Law Society warns new criminal sanctions will not stop banks failing

Handcuffs

New criminal sanctions targeting reckless misconduct by senior bankers will not help to promote economic growth or guarantee a systemic improvement in banking standards, warns the Law Society of England and Wales.

The new criminal ‘reckless misconduct’ offence was recommended by the Parliamentary Commission on Banking Standards in its report, ‘Changing banking for good’, and is currently being debated in the House of Commons as part of the Financial Services (Banking Reform) Bill.

The introduction of new criminal sanctions, including an offence of ‘reckless misconduct in the management of a bank’ which carries a custodial sentence, forms part of significant legislative changes designed to radically reform the banking industry.

Law Society Chief Executive Desmond Hudson said the Society is particularly concerned about the unfortunate and unintended consequences of the reforms.

'Introducing recklessness as the basis for an offence means that prosecutors will have to decide, possibly years after a business decision was taken, whether it was reckless or not at the time. At a time when growth is vital for the UK economy, it’s important that we get the balance right between ensuring adequate risk control and stimulating business'.

'Business decisions will always involve a degree of risk; the commercial environment is unpredictable and, while a decision may be characterised as reckless with the benefit of hindsight, at the time it is taken it may be a perfectly reasonable course of action', Hudson said.

The Society argues the prospect of facing criminal sanctions may deter experienced, well-qualified candidates from taking up senior positions. This could lead to struggling banks facing a vacuum of quality leadership at a time when they most need it, perpetuating a quicker and more significant failure of the bank.

The Society also argues that it would be quicker, more transparent and more effective if relevant authorities use the full range of regulatory measures coupled with civil remedies to ensure irresponsible individuals cannot continue to work in the industry.

The Law Society has undertaken a raft of work to help inform and shape the debate about banking regulation including responding to HM Treasury’s initial consultation and the Parliamentary Committee’s subsequent call for evidence.

In addition to director sanctions, the Law Society’s Banking Reform Working Group continues to engage with the Parliamentary process on the Financial Services (Banking Reform) Bill as it passes through Parliament.

Last year Chair of the Working Group, Dorothy Livingston was called to give oral evidence to the Parliamentary Commission on Banking Standards.

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