The Emperor's new clothes

The Parliamentary Commission on Banking Standards, established in the wake of the LIBOR rate-rigging scandal, has turned its attention in recent weeks to a populist proposal: that bankers who behave recklessly be subject to criminal sanctions, that there be an element of personal responsibility in the making of catastrophically bad decisions. New legislation criminalising such conduct would prospectively be modelled on US health and safety legislation, which allows public safety professionals to be prosecuted for taking decisions which endanger the public. In principle, it's a difficult proposal to reject. Bankers should be made to share in the consequences borne by those who suffer financially because of their mistakes. In practice, however, any such law may only bite in extreme circumstances, meaning the main impact of such legislation may simply be to make bankers a little more risk-averse; perhaps the intended consequence in the long term.

If a traditional criminal statutory model is employed for this new reckless endangerment law, then like the Bribery Act 2010, it may only lead to prosecutions in very special circumstances. Proving any criminal allegation beyond a reasonable doubt is, by definition, challenging. Proving that any given decision taken by a banker was reckless, given the complexities of that decision, the likely risks inherent in taking any such decision, and the comparable risks inherent in the dozens or hundreds of similar decisions taken by that same individual in close proximity to the decision in question, may be nigh on impossible. Moreover, there will presumably be some sort of good faith defence available to any banker charged under the proposed new law: should he or she have genuinely believed that the risks ought to be taken in the best interests of the client, or should she or he have determined, perhaps in a very short space of time, that the risks were manageable, and ultimately simply miscalculated, it is difficult to see how such conduct could properly be criminalised. There could potentially be extensive human rights implications in attempting to criminalise what is, in effect, an inherent part of any banker's professional obligations, namely the taking of calculated risks. Any investment in any product carries some element of risk. If such a law were to come into force, it would likely only bite in circumstances where the risks were unusually grave and threatened the institution and the wider public, where those were quite clearly seen in advance by the banker in question, who chose to ignore them and press on regardless. And the UK's criminal law already has extensive provisions for dealing with such risk taking.

Another option might be to legislatively classify banking as a specially high risk activity. Traditionally banking, unlike, for example, working with hazardous chemicals that may harm the environment and the general public, has not been described by the legislature as an activity that imposes certain minimum public safety standards on those who engage in it. But in the wake of the series of banking scandals that have rocked the financial services industry in the past few years and have affected the lives of millions, describing banking, like toxic waste management or nuclear power, as a high risk activity that imposes certain levels of knowledge on its participants by definition does not seem too much of a stretch. If the US model is closely followed, prosecutors could rely on this redefinition of banking to establish certain base knowledge in everyone involved in certain high risk financial sector activities, leaving prosecutors less to prove for purposes of establishing criminal liability.

Whichever model is followed, the impact on the banking industry is likely to be similar to that observed across a number of industries, particularly those like defence and energy that do extensive business abroad, in the run-up to the Bribery Act coming into force in mid-2011. Insurance premiums will go up, and banks will engage in extensive programmes of preparation and retraining to explain any new risk management protocols to their employees, particularly those involved in higher risk activities or the provision of new, perhaps unstable products or services. Once any such law comes into force, there will likely be a handful of demonstrative prosecutions of individuals who egregiously breach its provisions.

But it is unlikely that the mechanics of the banking industry will change in response to a criminal sanction which, by definition, only targets the most extreme cases of reckless abuse. A wider change in the culture of risk starts more assertive day-to-day regulation of bankers, with the criminal law remaining in the background as an ultimate sanction if those measures fail. Banking culture is not merely the product of a small percentage of bankers who recklessly take risks, and a more sustainable banking culture will not be created by merely targeting that small percentage.