As RBS posts a multi-billion Pound loss for the seventh successive year since the taxpayer bailed it out in 2008, making a total of £49 billion in losses in those seven years, the ordinary taxpayer might be forgiven for wondering why no bankers have faced criminal charges or even had the civil law applied to them.

Criminal charges might have been tricky but civil action would have been straightforward because there is an existing law which could be applied to culpable bank directors.  Section 174 of the 2006 Companies Act details the duties of the directors as follows:

(1) A director of a company must exercise reasonable care, skill and diligence.

(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b) the general knowledge, skill and experience that the director has.

How can the directors of RBS, HBOS, Lloyds TSB and Northern Rock be said to have met these requirements? Lloyds TSB have even admitted that inadequate due diligence was done before the takeover of HBOS.

There is also the question of general competence. The alarming truth is that the executive directors of banks almost certainly did not understand the complex financial packages being devised by their investment arms which led to the crisis.  On 10 February 2009 the recently removed executive directors of the RBS and the HBOS appeared before the Commons Treasury Select Committee: Sir Fred Goodwin (ex-RBS chief executive) and Sir Tom McKillop (ex-RBS Chairman), Andy Hornby  (ex-HBOS chief executive) and Lord Steveson of Conandsham  (ex-HBOS  Chairman).

During their examination by the committee, each of the four directors on show was asked to detail their formal banking qualifications. All four had to admit that they had none  (see Q779, Q848 and Q858). I am generally an enemy of credentialitis, but in this case technical qualifications are necessary to ensure that the directors understand the very complex financial instruments being used and the exotic accounting practices employed by large corporations. If failure to understand such things does not amount to gross negligence, what does?

The Companies Act allows shareholders, subject to the agreement of a court, to sue directors for negligence, default, breach of duty or breach of trust. No attempt has been made to remove their limited liability to allow this to happen. If their limited liability had been removed it would placed them potentially at risk of losing everything rather than walking away with the fruits of past vast remuneration and pensions intact.

As for criminal charges, I wonder if something could be done under the laws relating to fraud. There must come a point where reckless behaviour becomes fraud because the director knows they are taking chances which will most probably not come off. Moreover, for the future we need a law of reckless endangerment which would make any director who endangered a bank or allied institution through their criminally reckless behaviour liable to be punished by the criminal law.

Why has no director at the bailed out banks been punished in any meaningful fashion?  Probably because bankers and senior politicians are too closely associated with one another. Perhaps because going after bank directors might uncover dangerous fact about political interference, for example, the circumstances behind the on the face of it, strange willingness of Lloyds to take over HBOS at Gordon Brown’s urging  which turned Lloyds from a prudent, cautious well managed bank to a basket-case needing rescue by the taxpayer.

The failure to punish bank directors for at the least gross recklessness creates an extreme example of moral hazard.  As the Government almost invariably steps in when it is a bank going bust, being a  banker is a one way bet:  the bank makes money, you get the vast remuneration; the bank fails, the taxpayer steps in and you do not  suffer any punishment such as summary dismissal, the removal of limited liability if you are a director or criminal proceedings, but are dismissed with a massive pay-off at worst and continue to be employed on the same remuneration terms as you were before the taxpayer had to bail out the banks.

The culpable bankers should be punished both from common decency and to deter others in the future. Those who are saying “we must move on” are arguing a nonsense. Let’s try that argument with a few other scenarios: X murdered Y but there is no point in recriminations: we must move forward; X stole £50 million from his employer but that was in the past: we must move on.  Doesn’t really work does it? The argument politicians and bankers both employ promiscuously that to concentrate on bankers’ pay is to distract from the real issue of what is to be done about the economy is simply special pleading: reforming bankers’ pay is part of dealing with the economic mess because if they have the same incentives to misbehave in the future and no penalty is paid by those who have misbehaved in the past there will be no reason not to misbehave once more.

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