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Bankers will face jail for reckless misconduct, says George Osborne Bankers will face jail for reckless misconduct, says George Osborne
(about 5 hours later)
Bankers will now face jail for reckless misconduct, the chancellor has said as he pledged to adopt the main recommendations of the parliamentary commission on banking standards intended to clean up the City. The coalition has been accused of failing to implement key recommendations of a high-profile parliamentary report on cleaning up the City, despite having announced that bankers would now face jail for reckless misconduct.
But in the government's formal response to the commission, chaired by the Conservative MP Andrew Tyrie, George Osborne failed to provide explicit support for the proposal to defer bankers' bonuses for up to 10 years or adopt ideas for sweeping changes to the way the Bank of England is managed. It also rejected proposals to make banks stronger through tightening a measure of capital known as the leverage ratio. In its formal response to the parliamentary commission on banking standards, the government said it would introduce a licencing regime for top bankers, stop bonuses being paid to bosses of bailed out banks and look at ways to inject more competition into the industry.
Of the 114 recommendations in the commission's report, the government intends to bring forward legislation to implement just nine changes, including the new criminal offence of reckless misconduct and changing the way senior figures are authorised by City regulators. But it failed to adopt ideas for sweeping changes to how the Bank of England is managed and rejected proposals to make banks financially stronger through tightening a measure of capital known as the leverage ratio. Nor would it give a clearer remit to the new regulator, the Financial Conduct Authority.
However, some of the recommendations made by the Tyrie commission – set up after Barclays was fined £290m for rigging Libor a year ago – can be implemented without changes to the law and through existing powers handed to the regulators. It prompted Andrew Tyrie, the Conservative MP who chaired the commission set up in the wake of the Libor rigging scandal, to claim key elements of his 114 recommendations in last month's report had been overlooked.
For instance, the government will ask the Prudential Regulation Authority, which regulates the biggest banks and insurance companies, to look at ways of strengthening rules about blocking deferred bonuses and pensions of bailed-out banks. The PRA is also to be asked to look for ways to make it easier to claw back bonuses from bankers and restrict signing-on fees when they move jobs. He said: "Our recommendations are designed to enhance culture and standards in banking. They can only do so if implemented as a package. On an initial reading, the government's response appears to fall short on a number of important points, including the leverage ratio, proprietary trading, improving the governance of the Bank of England and reform of the FCA's objectives."
Before a parliamentary debate on the banking reform bill, to which amendments will be tabled to incorporate the Tyrie report, Osborne said the main recommendations of the commission were being adopted. Tyrie also put the government on notice that he planned to pay close attention to amendments tabled to the banking reform bill currently being debated in parliament, which will implement the recommendations.
"Cultural reform in the banking sector marks the next step in the government's plan to move the whole sector from rescue to recovery and ensure that UK banks demonstrate the highest standards, and are able to support business and drive economic growth," said Osborne, who will not attend the debate. He added: "The government is determined to raise standards across the banking industry to create a stronger and safer banking system." Tyrie said amendments tabled by the government on Monday to "electrify" the ringfence that banks are required to set up to keep high street operations separate from investment banking were "virtually useless". The commission, in an earlier report, wanted the ringfence toughened to stop the banks gaming the rules.
Tyrie is likely to want reassurance that the reforms his commission recommended are to be put into legislation. The business secretary, Vince Cable, who also signed the foreword to the government's response, said: "If we're to get our economy back on track, we need to get the banking system back on track first. Creating new powers to jail bankers who are reckless with other people's money, and getting more competition into banking, is a start." The highest profile recommendation in last month's final report called for a law to jail bankers for reckless misconduct – although lawyers questioned whether it would ever be tested in the courts.
Lack of competition in the industry, dominated by Barclays, HSBC and the two bailed-out banks Royal Bank of Scotland and Lloyds Banking Group, is to be tackled by adopting the Tyrie recommendation to review whether bank accounts should be made portable to make it easier to move between current account providers. On pay, the government rejects the commission's proposals to impose tougher pay standards on a wider range of individuals employed by banks. It said the commission's proposals went "significantly beyond existing international standards, introducing inconsistency in the regulation of remuneration, and could strictly regulate the pay of junior staff whose actions do not have a material impact on the risk profile of an institution". Owen Watkins, barrister in the corporate department at Lewis Silkin, said: "The new offence of 'reckless misconduct in the management of a bank' will grab headlines, but I suspect that such a charge is unlikely to be brought in practice".
The government does not give explicit support for deferring bonuses over 10 years – as suggested by Tyrie – saying "firms should retain the flexibility to set deferral periods in accordance with the business cycle, the nature of the business, its risks and the activities of the employee in question". Ed Balls, the shadow chancellor, accused his Tory counterpart George Osborne of "continuing to duck the radical banking reform we need".
It also rejects calls for a leverage ratio of 4%, more restrictive than the 3% being adopted internationally, which restricts the amount of risks a bank can run. Osborne, who like Balls did not attend Monday's Commons debate, said the main recommendations of the commission were being adopted.
Osborne had previously adopted one aspect of the Tyrie report by commissioning a review into whether RBS should be broken into a good and a bad bank but has now rejected the call to conduct a wider review into whether it should be broken up into smaller components to encourage competition. "Cultural reform in the banking sector marks the next step in the government's plan to move the whole sector from rescue to recovery and ensure that UK banks demonstrate the highest standards, and are able to support business and drive economic growth," said Osborne. "The government is determined to raise standards across the banking industry to create a stronger and safer banking system."
Some of the recommendations can be implemented without changes to the law. The government will ask the Prudential Regulation Authority, which regulates the biggest banks and insurance companies, to look at ways of strengthening rules on blocking deferred bonuses and pensions at bailed-out banks.
But proposals to widen the scope of individuals covered by pay rules were rejected as they go "significantly beyond existing international standards". The government also did not explicitly endorse proposals to force bankers to wait 10 years for their bonuses. "Firms should retain the flexibility to set deferral periods," the government said, although it supported the idea of deferring payouts beyond the usual 3-5 years.
The government also responded to calls to analyse the different tax treatment banks receive when holding debt – which fuels private equity deals – and shares in companies. It pledged to conduct a review on so-called allowance for corporate equity by the time of next year's budget.
The government did not rule out extending the new regime, designed to make top bankers more accountable, more broadly across the financial services industry. "The government has not ruled out making the new senior persons regime applicable to the whole financial services industry, not just banking.
"Whilst this would not include the possibility of jail – that is reserved as a threat for bankers only – this would mean that executives in insurance and asset management would also be under a greater spotlight to be accountable and responsible for their actions. This would open the way for tougher scrutiny of pensions and investment product misselling," said Bill Michael, head of financial services at accountants KPMG.
Lack of competition in the industry, dominated by Barclays, HSBC and the two bailed-out banks Royal Bank of Scotland and Lloyds Banking Group, is to be tackled by adopting the Tyrie recommendation to review whether banks could be forced to make it easier for customers to move their current accounts to rival providers.