UK invites more bank failures by backtracking on executive liability

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In a book written 30 years ago in the wake of the accident at Three Mile Island, the organisational sociologist Charles Perrow explained that in complex environments catastrophic outcomes and recurrent failures are generally caused by bad systems rather than bad people. Punishing junior personnel not only fails to identify the culprits but often gets in the way of improvement, by encouraging cover up and inviting wilful blindness by senior executives.

The Parliamentary Commission on Banking Standards, which reported in 2013, recognised the central significance of executive responsibility for systemic failure in the sector. It proposed a senior managers regime which would hold executives liable for wrongdoing in activities for which they had responsibility even if they had no specific knowledge of the improper conduct. Having accepted this recommendation, the UK government is now backtracking.

While everyone knows that the real reason for the U-turn is lobbying by banks, other ostensible justifications are put forward — notably, that the provision would violate the European Convention on Human Rights which enshrines the presumption that a person is innocent of a criminal offence until proven guilty. The PCBS unfortunately encouraged this misapprehension by describing their proposal as “reversing the burden of proof”.

This misses the point. The offence is that of being responsible for an activity in which wrongdoing took place, not of committing the wrongdoing itself. If it is a criminal offence to be in charge of a den of thieves, the prosecution needs to establish only that it was a den of thieves and that you were in charge of it, not that you were yourself a thief. It is no defence that you thought the organisation was a monastery, which is broadly the argument employed by those made “physically ill” by the discovery of what their subordinates had been doing.

Primary responsibility for rate-fixing scandals lies with those who allowed a culture in which such behaviour was seen as normal. This is not to absolve the individuals who actually perpetrated the crimes. It is easier to sympathise with the junior and modestly paid people employed in call centres to sell often worthless payment protection insurance. No sympathy should be extended to their bosses, who benefited from transactions that were in essence fraudulent; still less to those who legally challenged attempts to stamp out the shameful practices.

Andrew Bailey, who chairs the Prudential Regulation Authority, presented a better argument when he worried that the requirement that executives should show they had taken all reasonable steps to eliminate wrongdoing would encourage box ticking and paper pushing rather than substantive action to change organisational culture.

Perhaps the PCBS was simply being weak in admitting this escape route at all. Might it have been better simply to impose strict liability, without exception, and leave it to regulators and prosecutors to limit enforcement action to egregious cases; thus severely limiting opportunities for legal challenge, either on human rights grounds or in particular cases?

And the worst argument the lobbyists present is that an effective regime of managerial accountability would encourage talented managers to move abroad. If these talented people find it impossibly burdensome to accept responsibility for the actions of their subordinates, their talents are ones Britain would be better without.

The question parliamentarians should ask themselves is whether, under the proposed regime, the people actually responsible for recent instances of criminal rate fixing and fraudulent PPI sales would have been subject to severe regulatory sanctions (criminal penalties are still not in prospect). Because only if the answer is yes can we be reasonably confident that similar events will not happen in future.

 

This article was first published in the Financial Times on December 9th, 2015.

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