Where the Buck Stops in Banking
In the wake of the LIBOR scandal, which saw rogue bankers making millions by engaging in illegal insider trading, Parliament established a cross-party Commission to investigate professional standards and culture in the banking sector. One of the Commission’s main findings was that there was insufficient individual responsibility for senior managers, which meant that there was little accountability within the sector when things went wrong.
In order to make senior bankers more accountable for their actions and lines of responsibility, the Commission proposed that the UK Government introduce a reverse burden of proof for alleged misconduct and failings. This would require senior bankers to show they had taken all reasonable steps to prevent or mitigate the effects of failures they were responsible for. Under previous rules, the Financial Conduct Authority had to prove that an individual was personally responsible, which was extremely difficult to do in practice.
Initially, the government introduced the reverse burden of proof through the Financial Services (Banking Reform) Act 2013. This was due to commence in 2016 just before the new Senior Managers Regime came into force. However, before this provision even went live, the new government removed the reverse burden of proof through the Bank of England and Financial Services Act 2016. This raises the question: why?
To outsiders, the u-turn looks strange. This was a change that was recommended by a cross-party Parliamentary Commission that drew evidence from a wide range of sources, including the banking sector, and accepted by the previous government. If there were significant issues with the new reverse burden of proof, this surely should have been identified before it received Royal Assent.
At the time the u-turn was announced, there were also a number of news reports suggesting this change of mind was due to lobbying by the banking industry. However, due to the lack of transparency in the UK about who’s lobbying decision-makers, when and for what purpose, there is no public information to assess whether or not this could have been the case. All of this creates the perception that the government caved-in to pressure from the industry at the expense of something that could have had a public benefit.