focused on the short term" and "forgot what our role in society was and who we were there to serve".

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