From the “conclusion and recommendations” of the preliminary report:
On the need for widening the market abuse and criminal regimes to catch benchmark manipulation:
“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.”
On the Financial Services Authority’s shortcomings:
“The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal LIBOR investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets…
…During this period of extremely weak compliance at Barclays, it was nonetheless subject to extensive regulatory oversight by the FSA. Despite the numerous ARROW visits that were conducted by the FSA during this period, we have seen no evidence that this weakness in compliance elaborated in the Final Notice was identified by the FSA in a timely manner, still less, dealt with. The FSA must report to this Committee on how it will alter its supervisory efforts to counter such weak compliance in future…
…Unlike the Bank of England, the Financial Services Authority was the prudential regulator. Its shortcomings at this time are therefore far more serious. The Committee is concerned about the FSA’s failure to appreciate the significance of market rumours relating to the artificial rigging of the LIBOR rate. We therefore look 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.”
On the Bank of England’s naivety and future governance:
“Mr Tucker told us that possible clues to dishonesty “did not set alarm bells ringing at the time”. The evidence suggests that the Bank of England was aware of the incentive for banks to behave dishonestly, yet did not think that dishonesty was occurring. Nor did it appear to have asked the FSA to check to see if such dishonesty was occurring. With hindsight this suggests a naivety on the part of the Bank of England. They were certainly relatively inactive. This confirms evidence from other Treasury Committee inquiries of the dysfunctional relationship between the Bank of England and the FSA which existed at that time to the detriment of the public interest.”
“…once the Bank of England assumes full responsibility for financial stability and micro-prudential supervision,..[the] Governor of the Bank of England will stand all-powerful and able, by dint of raising his eyebrows, effectively to dismiss senior banking executives without discussing it with, or consulting, anyone. This is unsatisfactory. As the Treasury Committee has repeatedly stated, a much stronger governance framework is needed. Among other things this can ensure that the regulatory authorities are unable to remove senior bank executives arbitrarily or without just cause. We welcome the fact that the Chairman of the FSA agrees with us 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.”
On the move to judgement-led supervision:
“The messages that Lord Turner and Mr Bailey gave to the Barclays board this year provide evidence of the evolution of a more judgement-led approach on the part of the FSA. Lord Turner said that the change to this approach began as long ago as 2008, and it featured in his Mansion House speech in 2009. Judgement-led regulation is welcome: the FSA has concentrated too much on ensuring narrow rule-based compliance, often leading to the collection of data of little value and to box ticking, and too little on making judgements about what will cause serious problems for consumers and the financial system. In February, though, the FSA judged that it was the overall culture, rather than just a particular behaviour, of Barclays that represented a risk, and so took steps to address this directly. This intervention was not routine or coded. It was a loud and clear expression of the concerns the FSA had about the culture at Barclays and should have been clearly understood by the board. This innovative action is also welcome. The episode shows, however, that judgement-led regulation will require the regulator to be resolutely clear about its concerns to senior figures in systemically important firms.”
On the Parliamentary Commission:
“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.”
On the Wheatley review:
“We recommend that the Wheatley review examine 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.”
On governance and compliance at Barclays, or the lack of it:
“There was something deeply wrong with the culture of Barclays. Such behaviour would only be possible if the management of the bank turned a blind eye to the culture of the trading floor. The incentives and control systems of Barclays were so defective that they incentivised traders to benefit their own book irrespective of the impact on shareholders and the bank’s overall performance. Now exposed, their actions are to the detriment of Barclays’ reputation and the reputation of the industry. The standards and culture of Barclays, and banking more widely, are in a poor state. Urgent reform, by both regulators and banks, is needed to prevent such misconduct flourishing.
The attempted manipulation of Barclays’ LIBOR submissions with the intention of personal gain continued for four years. It is shocking that it flourished for so long. Any system may fail for a short period, but compliance at Barclays was persistently ineffective. Even when Barclays’ compliance had indications that something was awry, it failed to take the opportunity to strengthen the bank’s controls. Nor was there any pressure from senior executives within Barclays to ensure that effective LIBOR controls were in place, as it was considered low-risk, in particular where LIBOR setters sat, with no presence of the compliance function. These are serious failures of governance within Barclays, for which the board is responsible. The compliance function within a bank is very important. If it is weak or ignored in the practices of the bank that is reflective of a poor culture which does not take seriously enough abiding by the rules essential to proper functioning of the bank and the wider financial system. The serious failings of the compliance function during the period under examination suggest there was this kind of culture at Barclays.”
UPDATE 11 September 2012: GC100 opposes amending s397 FSMA 2000.
For more on the LIBOR scandal, see here.
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