'Fred Goodwin Law' is mooted to ban disgraced bankers for life

A "Fred Goodwin Law" making it easier to ban the bosses of failed banks from the City could be on the statute books by January.

Following the abject failure of UK law and prosecutors to jail any bankers for wrongdoing over the financial crisis, the Financial Services Authority said before Christmas that the current legal framework was inadequate to bring sufficient actions against directors responsible for mismanaging their banks.

The Treasury yesterday published a consultation document proposing rules that could prevent directors of failed banks from ever holding senior positions in finance again.

Key to the reform would be changing the system so directors of collapsed banks have to prove their suitability for office to the Financial Services Authority – a 180-degree shift in the burden of proof. Currently, the regulator has to prove the individual acted improperly before banning them, but now directors will have to prove they acted properly and were not responsible for the failure.

Second, the Treasury proposes creating a new criminal offence covering serious mismanagement in bank management. This would go some way toward dealing with the loophole in the law that makes it difficult to prosecute through the narrow crimes of fraud, insider dealing and making misleading statements.

The consultation suggests negligence, incompetence and recklessness could be made offences under the umbrella of "managerial misconduct". Recklessness would almost certainly have been usable in Goodwin's case at Royal Bank of Scotland. It would be particularly used to cover excessive risk taking and "the sort of irresponsible conduct that could put a bank's survival at risk and potentially put the taxpayer at risk also," the Treasury said.

The initial consultation started yesterday with responses due by September 30 in the hope of getting the new rules included into Banking Reform Bill aimed at driving through the Vickers proposals to ringfence retail banks from investment banks.