My Lords, we now turn to one of the key recommendations of the PCBS: the introduction of a new criminal offence of reckless misconduct in the management of a bank. The commission argued convincingly that existing sanctions for financial crime,
“do not cover the apparent mismanagement and failure of control by senior bankers”,
and that the risk of a criminal conviction and a prison sentence would give senior officers of UK banks pause for thought. As the Government made clear in our response to the commission, we believe that there is a strong case for the introduction of such an offence. Serious bank failure results in severe economic disruption and considerable losses for taxpayers.
In line with the commission’s recommendations, the new offence will be applicable only to individuals who are covered by the new senior managers regime. Senior managers could be liable if they take a decision which leads to the failure of the bank or fail to take steps available to them to prevent such a decision being taken. The offence will apply only to behaviour that falls far below the standard that could reasonably be expected of a person in their position, which is a similar test to that for corporate manslaughter. In addition, at the time when the decision was taken the senior manager must have been aware of a risk that its implementation may cause the failure of the bank. Limiting the application of the offence to individuals who are covered by the senior managers regime, and the precise definition of when a bank has failed for the purposes of the offence, mean that those affected should be in no doubt as to their potential criminal liability.
The maximum sentence for the new offence will be seven years in prison and/or an unlimited fine on indictment. This is in line with the recommendation of the commission, which argued that the offence must carry the possibility of a prison sentence to be effective, as with other offences of similar gravity under FiSMA, such as misleadingly manipulating benchmarks such as LIBOR. The commission said that it,
“would expect this offence to be pursued in cases involving only the most serious of failings ... and not predominantly against smaller operators where proving responsibility is easier, but the harm is much lower”.
The Government endorse this position, and the offence will therefore apply to banks and building societies but not to credit unions.
One area where we do not agree with the commission is on its proposal that there should be a time limit of one year within which criminal charges could be brought following successful civil enforcement action. I have considerable sympathy with its arguments that laws forbidding disclosure of information with regard to criminal proceedings could mean that the publication of information around a bank failure—information
that it would be in the public interest to release—would be suppressed until court proceedings had concluded. However, it is very unusual to have a time limit on bringing charges relating to serious criminal offences such as this and, given the likely complexities of many of the cases that will be tried under this offence, such a time limit may seriously limit the regulators’ ability to prosecute. The offence introduced by this amendment will be in a vital tool in ensuring that those at the top of our banks are focused on taking prudent and measured decisions and in holding them account for reckless behaviour that falls short of that standard.
I now address the amendments to this group. On Amendment 58, the PCBS recommended an offence of reckless misconduct. In order for a person’s behaviour to be reckless, they must be aware of the risks that they are taking. The insertion of the text proposed by Amendment 58A would allow for the possibility that a manager acting without knowledge of the possible effects of their actions could also be guilty of the offence. A key aspect of making an offence prosecutable is that the person concerned must know that they are at risk of committing the crime. There are other, civil, sanctions, which FSMA provides for, which can apply if a senior manager has acted incompetently rather than criminally recklessly. For example, if a senior manager in a bank fails to comply with binding statements of principle issued by the regulator, they can be penalised. These penalties can be heavy, including up to an unlimited fine. In light of this, I hope that the noble Lord will withdraw his amendment.
On Amendment 58B, we have thought very carefully about the wording of this offence, and have built upon robust precedent where possible. Referring to conduct that is “far below” that which would be expected has precedents in the Law Commission’s proposal for a statutory offence of killing by gross carelessness, and in legislation creating the offence of corporate manslaughter. So we have used this particular phrase knowing that it works and can be effectively interpreted by the courts. The offence must be precise enough to comply with principles of legal certainty and fairness. There is no precedent in UK criminal law for criminalising behaviour that is merely unreasonable. To do so would amount to an indiscriminate diffusion of criminal liability in a way that would make it hard for individuals to know with sufficient certainty when they might be committing an offence.
We also need to be very aware of the incentives that the offence creates. There would be a considerable risk that a broader, vaguer offence would put talented executives off taking on senior management positions, and the Government are keen to get the balance right between punishing genuine recklessness and supporting appropriate risk-taking. This would be a particular risk when people consider whether to take on a senior role in a troubled bank just when it was most important for it to have highly capable leadership.
I understand that the intention of Amendment 58C is to make the offence more objective. First, the reasonableness test as currently drafted gives a clear, objective test of when the crime has been committed by a senior manager. It will enable the jury to consider whether the defendant’s behaviour was reasonable,
taking into account the position they were actually in. To be precise, it requires the jury to consider what conduct could, in all the circumstances, reasonably be expected of a person holding the position in the bank which that individual senior manager held.
This amendment would, arguably, remove this clarity and ask the jury to consider whether the person’s behaviour was reasonable in a more general way. Such a test would be likely to be harder to apply to particular cases, and in some cases could be inappropriate. It is important to note that there can be no one clear definition of what could be expected of a person in a senior management position in a bank. Such drafting fails to take account of, for example, which particular senior management role the defendant was undertaking, in what kind of banking institution and what the institution’s business model was. This amendment would change the current reasonableness test to one that it would be extremely difficult for a jury to apply in any meaningful way, making the offence less certain and prosecution more problematic.
On Amendment 59A, the Government are introducing this offence to close a gap in financial crime legislation. There are currently no criminal powers available to sanction senior managers who have recklessly caused their banks to fail. This is a clear shortcoming, which we are now remedying. As we have already debated, though, offences already exist for failing to comply with the Fraud Act, the Proceeds of Crime Act or the Money Laundering Regulations. Individuals can be prosecuted under these Acts, and any sentencing following the successful prosecution of these offences would take into account how serious these breaches were, so it is difficult to see what benefit this amendment would add. Further, if a bank is found to have committed an offence under the Fraud Act 2006 or under the Money Laundering Regulations 2007, senior managers of the bank could also be found guilty if they have consented to or connived in the commission of the offence by the bank. As previously noted, the new senior managers regime will also provide enhanced accountability in these areas. So there is no lack of individual accountability in cases where banks fail to comply with the requirements of the 2006 Act or the 2007 Regulations.
We believe that we have introduced a sensible definition and an important piece in the jigsaw of improved accountability for individuals by our amendments, and I commend them to the House.
Amendment 58A*