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E&Y: Personal liability would focus bank directors’ minds

A senior partner at Ernst and Young has backed the idea of requiring directors of financial institutions to be personally liable for the firm’s losses.

Ernst and Young is itself a partnership and its 600 partners share in the firms profits and losses.

In February, all-party Parliamentary group on economics, money and banking chair Steve Baker tabled a bill that would have seen directors of financial institutions be forced to take personal liability for their firms’ losses. However, it was dropped in May because it did not become law before the end of the two year Parliamentary session.

Speaking at a Reform event on the future of financial services regulation earlier this week, Ernst and Young Financial Services partner Philip Middleton said: “If we go back to the 1930s when bankers had personal and individual liability, speaking as a partner in a firm, a partnership, personal liability does tend to concentrate the mind wonderfully when one is thinking about taking risks. The idea you can wipe yourself and your fellow partners out has a massive impact on behaviour, culture and activities.”

Baker’s bill would have required any losses to be “made good” first by directors’ bonuses which should be held back for five years, and then by personal bonds worth £2m or half of the director’s net wealth. He says if this is not enough to cover losses, directors should be required to put more money into the bank or be declared bankrupt.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I think the issue is you shouldn’t have the opportunities to earn the mega bucks without having the nerve to risk losing it all.

    At the moment these people are getting all the rewards of the entrepeneur while playing with someone else’s money.

    It is like going to the racetrack, backing a longshot, collecting when it wins and getting your money back if you lose!

    Something has to give!

  2. Wise advice from EY.

    Odd however, given this advice, that the accountancy firms like EY all converted to LLP status a few years ago in order to ensure that their own partners were partially protected from personal liability.

    Given how often the auditing firms mess up, perhaps they should be stripped of LLP status to ensure that their minds are ‘focused’.

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