It will take a comprehensive and far-reaching programme of reform to rehabilitate Libor, says Martin Wheatley, CEO designate of the Financial Conduct Authority
“Although the system is broken, it is not beyond repair,” he said, “and it is up to regulators and market participants to work together towards a lasting and sustainable solution.”
Wheatley was asked to carry out an independent review by the Treasury after Barclays was fined £290m in June for manipulating Libor. Bank employees had been using the system to signal their perceived institutional creditworthiness or to support trading positions.
In his final report, launched this morning, Wheatley has come up with a 10-part plan of reform to help restore trust in the system. “Libor needs to get back to doing what it is supposed to do, rather than what unscrupulous traders and individuals in banks wanted it to do.”
The plan includes making manipulation of Libor a crime and introducing statutory regulation of all aspects of the process. Wheatley also wants the British Bankers’ Association to be stripped of the responsibility for Libor. This, he suggests, should be transferred to a new administrator, selected by an independent committee, which would be responsible for compiling and distributing the rate as well as providing “credible” internal governance and oversight.
The new administrator would be set specific obligations as part of its governance and oversight, including surveillance and scrutiny of submissions, publication of a statistical digest of rate submissions, and periodic reviews addressing the issue of whether Libor continues to meet market needs effectively and credibly.
It would also introduce a code of conduct for submitters covering transaction data, systems and controls and transaction records. Submitting firms would also be required to have regular external audits.
Among other recommendations, Wheatley wants to see more banks brought into the compilation process, if necessary through new powers of regulatory compulsion, and market participants should be encouraged to consider and evaluate their use of Libor.
Wheatley stresses the importance of taking “swift and decisive action” to restore confidence in the benchmark, which is referenced by contracts worth well in excess of $3trn.
“I regard this as an issue with far-reaching implications for international financial markets, not least because of the risk to London’s status as a leading global financial centre,” Wheatley said.
Welcoming the launch of the report, Treasury financial secretary Greg Clark said that the Libor scandal was a failure of self-regulation. "It is yet another example of the broken regulatory system that the government is committed to fixing," he said.
ICAEW has also welcomed the report, describing its recommendations as "sensible", in particular the requirement that institutions obtain external assurance on their Libor processes. This is something, it says, that it is currently working on.
However, it says, creating a specific offence of "manipulating Libor" seems unnecessarily narrow. "We would prefer to see either wider anti-fraud provision criminalising similar forms of market abuse or for the Financial Conduct Authority to be given powers to prosecute under the Fraud Act," said Iain Coke, head of the ICAEW Financial Services Faculty.
"Ultimately, the Wheatley report is a specific response to deal with a specific problem. In order to regain trust in banking, what is needed is a real change in culture, embedding integrity and eradicating the ‘what can I get away with’ attitude," he added.
Wheatley’s recommendations will now go to the Cabinet Committee on Banking Reform, which is chaired by chancellor George Osborne. It will consider what, if any, legislative changes are needed. These will then be included in the Financial Services Bill, which is currently before the Lords, or the Banking Reform Bill.