The Prudential Regulation Authority has published a consultation paper aimed at improving individual accountability in the banking sector. The paper, published jointly with the FCA, proposes a ‘senior managers’ regime’ with powers to jail top bankers for up to seven years for reckless misconduct. Despite the public baying for bankers blood following the financial crisis are the proposals fair or even necessary?
In Roman times, when an arch was nearing completion and the keystone was about to be put in place, the head engineer would be expected to demonstrate his trust in his own skill and planning by standing directly underneath it, thus proving his confidence in his own work. We like people demonstrably taking such responsibility willing to be held accountable for their mistakes. It’s one reason why since 2008, bankers have become amongst the most reviled 'professionals'. The sense of injustice engendered after the near-implosion of the global banking system was heightened by the knowledge that the crash was not due to bad luck but to the widespread arrogance of a cast of financial kingpins that seemed to increase in direct proportion to those same bankers’ increasingly lavish lifestyles. When the music stopped we demanded culprits and that heads should roll. But none did. Now, six years after the crisis and not a moment before time the Bank of England has threatened to act.
We like to maintain a healthy balance with our proverbs and advice. From the ancient Greeks’ warning of ‘nothing in excess’ to our own ‘cut your cloth accordingly’ and ‘the grass is always greener on the other side’, on one hand we counsel moderation in all things. And yet we balance this out by other bolder, less prudent exhortations too; ‘who dares wins’, ‘fortune favours the brave’, ‘seize the day’. It is patently obvious now- as it was to some at the time- that those in charge of our financial institutions, our pensions and our savings pre-2008 fell fatally on the boldest side of the spectrum. And yet, the only headline-worthy people offered up to jail and so to sate the demand for retribution were small beer; Jerome Kerviel at Société Générale and Kweku Adoboli at UBS. But they were too whizz-kiddy, their crimes were too complex for laymen to understand clearly and they were doing things that would have been illegal at any time. What the public wanted was those at the very top to be found liable for the recklessness that caused 2008. It happens in every other walk of life. When the Costa Concordia ran aground due to the Captain’s venality he was criminally tried. The alleged negligence of Sharon Shoesmith over the Baby P case forced the then Secretary of State for Children, Ed Balls, to remove her from her post. This is the kind of law-enshrined or government-led retribution that the public was crying out for in the aftermath of 2008. Lurid stories of ‘Fred the Shred’ and his being stripped of his knighthood, front page pictures of Steven Hester in hunting garb, and Bob Diamond getting his come-uppance at Barclays were given to us, but that was all media-driven, not government-driven.
The PRA’s proposals have reportedly prompted two Directors of HSBC, Alan Thomson and John Trueman, to resign in protest. There are- unattributed- reports in the press that the proposals have sent shockwaves through boardrooms, with one source saying the HSBC resignations are merely ‘the tip of the iceberg.’ If that is the case the iceberg does not appear to be a particularly large one. Since Thomson and Trueman hit the news in early October there has been little sign of a mass exodus. Nevertheless, the mood among lawmakers seems buoyant, with Andre Tyrie MP, who chaired the Parliamentary Commission on Banking, stonewalling the City’s protests; ‘the crisis showed that there must be much greater individual responsibility in banking. A buck that does not stop with an individual often stops nowhere.’ Mark Carney himself, in an event at the IMF’s annual meeting, countered the banker’s howls that increased liability would deter the best and brightest from taking directorships with a jibe perfectly judged to needle macho mindsets, saying, ‘if you are the chairman or the head of the risk committee, you have a responsibility for the activities of that institution. If you don’t think you can do it, you shouldn’t be on the board.’
What will the consequences of the PRA’s proposals be? The fact that Thomson and Trueman are the only two senior bankers to have resigned publicly seems to suggest that the banking world has decided to play ball, at least for the moment or else has confidence in the power of its lobby to dilute the proposals. Even a group of people who demonstrated such myopia as to what many saw as an inevitable descent into the chaos of 2008 can not be so blind as to ignore that the public’s anger at the lack of culpability in the wake of the financial crisis has forced the politicians’ hands. What is interesting about this threat of action is that it perhaps marks a new departure for British lawmakers catching up with some of their European counterparts. The Germans, for instance, have the concept of untreue, ‘breach of trust’, that provides a lower threshold for prosecuting bankers. Where not one single British senior executive faced prosecution post-2008, there have been a slew of them in Germany. And it is not as if London has never had teeth; in the wake of the Barings disaster in the 1990s, the bank’s Directors were barred from holding other directorships despite having had no connection at all to the antics of Nick Leeson in Singapore. So while the UK has bared its teeth before, in 2008 and its immediate aftermath it remained muzzled.
There are serious concerns, however, that the PRA’s recommendations may not just be unnecessary, but very dangerous indeed for a healthy free-market economy that does, lest we forget, need an active risk-taking banking sector in order to thrive. What we must guard against is letting an understandable anger at a few very wealthy people who appear to have got away scot-free ruin our judgement and make us knee-jerk too violently. There is a very serious question of fairness and justice raised by the PRA’s proposals. Let us say, for instance, that a director is found to be guilty of negligence in not realizing that a subordinate was doing something reckless that led to financial disaster. The director was merely negligent, not fraudulent. He had exhibited no behavior that could really be classed as criminal, and yet purely by dint of his own ineptitude he goes to prison. If such a law does bite, then large wallets will be funding very public appeals in the coming years.
Another concern with these apparently bold new powers is that they are not really needed, and if they are enacted will catch very few people. There are pre-existing regulatory deterrents that simply have not been used. What is needed is for the industry as a whole to get a grip of itself, to really arm itself with its own internal code of conduct, and to ensure that those who wield enormous power in boardrooms are subjected to regular and thorough certification and recertification of their fitness to do so. GPs and surgeons are constantly tested and retested for their competencies, as are pilots. Those professions perhaps more obviously than bankers hold the power of life and death in their hands, but the same really is true of bankers, who hold in people’s savings their future and livelihood. It is time for the boardroom to lose its amateurish air and get professional. Regulatory fines should be targeted not at a faceless Plc with bottomless pockets but at individual directors or audit committee members themselves, so that while they would not be criminalized by the state they would at least be humiliated and ostracized by their own industry, in front of their peers.
In concert with that professionalization of C-suites and boardrooms should be a cultural change that permeates lower tiers of banks. What the regulator should be trying to do is to force many employees to take responsibility; those working in the riskier parts of an investment bank would behave differently - or at least be incentivised to behave differently - if they had their own money on the line. For a bank to invoke the spirit and at times the letter of an old-school partnership structure, to encourage prudent risk taking and build a risk-taking culture that encourages profits but begets accountability would be a sensitive, cheap, and long term guard against recklessness.
The key thing to watch in the coming months and years is whether the PRA’s pandering to the public’s demands for accountability will create a better balance of healthy risk taking against effective risk management. It will be a very difficult tightrope to walk. Either way, as Carney himself implied at the IMF event, it is not as though there is no incentive to still be a senior banker; ‘maybe [bankers] are no longer at the most esteemed table in society, but they are still on the best golf courses.’