A UK parliamentary review of the London interbank offered rate (LIBOR) scandal has found that reforms are necessary by both regulators and criminal justice authorities.
The UK’s Treasury Select Committee published its report into the LIBOR scandal on the weekend, which included a series of recommendations for regulators and the government.
The report calls for the UK’s Financial Services Authority, and its successors, to consider levying much heavier penalties on firms that fail fully to co-operate with them, but that it should remain flexible with firms that do co-operate and self report. It also said that the FSA may also need to re-examine its treatment of whistleblowers, in order to provide the appropriate incentives to report wrongdoing.
The committee calls on the FSA to continue investigating other banks for possible LIBOR-rigging, and said that it must report to the committee on how it will alter its supervisory efforts to counter weak compliance in the future.
The report recommends that the Bank of England beef up its efforts to document interactions with financial firms, and says that it needs a much stronger governance framework. And, it says that the Bank, the FSA, and its successors, also need to examine their ability to remove senior executives from financial firms.
The committee also recommends that, following the so-called Wheatley review into the LIBOR mechanism, the government should consider clarifying the scope of the regulators’ power to initiate criminal proceedings. It says that the Wheatley review should consider the case for widening the definition of market abuse to include the manipulation of LIBOR and other benchmark rates, and for widening the definition of the criminal offence to include such rate manipulation. Additionally, it says that the review should examine whether there is a legislative gap between the responsibility of the FSA and the Serious Fraud Office to initiate a criminal investigation in a case of serious financial market fraud.
“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,” said the committee’s chairman, Andrew Tyrie.
“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,” he added.
However, he also criticized the FSA’s handling of the removal of Barclays plc CEO, Bob Diamond, in the wake of the scandal. “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,” he said.
“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,” Tyrie said.
The Bank of England welcomed the report, adding that a much stronger governance framework for the Bank is to be enshrined in new legislation. It also said it will review its note taking system. The FSA has yet to comment.