Treasury committee publishes LIBOR report

Sarah Davidson

August 20, 2012

Alongside the report, a number of related pieces of supplementary and written evidence will also be published.

The Chairman of the Treasury Select Committee, Andrew Tyrie MP, said: “As a result of this inquiry, a good deal of further information has now been brought into the public domain.

“The Committee has called for action in a number of areas, including: higher fines for firms that fail to co-operate with regulators, the need to examine gaps in the criminal law, and a much stronger governance framework at the Bank of England.

“Along with my colleagues on the Treasury Committee, I was shocked when the FSA’s Final Notice against Barclays was first published.

“The sustained rigging of a crucial benchmark rate has done great damage to the UK’s reputation. Public trust in banks is at an all time low.

“Urgent improvements, both to the way banks are run, and the way they are regulated, is needed if public and market confidence is to be restored.”

Some of the issues covered in the report include:

1. Manipulation by individuals with the intention of personal benefit

“Every witness who appeared before the Committee agreed that these actions were disgraceful,” said Tyrie.

“They were made possible by a prolonged period of extremely weak internal compliance and board governance at Barclays, as well as a failure of regulatory supervision.

“Such misconduct is a sign of a culture on the trading floor, and higher up, that had gone badly awry.”

2. Manipulation during the financial crisis

“The manipulation was spotted neither by the FSA nor the Bank of England at the time. That doesn’t look good,” said Tyrie.

“The evidence that Mr Tucker, Mr Diamond and Mr del Missier separately gave about this manipulation describes a combination of circumstances which would excuse all the participants from the charge of deliberate wrongdoing.

“If they are all to be believed, an extraordinary, but conceivably plausible, series of miscommunications occurred.

“As the Report points out, it remains possible that the information released in the Barclays File Note, regarding a dialogue between Mr Tucker and Diamond, could have been a smokescreen put up to distract our attention and that of outside commentators from the most serious issues underlying this scandal.

“Senior management at Barclays were issuing instructions to manipulate artificially the bank’s submissions. It is unlikely that Barclays was the only bank attempting this.”

3. Barclays and the FSA

“It is clear that what was wrong with Barclays went well beyond LIBOR. The culture at Barclays fell well short of the standards outlined by Mr Diamond in his 2011 Today lecture. The PR and the reality were a long way apart,” said Tyrie.

“It seems that the FSA was on the case. In explaining what was wrong with the culture at Barclays, the FSA showed some welcome evidence of a new, judgement-led regulatory approach.

“It will be a great step forward if the regulators get away from box-ticking and endless data collection and instead devote more careful thought to where risk really lies. This could reduce the regulatory burden and, at the same time, provide more effective oversight. It will involve a change in culture on the part of the regulators and is a major challenge for the future.”

4. The resignations

“The FSA were less adroit in their handling of the removal of Bob Diamond. They appeared, initially, to be content to allow Mr Diamond to continue in his role, until public pressure mounted over the LIBOR scandal. Then, without engaging in any formal process, they decided that he should go. Both responses were misjudged,” said Tyrie.

“Regulators should not decide the composition of boards in response to headlines. 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 need better corporate governance. The absence of a requirement for effective governance in the new regulatory framework is a serious defect of the Financial Services Bill.”

5. Evidence received by the Committee from Mr Diamond

“Select committees are entitled to expect candour and frankness from witnesses before them. Mr Diamond’s evidence, at times highly selective, fell well short of the standard that Parliament expects, particularly from such an experienced and senior witness,” said Tyrie.

The Treasury Committee’s report calls for specific action to be taken by a number of institutions as well as by some of the inquiries and reviews currently being undertaken:

1. The Financial Services Authority

– The FSA and its successors should consider greater flexibility in fine levels, levying much heavier penalties on firms which fail fully to co-operate with them. The FSA needs to give high priority to its investigations into other banks, including those largely owned by the taxpayer.

– Firms must be encouraged to report to the regulator instances they find of their own misconduct. 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. The FSA may also need to re-examine its treatment of whistleblowers, both corporate and individual, in order to provide the appropriate incentives for the reporting of wrongdoing.

– The FSA must report to this Committee on how it will alter its supervisory efforts to counter weak compliance in future.

– The Treasury Committee looks forward to the result of the FSA’s internal investigation, the existence of which was disclosed in evidence to us. The Committee will want the findings of that investigation to be published.

– To avoid the scope for misunderstanding in future, the Committee recommends that the regulator set out clearly for firms any concerns it has about a senior appointment, listing any actions that it requires. It should ensure that a response is obtained in writing from the firm, undertaking to meet each of the requirements. Failure by the firm to show evidence that the regulatory messages have been seen and acted upon should be considered a serious matter.

– Judgement-led regulation, as recently demonstrated by the FSA, will require the regulator to be resolutely clear about its concerns to senior figures in systemically important firms.

2. The Bank of England

– The Bank of England should have had adequate procedures in place for at least the making of a File note of conversations such as that between Mr Tucker and Mr Diamond. The Committee recommends that the Bank undertake a review of its note keeping systems, especially those involving senior executives, and publicly report its conclusions.

– As the Treasury Committee has repeatedly stated, a much stronger governance framework is needed for the Bank of England. Among other things this can ensure that the regulatory authorities are unable to remove senior bank executives arbitrarily or without just cause. The Committee welcomes the fact that the Chairman of the FSA agrees that governance processes must be put in place to ensure accountability and transparency for the process of removing senior bank executives in whom the regulators have lost confidence.

– The regulatory authorities need to possess the ability to remove senior executives, but when they exercise this power, they should recognise their duty of care to shareholders. This issue should be examined by the Bank of England, the FSA and its successor bodies.

3. The Government

– The evidence we have received is that there was significant co-operation between the US and the UK authorities at the time of the 2008 BBA review. It is understandable that regulators, in response to the LIBOR crisis, may have placed information in the public domain to demonstrate their respective assiduity at the time. This release of information must complement co-operation between regulators. The Chancellor should stress to his counterparts the need for such co-operation at the next G20 meeting.

– The Committee recommends that the Government, following the Wheatley review, should consider clarifying the scope of the FSA’s, and its successors’, power to initiate criminal proceedings where there is serious fraudulent conduct in the context of the financial markets.

4. The Wheatley review

– The Wheatley review should now look at the role of the BBA in LIBOR setting at that time in detail and publish its findings. This is essential if its recommendations for a more reliable LIBOR setting process are to carry credibility. The review should include how such systems work during times of financial crisis, when there may be little or no interbank lending taking place, and how the authorities should respond to signs of dysfunction. It should also consider whether a trade association is the appropriate body to perform that role.

– The Committee urges the Wheatley review to consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation, of the LIBOR rate and other survey rates. They should also consider the case for widening the definition of the criminal offence in section 397 of FSMA to include a course of conduct which involves the intention or reckless manipulation of LIBOR and other survey rates.

– The Committee recommends that the Wheatley review examines whether there is a legislative gap between the responsibility of the FSA and the SFO to initiate a criminal investigation in a case of serious fraud committed in relation to the financial markets.

5. The Parliamentary Commission on Banking Standards

– The Parliamentary Commission on Banking Standards’ examination of the corporate governance of systemically important financial institutions should consider how to mitigate the risk that the leadership style of a chief executive may permit a lack of effective challenge or to the firm committing strategic mistakes.

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