The UK does not have a good track record of getting executives to pay for their mistakes. Most of the time, boardroom wrongdoers have stepped down, taken their pensions, and sometimes even moved on to greener pastures long before regulators show up.
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), which are the two main financial regulators in the U.K., ended their six-year investigations into former senior managers at HBOS on August 26 and said they would not take any more action against the people for their roles in the 2008 failure of the bank. This was the latest nonenforcement notice.
During their "forensic" and "rigorous" investigations, the regulators said they looked at more than two million documents, talked to witnesses, and went through reams of evidence from the time in question to see if these top managers failed to do their jobs. As a result, there was no need to take any action.
One of the bank's former top managers was fined ten years ago. The Financial Services Authority, which came before the FCA, fined Peter Cummings, the head of HBOS's corporate division, £500,000 (about $805,000 at the time) in 2012 for not being able to do his job well. He was also banned from any senior position in financial services.
When the bank failed, neither the bank's former CEO nor its chairman were punished. Cummings thought he was used as a scapegoat and blamed for a lack of collective responsibility in the bank and bad regulation and oversight by the government and industry watchdogs, which made it possible for bankers to take huge risks to get bonuses.
In the UK, the question of who is responsible for what can be a sensitive one. People who want corporations to be more accountable like it when nominated directors are in charge of certain issues, like health and safety. Directors, however, have so far been able to keep the line that it is better for the board as a whole to take responsibility because they know they would be easier to find and therefore more accountable.
In fact, risk managers and compliance professionals like to point out that the board and senior management are ultimately responsible for risk management and corporate governance. They set the "tone from the top" about how the company acts and how much risk it is willing to take.
James Alleyne, a legal counsel in the financial services regulatory team at law firm Kingsley Napley, said that regulatory cases against senior people are notoriously hard for the FCA, "particularly against those operating in large complex organizations, with multiple layers of management and oversight and where the lines of individual accountability may not always be clearly drawn."
Trying to hold people accountable for years of alleged wrongdoing is made even harder by the fact that the FCA only has a certain amount of time to act. The regulator also has to think about how the different rules in place at different times affect each other. Alleyne also said that regulatory standards for senior executives usually just tell them to take "reasonable steps." They do not have specific rules or strict liability, so the execs' actions can be questioned and interpreted.
Alleyne said that the FCA has enough legal and regulatory tools to go after executives. The Senior Managers and Certification Regime (SMCR), which most firms have had to follow since 2019, was meant to make people who work in regulated financial services more accountable. It should also make it easier for the Financial Conduct Authority (FCA) to take action against senior people.
Alleyne, on the other hand, said that the SMCR did not apply to HBOS because it did not go into effect until after the bank failed.
So far, the SMCR has led to a small number of results. This is not surprising, he said, because "we would always expect there to be a time lag between new rules coming in and corresponding enforcement action, but we certainly anticipate there being numerous cases in the enforcement pipeline."
The U.K.'s financial regulators are not the only ones with a checkered history of enforcing laws when companies, not people, break the law. If you look at the Serious Fraud Office's (SFO) recent case history, you will see that Tesco is accused of committing accounting fraud on its own, Serco is accused of defrauding a U.K. government department by claiming money for tagging criminals who were already dead, and companies are accused of paying bribes to get contracts in other countries (Sarclad). In each of these situations, the SFO was not able to get people charged for actions for which the company had agreed to a deferred prosecution agreement.
Complex white-collar crimes are hard to investigate and bring to justice in the United Kingdom. The situation does not look like it will change soon because the government seems to be focusing on freezing or cutting the resources of regulators and getting rid of "burdensome" rules to attract investment and talent as the UK moves away from the European Union.
By fLEXI tEAM