New criminal offence for senior management to be held responsible for the failure of financial institutions

For the first time, senior managers, or those who perform a “senior management function”, of certain financial institutions (such as banks, building societies and investment firms) are criminally responsible for their reckless decision making, or their reckless failure to monitor such decisions taken by others, which cause a financial institution to fail.

To this effect, section 36 of the Financial Services (Banking Reform) Act 2013, which came into force on 7 March 2016, creates a new criminal offence (“the Offence”).

Key elements of the Offence

The Offence only applies to senior managers of relevant financial institutions. These are UK institutions (other than insurers or credit unions) which have permission to carry on the regulated activity of accepting deposits or those which are regulated by the Prudential Regulatory Authority.

The act or omission must be reckless. This means, at the time of the decision, the senior manager was aware of a risk that the decision may cause the failure of the financial institution. Furthermore, the act or omission fell below what could reasonably have been expected of a person performing the senior management function.

The conduct must cause the financial institution to fail. A financial institution is regarded as failing when:

1. It enters into insolvency (i.e. liquidation, administration or receivership)
2. One of the stabilisation options in Part 1 of the Banking Act 2009 is achieved (i.e. for private sector purchase, temporary public ownership or a bridge bank); or
3. It is taken, for the purposes of the Financial Services Compensation Scheme, to be unable or likely to be unable to satisfy claims against it

The repercussions if convicted

The Offence is triable either way, meaning the trial can take place in either the Magistrates Court or the Crown Court. The venue chosen has significant ramifications on the gravity of the potential sentence if convicted.

If convicted in the Magistrates Court, in addition to a potential financial penalty, a senior manager may be imprisoned for up to 12 months. Where as, if convicted in the Crown Court, the maximum term of imprisonment increases to 7 years and a financial penalty may still also be imposed.

If you have been charged with, or are being investigated in relation to, this offence and would like to discuss your situation and obtain legal advice, please contact our legal experts to arrange a reduced fee initial meeting on 01202 525333 or jon.morrissey@ellisjones.co.uk.