Treasury Committee suggests higher fines and criminal sanctions for LIBOR manipulation

Out-Law News | 21 Aug 2012 | 10:26 am | 4 min. read

Higher fines for firms that fail to co-operate with regulators and potential criminal sanctions for benchmark manipulation have been suggested by the Treasury Select Committee in a report responding to alleged manipulation of market rates by major banks.

The Committee said that the "sustained rigging of a crucial benchmark" had done "great damage" to the reputation of the UK's financial services sector and said that the Bank of England needed a much stronger governance framework.

The Committee has published its preliminary findings following its inquiry into a settlement in June between Barclays and the Financial Services Authority (FSA) for "misconduct" in relation to its submissions to the London Interbank Offered Rate (LIBOR) and its euro equivalent, EURIBOR, during the 2008 economic crisis.

"As a result of this inquiry, a good deal of further information has now been brought into the public domain," said committee chairman Andrew Tyrie. "Urgent improvements, both to the way banks are run and the way they are regulated, are needed if public and market confidence is to be restored."

Barclays announced on 27 June that it would pay total penalties worth £290 million to the FSA, US Commodity Futures Trading Commission (CFTC) and the Fraud Section of the US Department of Justice (DOJ). It has also been granted conditional leniency from the DOJ's Antitrust Division "in connection with potential US antitrust law violations". Since then the bank's chief executive Bob Diamond and chairman Marcus Agius have announced their resignations, in Diamond's case with immediate effect.

LIBOR is a daily reference rate based on the interest rates at which banks can borrow unsecured funds from other banks. It is widely used as the pricing basis for some $550 trillion worth of global financial instruments including interest rates and currency hedging instruments, and to set the interest rate for syndicated loans. Contributing banks submit their rates directly to business data provider Thomson Reuters, which carries out the calculation and publishes LIBOR rates in 10 currencies at midday every London business day.

Tyrie said that the evidence gathered by the Committee from witnesses pointed to "disgraceful" actions that were "made possible by a prolonged period of extremely weak internal compliance and board governance" at the bank, as well as regulatory failure. The evidence given by senior figures at the bank and FSA described, he said, "a combination of circumstances which would excuse all the participants from the charge of deliberate wrongdoing".

The FSA's final notice in relation to Barclays identified "significant failings" by the bank, including requests taken into account from its interest rate derivatives traders when making its LIBOR and EURIBOR submissions and attempts to influence the submissions of other banks. It also failed to have adequate systems and controls in place relating to its LIBOR and EURIBOR submissions processes until June 2010, and failed to deal with issues related to its submissions when these were escalated to its compliance department in 2007 and 2008.

The MPs said that, in explaining what was wrong with the culture at Barclays, the regulator had shown "some welcome evidence of a new, judgement-led regulatory approach" which it hoped to see carried forward when the new Prudential Regulation Authority (PRA), which is set to assume the FSA's regulatory functions from April next year, is established. However, in initially appearing to be "content to allow [chief executive] Mr Diamond to continue in his role" until deciding "without engaging in any formal process" that he should resign in response to public pressure, the FSA's actions were "misjudged", they said.

"Regulators should not decide the composition of boards in response to headlines," Tyrie said. "Many will agree with the removal of Mr Diamond. However, many will wonder why the regulators did not intervene earlier, for example, at the time of the publication of the Final Notice. Such an informal approach, as was taken in this case, is open to abuse in the future. The PRA and the Bank [of England, in its regulatory role] need better corporate governance."

He added that the absence of a requirement for effective governance in the new regulatory framework, set out in the draft Financial Services Bill which is currently before Parliament, was a "serious defect".

A Government-commissioned review of rate-setting process, led by Martin Wheatley of the FSA, is due to report in September to ensure that any necessary amendments to the law can be included in the Bill. The Bill will overhaul the current system of financial services regulation in the UK and establish the PRA within the Bank of England, as well as a Financial Conduct Authority (FCA) to deal with conduct and compliance issues.

As part of his review Wheatley should, the Committee said, consider how the rate-setting process will work during future financial crises when there is little or no interbank lending taking place and how regulators should respond to signs of dysfunction. He should also consider whether it is appropriate for a trade association to sponsor the system, as the British Bankers' Association (BBA) currently does. Wheatley should also, it said, consider the case for widening existing market abuse and other criminal offences to include the manipulation or attempted manipulation of LIBOR - something the European Commission proposed last month as part of its own review of market abuse laws.

Regulators should consider "greater flexibility" in the levels of fines they impose, with the highest penalties to be levied on firms which "fail fully to co-operate", the committee said. The FSA will also be required to report to the committee on how it planned to alter its supervisory efforts to guard against weak compliance in future.

"Firms must be encouraged to report to the regulator instances they find of their own misconduct," Tyrie said. "While such a firm should still be required to pay compensation to any other party who has been disadvantaged by the misconduct, in cases where a firm makes a complete admission of its own culpability the FSA should retain flexibility in setting the fine payable. The FSA should have regard to the desirability of encouraging other firms to confess their misdemeanours in a similar way."

Similarly, a "much stronger governance framework" was needed for the Bank of England, particularly in light of its increased powers once the Financial Services Bill comes into force, he added.

The Serious Fraud Office (SFO), the Government department responsible for investigating and prosecuting serious and complex fraud, is currently investigating the alleged manipulation of LIBOR by "a number of financial institutions" under existing fraud and false accounting laws.

Further investigations remain underway in the US. Last week, Lloyds became the latest UK bank summoned by US regulators after Florida's state regulator subpoenaed a total of 14 banks over rate-rigging allegations, according to a report in the Telegraph newspaper.