Simply put, the new regime is aimed at deterring senior management from reckless decision making. ‘Senior management’ is defined as a person who carries out a specific function (as per section 37(7) and (8) of the Act) at a UK incorporated bank, investment bank or a building society. The crime of ‘reckless misconduct’ in managing a bank has three constituent elements:
- the manager’s decision, whether active or passive, caused the failure of the financial institution in question (for the purpose of this section, ‘decision’ has been broadly defined to include a failure to prevent a decision)
- at the time the decision was taken, the manager was aware of the risk that such a decision might cause the failure of the financial institution (or its group companies)
- the manager’s conduct was ‘far below’ the reasonable standard expected from a person in such a position.
Proceedings in respect of this offence may be instituted by the Financial Conduct Authority (the ‘FCA’), the Prudential Regulation Authority (the ‘PRA’), the Secretary of State or the Director of Public Prosecutions. Moreover, under section 38(4), if proceedings are instituted by the FCA or the PRA they must comply with any conditions imposed by the Treasury in this respect. A successful conviction could lead to the individual being imprisoned for up to seven years and/ or fined an unlimited amount.
The implications of a prosecution are therefore very serious for the individuals concerned. However, the drafting of the Act raises questions about the likelihood of a successful conviction since the Act delineates an extremely narrow category of behaviour that is required to be proved. To be found guilty of the offence, the person’s decision must have ‘caused’ the bank’s failure, they must have ‘been aware’ that their action could cause the failure of a bank or any of its group companies and their behaviour must have fallen ‘far below’ reasonably expected standards. How these issues will be interpreted will only become clear at the judicial stage. For example, the government argued during the Parliamentary debates on the bill that ‘causing’ the bank’s failure should be understood as having significantly contributed to the failure. However, this interpretation is unsupported by a plain reading of the Act.
Practically speaking, whilst the financial institution employer of an individual subject to an investigation for this offence would, by definition, have failed, there is likely to be a continuing entity. The management of this entity will need to be alive to the problems posed by an investigation. Separately, it is noteworthy that the offence seeks to cast a wide net by making the management of a financial institution potentially liable for the failure of any of its group companies. Therefore, even if the entity at the top of the corporate tree is alive and flourishing, the collapse of a small subsidiary could still lead to potential exposure.