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Managed out

15 October 2015 By George Hay

The very small group of people who see UK bank executives as victims can now disband peaceably. New UK rules opening up the outside risk of jail time for bosses who mess up are to be tweaked so that the burden of proof rests with the regulator, rather than the miscreant bank. It should shift the emphasis from the margins of workability to something more viable.

The so-called senior managers regime initially threatened to treat high-level bankers as guilty until proven innocent. The main beef was that it would lead to intense internal sclerosis – in order to pre-empt future accusations of mismanagement, bosses would have to conduct their business as if they were perpetually on trial. Offices could have disappeared beneath a mountain of regulatory paperwork, one senior banker warned Breakingviews.

But, as Prudential Regulation Authority boss Andrew Bailey argued on Oct. 15, tweaking this part of the SMR doesn’t mean it has been neutered. Senior managers can still be held criminally liable. And the regime also covers non-executives, which could complicate efforts to find board members.

The result is still a headache for the targets of all this regulation. But there is a reason why the old authorised persons regime has been beefed up with threats of bonus clawbacks and a small chance of prison. It is that regulators are legitimately concerned corporate-level punishments are an insufficient deterrent. The ultimate fear of bank executives used to be a guilty verdict from U.S. regulators, with the implied risk of one’s bank being shut out of dollar-clearing markets, but BNP Paribas and Credit Suisse appear to have weathered their guilty pleas last year.

The SMR’s solution – focusing the terror on each individual bank executive – is a bit draconian. But until banks can be trusted to have robust enough internal cultures, there is a need for it. The new softer approach still works, but it should get no softer than this.

 

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