Policy Papers

Why have no bankers gone to jail?

James Taylor |

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Executive Summary

  • Contrary to the popular image of Victorian Britain as an era of unbridled capitalism, the Victorians took financial transgressions seriously.
  • Legal reforms passed in the second half of the nineteenth century made it possible for bankers to be held criminally responsible for their actions.
  • The prosecutions which became commonplace by the end of the nineteenth century were high-risk and did not always succeed, but they had important economic and social effects. They restored market confidence in times of crisis, established the City of London’s good reputation, and demonstrated the fairness of the criminal justice system.
  • In addition, by punishing transgressions in a highly visible way, prosecutions defused demand for radical structural reforms, thus bolstering rather than undermining free enterprise.
  • The lack of prosecutions following the recent banking crisis is thought to prove the inadequacy of existing laws and the government is therefore proposing to make reckless misconduct in the management of a bank a criminal offence.
  • But it is doubtful whether such a reform would be either viable or necessary. Laws first passed in Victorian Britain define publishing false information to shareholders in prospectuses and balance sheets as fraud. It is easier to gain convictions based on fraudulent misrepresentation than recklessness, and in the past these laws have been successfully used to convict bankers and other directors who were reckless with their shareholders’ money.
  • These laws are still in place, and have been stiffened since 1900, but regulators have shown little willingness to test their applicability in the current crisis.
  • This absence of political will has led to the effective decriminalisation of fraud. This will make it harder to clean up the City, and will foster radical critiques of the criminal justice system in particular and of the state in general.


One often-remarked aspect of the recent banking crisis is the absence of criminal prosecutions of senior executives. In the UK, the bailout cost the taxpayer £133 billion, or over £2,000 for every person in the country. A lot of people struggle to understand why those responsible have not faced criminal sanctions. Labour MP David Crausby summed up the feelings of many in December 2012 when he noted in the Commons that:

When the great train robbers stole £2.5 million from Royal Mail, they were sentenced to as many as 30 years in prison. When our bankers get caught fraudulently taking billions of pounds from poor people throughout the world, they just pay large corporate fines and walk away with fat pensions.

History provides a useful perspective on the question. In the popular imagination, the Victorian era is a byword for unrestrained greed, when the ‘dark satanic mills’ reigned supreme, and only profit was sacred. Yet, as unlikely as it may seem, this period saw the first sustained attempt to hold businessmen criminally responsible for financial misdemeanours. Placed in this context, many of the reasons which have been advanced to explain or justify the absence of arrests since 2008, in particular the supposed inadequacy of the law, become invalid. The real reason is a lack of political will, the result of a combination of ideology and pragmatism which views criminal prosecutions as risky and counterproductive. But while history shows that prosecutions are indeed hazardous, dispensing with them altogether carries a different set of dangers of which policymakers should be aware.

Victorian reforms

One perceived obstacle to prosecution is the difficulty of enforcing personal accountability in complex financial institutions which are predicated on shared responsibility – ‘the Murder on the Orient Express’ defence, as it was termed by the cross-party Parliamentary Commission on Banking Standards, established in July 2012. However, this was a problem successfully tackled by Victorian policymakers. Legislation in the 1840s and 1850s made it much easier to form companies, which generally had much more complicated management structures than the private partnerships which had hitherto dominated most sectors of British business. But when companies went bust, management played pass-the-parcel with responsibility. Managers who had taken the decisions which had led to disaster claimed that their actions had been approved by their directors; the directors maintained that they did not know or did not understand what their managers were really doing; auditors who had approved misleading financial statements denied liability, insisting that key information had been concealed from them by directors or managers. Faced with such a mass of conflicting testimony, and with no precedents for determining legal responsibilities in companies, the courts struggled to deal adequately with corporate failures. But in response to a series of bank failures in the mid-1850s, Lord Palmerston’s Liberal administration promoted legislation between 1857 and 1861 which targeted offences by directors, managers and employees of companies. Now embezzlement of company money, falsification of company books and the publication of false statements with intent to defraud were criminal offences punishable by up to seven years’ penal servitude.

Initially, prosecutions were rare because financial crime still tended to be viewed as a private rather than a public offence which should be prosecuted by the victims rather than the state. However, the collapse in 1878 of the City of Glasgow Bank and the successful prosecution of its management by the Scottish public prosecutor demonstrated to the English the benefits of a change in the law, and the following year saw the appointment of a director of public prosecutions (DPP) for England and Wales. The system was further refined in 1890 with the tightening up of the procedures for winding up insolvent companies: they would be investigated by an official receiver, and when fraud was suspected, the case would be referred to the DPP.

By the 1890s, criminal trials of company directors and managers were becoming a familiar sight. While it was still difficult to prove who knew what and when, judges and juries often proved impatient with defence lawyers who tried to absolve their clients by shuffling responsibility onto others. For example, when in 1895 Jabez Balfour, the man behind the Liberator Building Society – the largest chain in the country – was prosecuted for fraud after his empire collapsed, his barrister dismissed the idea that Balfour was the guiding spirit behind the company as a press invention. Preoccupied with his parliamentary career, Balfour had left his subordinates in charge, and they were to blame for the failure. The jury remained unimpressed, however, and Balfour was handed two seven-year sentences, to run consecutively.

City culture

A second impediment to legal action since 2008 is the belief that what the bankers did was the product of an all-pervasive City culture and that it would be unjust, not to mention practically impossible, to single out individual wrongdoers for punishment. Indeed, this has long been a defence employed by executives finding themselves accused of wrongdoing. It has not, however, always succeeded in shielding them from punishment. In 1922, Gerard Lee Bevan, the chairman of the City Equitable Fire Insurance Company, faced prosecution for issuing false balance sheets. Bevan had kept his company going by ‘window-dressing’ the accounts – buying in securities to appear on the balance sheet then selling them immediately afterwards. In the witness box, he claimed that ‘six out of ten balance-sheets published in the United Kingdom’ operated on the same principle: ‘Every big man knew perfectly well what was done.’ But the alleged extent of the practice proved no defence: after a scathing summing-up from the judge, Bevan was convicted and sentenced to seven years’ penal servitude.

Free enterprise

A third barrier to criminal actions is unease over the wider implications such actions would have for the economy. Even if a light-touch regulatory regime is commonly identified as one of the chief causes of the crisis, moving too far in the opposite direction risks stifling the economic activity on which Britain’s prosperity ultimately depends. As The Economist succinctly puts it, ‘Discouraging risk-taking altogether…can be counterproductive.’ However, history provides a different perspective. In late-Victorian Britain, criminal sanctions were understood as a natural adjunct of an otherwise lightly-regulated economy. The legislation passed in the 1840s and 1850s made it cheap and easy to register as a company and represented a major boon to business. Corporate scandals jeopardised this settlement, stoking demands for measures such as restraints on company formation, government audit of accounts and unlimited liability for directors. By punishing bad behaviour, criminal prosecutions neutralised calls for such radical overhauls of company law, therefore buttressing rather than undermining free enterprise. This was understood even by the most dogmatic advocates of laissez-faire economics in Victorian Britain. Lord Justice George Bramwell was an extreme defender of the principle of caveat emptor (let the buyer beware), yet took a firm line against directors accused of lying to shareholders about the true state of their firm’s finances – even when they did so to protect the share price. ‘A wilful falsity was a fraud’, he explained from the bench in 1880. ‘It did not matter how good or how pure, or how right-minded the intention might be.’

With the possibility of criminal punishments for the failings that led to the recent banking crisis seemingly not being seriously explored, sweeping and untested structural innovations such as splitting investment and retail banking – which many doubt will improve UK banking – will be much harder for policymakers to resist.

Banker bashing

A fourth objection to taking the banks into the courts is that public appetite for ‘banker bashing’ is fading and that the more pressing issue is to get the banking system working again. Some cite the muted response to the decision to strip former Royal Bank of Scotland CEO Fred Goodwin of his knighthood in 2012 as evidence of this shift in public mood. Even the trade unions remained unimpressed, with Unite regarding it as a ‘token gesture’. Interestingly, this episode represented a reversion to pre-Victorian forms of punishment. Before corporate offences were enshrined in the statute books, parliament dealt with scandals on an ad hoc basis. So, in the wake of the collapse of the notorious stock market bubble of 1720 in which thousands of investors lost their cash, parliament responded to public outcry by holding investigations and confiscating the property of some of the South Sea Company directors. Those who were also MPs were treated more severely – several were expelled from parliament and one, Chancellor of the Exchequer John Aislabie, was briefly sent to the Tower of London.

Fred Goodwin’s public degradation can be seen in this light, as a one-off symbolic punishment of little wider significance. The criminal trials of the nineteenth century, by contrast, achieved much more than this. For a start, they helped to restore economic confidence in times of crisis. The collapse of the City of Glasgow Bank in 1878 could have triggered a general panic. Indeed, investors besieged other Scottish banks; press reports described customers waddling home ‘laden with the gold which they had withdrawn’. Shares on the London market dropped following the news. But the swift action of the authorities – within three weeks of the failure the entire board had been arrested – did much to calm the public mood. Investors were reassured that the gross falsification of accounts practised by the bank’s directors was not representative of the sector as a whole and could not be carried on with impunity. The City reaped significant reputational benefits from criminal actions. By the early twentieth century, US commentators were praising the state of the law in the UK which saw wrongdoers rooted out: such offenders, they said, would have remained unpunished in the States.

Just as importantly, criminal trials helped to defuse radical critiques of society. A long-standing feature of working-class attitudes to the criminal justice system was the belief that there was one law for the rich and another for the poor, that rich rogues could use their influence to get away with crimes while the poor bore the full brunt of the law. Such views became somewhat harder to maintain when wayward businessmen started appearing in the dock, and even the working-class press began acknowledging the ‘severe’ sentences doled out to white-collar criminals.

In short, criminal trials helped repair trust: trust in financial statements, and trust in the fairness of society and the criminal justice system.

A new law?

Returning to the present, for many, the biggest obstacle to criminal prosecutions since 2008 has been the perceived inadequacy of the law. As influential commentator Joris Luyendijk recently put it, ‘The fact that nobody went to jail after such a breakdown means that there is something wrong with the rules themselves.’ This view has received official endorsement. The Wheatley Review, which followed allegations of manipulation of LIBOR rates by several UK banks in 2012, argued for the creation of new criminal offences to deal with future attempts at rate-fixing. Similarly, in June 2013 the cross-party Parliamentary Commission on Banking Standards recommended the creation of 'a new criminal offence of reckless misconduct in the management of a bank.' This recommendation is embodied in a Treasury amendment to the Banking Reform Bill, currently before the House of Lords.

However, history shows that the problem does not always lie with the law: political will, or the lack thereof, can sometimes play a bigger factor. The London and Globe Finance Corporation collapsed in 1900 after making losses of £8 million and subsequent investigations revealed that it had concealed its insolvency by means of false balance sheets. The Conservative Attorney General controversially refused to order the DPP to prosecute the managing director Whitaker Wright, claiming that he had broken no law. The Prime Minister, Arthur Balfour, supported him, and made vague noises about the necessity of amending the law to ensure such offences were punished in the future. But there was nothing wrong with the law: some of the victims combined to bankroll a private prosecution and Wright was successfully convicted and sentenced to seven years’ penal servitude.

It is true that the law is sometimes unable to reach particular offences which public opinion deems scandalous. But it usually proves sufficiently flexible to punish the perpetrators in other ways. The Royal British Bank went bust in 1856 after its directors had drained it of its capital: some had been frittered away in high-risk mining speculations; the rest had been parcelled out in secret loans to board members. Though the press was disgusted that the directors had ‘taken from the till’, insider lending was not a criminal offence. However, the directors were prosecuted by the Attorney General, not for reckless speculation or for the loans, but for concealing the true state of the bank’s finances from the shareholders. All seven defendants were convicted, and six were given short custodial sentences.

This prosecution took place before the Palmerston government’s legislation tackling fraud and so the indictments were framed under the common law offence of conspiracy to defraud – a useful device for prosecuting behaviour not adequately dealt with by statute law. The law of conspiracy continued to sustain prosecutions in the twentieth century, and has survived to this day, retained explicitly for its effectiveness in dealing with large or complicated cases of fraud. At the same time, the body of statute law imposing criminal sanctions has expanded considerably since the Victorian age to keep pace with developments in the corporate sector. So, failing to keep proper books of account and share-pushing both became criminal offences in 1928, the law punishing falsehoods in company prospectuses was tightened up considerably in 1948, making false or deceptive statements to auditors was criminalised in 1976, while insider lending and trading in a company’s own shares were both criminalised in 1985. In 2000, criminal penalties for market manipulation were extended by the Financial Services and Markets Act establishing the Financial Services Authority. More recently, the 2006 Fraud Act made ‘fraud’ a statutory offence for the first time. Under the act, fraud can be committed in three ways, by making false representations, by failing to disclose information, and by abuse of position. The maximum prison sentence is ten years.

Thus the criminal laws against corporate wrongdoing are stronger than they have ever been. And there are a number of bodies tasked with enforcing these laws: the Serious Fraud Office, which took over responsibility from the DPP for investigating and prosecuting serious financial crimes in the 1980s; the Financial Conduct Authority, which superseded the FSA in April 2013; the Department for Business, Innovation and Skills; in Scotland, the Crown Office and Procurator Fiscal Service. But these regulators have so far proved remarkably reluctant to put the criminal law to the test. In 2010, the Financial Services Authority’s Enforcement Division attributed the Royal Bank of Scotland’s failure to ‘a series of bad decisions in the years immediately before the financial crisis’ and was unable to identify ‘any instances of fraud or dishonest activity by RBS senior individuals’.

But is this an overly narrow definition of fraud? Madoff-style Ponzi schemes are at the extreme end of the scale, but at the other lie a host of less egregious but nevertheless serious transgressions. History shows that proving misrepresentation in balance sheets and prospectuses has been the surest means of punishing wayward entrepreneurs. Some commentators, such as financial journalist Ian Fraser, have asked whether the Royal Bank of Scotland’s rights issue prospectus, which drew a further £12 billion from shareholders just months before the bank failed, might leave it liable to a criminal prosecution for misrepresentation. Yet to date the prospectus has only triggered a civil action – currently ongoing – from investors.

The boom years which preceded the bust saw an erosion of official enthusiasm for criminal sanctions. Regulators developed a preference for fines and other penalties such as boardroom bans, driven partly by ideology and partly by pragmatism, while New Labour’s target culture caused police resources to be diverted away from fraud investigations as these did not count towards key performance indicators. The implications were grave. Just before the financial crisis reached its climax in 2008, an independent review of the Serious Fraud Office by a former senior prosecutor from New York City Jessica de Grazia concluded that twenty-first century Britain had seen a ‘partial decriminalisation of fraud’. So when the crisis struck, criminal sanctions had slipped off the menu of regulatory options.

There are early signs that the reform of the FSA and a recent shake up at the SFO may lead to change: June and July 2013 saw two brokers and a trader charged in connection with the LIBOR scandal as a result of an SFO investigation. No laws needed to be amended: they are being prosecuted under the law of conspiracy to defraud. But whether this will presage further activity in the criminal courts remains in doubt.


Undoubtedly, criminal prosecutions of financial misdemeanours are fraught with risk. History shows that assembling a case in which guilt is unambiguously assigned to individuals out of intricate and often opaque company records is extremely difficult. Much depends on how judges choose to interpret the law, and prosecutors cannot rely upon consistency here. As a result, prosecutions can fail, and when they do, the press are usually the first to criticise, even when they had previously led demands that something be done. Moreover, such actions are always expensive, which further raises the stakes for prosecutors.

But history also indicates the real benefits that have accrued from criminalising financial offences. Prosecutions have restored confidence at moments of crisis, and helped to reinforce the City’s reputation as a relatively safe place to do business. They have also had a significant social impact, helping to heal rifts in society by demonstrating the class-blindness of British law. The country needs these economic and social benefits now more than ever. Former Chancellor Lord Lawson has recently warned that ‘if London wants to remain a really world-class financial centre, it has to be cleaned up’. Self-regulation is patently insufficient to restore trust in financial institutions. Decriminalising fraud has also weakened public trust in the state, undermining the Coalition Government’s attempts to create a mood of shared sacrifice to ease the nation through the years of austerity ahead. Reviving the criminal law – unlike stripping a lone banker of his knighthood – would signal that a healthy distance was beginning to open up once more between political and financial elites.

Further Reading

de Grazia, Jessica, Review of the Serious Fraud Office: final report (June 2008)

Fraser, Ian, ‘Looks like Fred Goodwin may face criminal charges after all’ (14 December 2011)

Johnson, Paul, Making the market: Victorian origins of corporate capitalism (Cambridge, 2010)

Parliamentary Commission on Banking Standards, Changing banking for good: fifth report (June 2013)

Robb, George, White-collar crime in modern England: financial fraud and business morality, 1845-1929 (Cambridge, 1992)

Searle, G. R., Morality and the market in Victorian Britain (Oxford, 1998)

Taylor, James, ‘Commercial fraud and public men in Victorian Britain’, Historical Research, 78 (2005), 230-52

Taylor, James, Boardroom scandal: the criminalization of company fraud in nineteenth-century Britain (Oxford, 2013)

The Wheatley Review of LIBOR: final report (September 2012)

Wilson, Sarah, ‘Law, morality and regulation: Victorian experiences of financial crime’,British Journal of Criminology, 46 (2006), 1073-90

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