On imprisoning bankers

The Report of the UK Parliamentary Commission on Banking Standards made a bit of a splash last week, with a lot of the media attention focusing on the proposal to create a new criminal offence of reckless misconduct in the management of a bank (see volume II chapter 10), which might ultimately lead to bankers being sent to prison. It is seen as important, in the words of the report, that there be "robust tools for holding those responsible to account and imposing appropriate penalties".

It is undoubtedly the case that there is a certain populist appeal  to this kind of proposal. After all, as banks like RBS and HBOS were exposed as having run huge financial risks and being on the verge of collapse, there was a lot of public anger directed at those individuals who were perceived to have mismanaged the institutions. Fred Goodwin's Edinburgh home was attacked and he was ultimately stripped of his knighthood. A new criminal offence would play well with the public discontent with the conduct of the big banks. And there is a kind of schadenfreude involved as well. For years, critical criminologists have complained that certain kinds of minor property or street crime are sanctioned more heavily than the more serious financial wrongs committed by those such as bankers or financial institutions - yet they continue, not only to get away with their financial 'crimes', but also to be handsomely rewarded, while petty thieves are relentlessly prosecuted. As the celebrated title of one book has it: the rich get richer and the poor get prison.

The arguments given in favour of individual criminal responsibility are as follows:

• That the existing sanctions regime (ineffective as it is) is directed at institutions rather than individuals, but that certain individuals play an important role in determining the policy and culture of the institution.
• That the potential harms created are public harms rather than private harms (i.e. internal only to the banks) because of the damage to market confidence and the use of public funds to bail out the banks
• That criminal sanctions could act as a deterrent to individuals, and that this could alter the conduct of the institution as various responsible individuals made more effort to supervise the conduct of those under their direction.

However, as the report itself notes, enforcement agencies already experience huge difficulties in establishing any kind of fault. In the words of one witness, Tracy McDermott, talking about previous investigations:

We invested a significant amount of time and resource into the investigations we did into the failed banks, but we were not able to establish the evidence necessary to take regulatory action, so even if there had been a criminal offence on the statute book, that would not have got us there ... If the evidence is not there, it will not be there for criminal cases in the same way as it won't be there for regulatory cases. You can debate whether we got that call right or wrong, but ultimately the evidential standard is higher in criminal cases

There are a number of reasons given for this: the standard of proof in criminal cases is higher than in civil cases; a successful criminal investigation requires huge resources to filter the enormous number of documents, which regulators or prosecutors do not possess; and, crucially, responsibility is diffused in large organisations, with few (if any) individuals have direct oversight or knowledge of all decisions that are taken.

Any new criminal offence is, thus, likely to face a number of potential difficulties. What about the offence proposed by the Commission?

The proposed offence would  be that of reckless misconduct in the management of a bank. There are a number of features to note about this. The first is that this requires 'misconduct'. Thus while the need for an offence is framed in terms of the harm caused, on the face of it this does not require any actual harm, only misconduct (and presumably potential harm). This might make it easier to prove as it would not be necessary to show that the conduct led to the specified harm.  However, what is required is presumably some conduct that is a clear departure from 'normal' management practices, and a lot would rest on how these were defined or understood.

The second point to note is that the crime is 'reckless' misconduct. This would mean, according to the Commission, that the normal criminal law standard of subjective recklessness should apply. While this may be preferable to a strict liability offence or an offence of negligence, it would be hard to prove. Proof of recklessness in English law requires proof that the person charged was aware of the risk and that it was unreasonable in the circumstances for them to take that risk. This may give rise to two significant problems. First, in a large and complex organisation, it is notoriously difficult to establish who was aware of what, as decisions are delegated or taken by committees. The Commission attempt to get around this by stressing that the important factor is whether or not a manager or director should have been aware of the conduct of those under their charge - the so-called accountability structure - but this may conflict with the criminal law standard of subjective awareness. The second difficulty will be that of establishing what is unreasonable in the circumstances. Is this unreasonable by the standards of the average banker? If this is the case, if the culture of the banks is 'out of control' it may be hard to establish unreasonableness because the defence will be that other banks were doing the same thing - and that the conduct was therefore reasonable. It may be that this would catch only clear or egregious cases of misconduct - which might very well already be criminal under the laws of fraud, market abuse or insider dealing anyway.

So where does this leave us? The Report is recommending the creation of an offence that is to be used only in rare cases where the most serious harm has resulted as a result of (presumably serious misconduct). It will have a high standard of fault, and therefore be difficult to prove, to cover situations where it is already conceded that it is difficult to meet even the lower civil standard of proof in enforcing regulations. It is, then, to imagine that we will see any bankers being jailed any time soon.

Of course, it might then be replied that the point is to show that the criminal law reaches these areas - that no one, not even bankers, is above or beyond the law. This might be important as a kind of symbolic politics, but it is surely pointless to create new criminal offences that clearly overlap with existing offences and which have little prospect of successful enforcement. There is undoubtedly a case for a creating a meaningful sanction regime in this sector, which would include criminal penalties, but this proposal does not make that case.