FSA: Ministers Must Outlaw Rate-Rigging
Ministers should legislate to criminalise attempts to rig the interbank borrowing rate Libor in order to stamp out the "shameful behaviour" behind the ongoing rate-rigging scandal, a Government-commissioned review has said.
Martin Wheatley, the head of the City regulator's conduct arm, has announced proposals for a sweeping overhaul of the process for setting Libor, which is used as a reference point for $300 trillion of financial contracts around the world, including the mortgages of millions of British home-owners.
He urged the Treasury to amend the Financial Services and Markets Act to allow the Financial Services Authority (FSA) to prosecute the manipulation of Libor, handing it criminal powers "for the worst cases of attempted manipulation".
And he set-out a ten-point manifesto for restoring the credibility of what has been widely-labelled "the world's most important number".
In a speech to City professionals, Mr Wheatley mounted a coruscating attack on the malpractice which led to regulators investigating more than a dozen of the banking sector's biggest names, with the industry likely to be hit by tens of billions of pounds-worth of fines and legal payouts.
Mr Wheatley singled out Barclays - the only major bank so far to have been punished for its transgressions - by pointing to the "web of traders that worked together to try and manipulate Libor to benefit one another". The British bank was fined £290m by regulators in the UK and US in June, prompting the resignation of Bob Diamond, chief executive, and other key executives.
"The system had in-built conflicts of interest from the start - banks could submit what they wanted - and with traders' bonuses dependent on the Libor rate, and no bank wanting to be seen as vulnerable in such a transparent system, too many people had a vested interest in gaming the system," Mr Wheatley said.
However he stopped short of recommending that Libor be scrapped altogether, suggesting that while it has become a "toxic brand", it is "not beyond repair".
Among the other reforms proposed in his report are:
1. The submission and administration of Libor rates should become a regulated activity. As Sky News revealed yesterday, the managers of Libor-submitters will in future require formal approval from the FSA to undertake their roles.
2. Malpractice in the Libor-setting process should be punishable by direct regulatory action, including public censure and financial penalties.
3. A new organisation should take over the supervision of Libor from the British Bankers' Association (BBA), which Mr Wheatley said "clearly failed to properly oversee the Libor-setting process and should take no further role in the administration and governance of Libor". A process to be launched shortly, overseen by Baroness Hogg, chair of the Financial Reporting Council, will allow private sector firms to pitch for the contract to oversee a new framework.
4. A code of conduct for those who submit Libor rates should be established, with submissions backed by hard data rather than the estimated borrowing costs employed until now. The banks which participate will have to be audited frequently.
5. The number of currencies which are used in the Libor-setting process should be pared back, with only those for which there is frequent trading data available continuing to operate. This would mean, Mr Wheatley will say, that the Australian, Canadian, Danish, New Zealand and Swedish currencies would be phased out. In total, 150 reference rates would be reduced to just 20.
6. The data submitted by banks should not be published for at least three months in order to avoid triggering the impulse - demonstrated by Barclays executives - to falsify their rates for fear that markets and rival institutions would doubt their current financial health.
7. Banks which have shied away from making Libor submissions should be encouraged to participate, "if necessary through new powers of regulatory compulsion. Libor requires collective responsibility if it is to work effectively," Mr Wheatley said.
8. International regulators should discuss the benefits of devising alternatives to Libor in certain circumstances, and benchmark rates used in commodity and other financial markets should also be scrutinised.
The Government welcomed Mr Wheatley's report and pledged to implement its recommendations as quickly as possible.
Greg Clark, financial secretary to the Treasury, said: "Today's independent report is very clear - the self-regulation of Libor has failed. It's yet another example of the broken regulatory system that this Government is committed to fixing.
"Libor is a hugely important international benchmark and this report makes a series of comprehensive and practical recommendations designed to restore its credibility. The Government will respond, in full, once Parliament returns."
The BBA acknowledged the failings of self-regulating the benchmark rate, calling Mr Wheatley's report an "essential step" to restoring confidence in the system.
"The BBA has strongly stated the need for greater regulatory oversight of Libor, and tougher sanctions for those who try to manipulate it.
"The absolute priority now for everyone is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators, and we will work closely with the Government and regulatory bodies to ensure this."