Bankers Should Face Jail Terms, Report Says

A new criminal offence punishing bankers for "reckless misconduct" while running their institutions is the centrepiece of proposals unveiled by a group of MPs and peers aimed at reforming the industry.

The Parliamentary Commission on Banking Standards (PCBS), which was set up after last summer's Libor-manipulation scandal led to Barclays being fined £290m, said in its final report that all areas of British banking required urgent change.

Citing "a profound loss of trust born of profound lapses in banking standards", the commission said a string of measures were needed to repair the industry's reputation.

In its 553-page report called Changing Banking For Good, the PCBS argued that individual accountability among senior bankers was lamentable, that industry pay schemes required a radical overhaul, and that executives should face a new sanctions regime that would dish out appropriate penalties, replacing a system that "looked good but achieved little".

It also said, as expected, that the Treasury's strategy for managing its 82% stake in Royal Bank of Scotland (RBS) was not working adequately and that options, including analysis of a break-up of the bank, should be conducted in the coming months.

The commission's hard-hitting recommendations underline the scale of public anger that so few British bank executives have faced punishment over the crisis that led to hundreds of billions of pounds of public money being put at risk to rescue them.

Only a small handful of senior bankers have been sanctioned by regulators for their roles prior to the bailouts of 2007 and 2008, while relatively few have been hit in the pocket despite mis-selling scandals such as the one involving payment protection insurance.

Andrew Tyrie, the Conservative MP who chaired the commission, said that senior bankers had hidden "behind an accountability firewall" but warned that governments and regulators had also been culpable for the decline in standards.

Among the concrete measures recommended by the PCBS are:

:: The introduction of a new criminal offence for reckless misconduct that would carry a custodial sentence.

:: Bankers' pay should be deferred for up to 10 years and should be more closely aligned to the safety and soundness of a firm.

:: Regulators should gain powers to cancel the pay and pensions of executives at banks which require taxpayer support.

:: UK Financial Investments, the body responsible for managing taxpayers' stakes in Lloyds and RBS, should be scrapped.

:: New senior persons and licensing regimes to ensure that regulators can take tougher action against bankers whose actions damage their employer's reputation or finances.

:: Reforms aimed at bolstering competition in retail banking, including, as Sky News revealed this month, a review of the costs and benefits of full current account portability.

Parts of the banking industry, whose main lobbying group the British Bankers' Association refused to respond on camera to the report, are expected to argue that some of the proposed reforms would undermine the City's international competitiveness.

Measures to defer pay for up to a decade would go further than any other major banking centre, but the PCBS argued that it was essential to do so if the industry's culture was to be genuinely reformed.

"The scale of remuneration in banking, the way it has been set and the form in which it has been paid have all incentivised misconduct and excessive risk-taking. The rewards for fleeting, often illusory, success have been huge, while the penalties for failure have been much smaller, or non-existent," it said.

"Many bankers were on to a one-way bet. Unlike unlimited liability partnerships, they had little or no skin in the game."

The Government is expected to consult on the PCBS recommendations that would require legislative change.

In a statement, the Treasury welcomed the commission's report, saying there were "many recommendations in it which will help the government's plan to create a stronger and safer banking system".

"The Government publicly welcomes the commission's recommendations on increased personal responsibility especially at a senior level, increased professional judgement by regulators and better functioning markets.

"We will now get on with a swift response and will report before the summer recess."

In his annual Mansion House speech on Wednesday night, George Osborne is likely to back the commission's call for a review of the options for the Government's stake in RBS, according to Treasury aides.

Vince Cable, the Business Secretary, also welcomed the report, backing calls for banks to relinquish ownership of the payments system and for a new approvals regime for bank staff.