LIBOR (Wheatley Review)
Greg Clark (Tunbridge Wells, Conservative)
At the end of June it was revealed that LIBOR—the London interbank offered rate, the benchmark used in trillions of pounds worth of financial contracts—had been subject to repeated attempts at manipulation.
The attempted manipulation of LIBOR is totally unacceptable and has further undermined trust in the financial services industry—without which this vital sector cannot operate.
Although the abuse is by no means confined to London—banks and benchmarks in a number of jurisdictions have been implicated, including Euribor and Tibor—I am determined that we in this country should move quickly to restore credibility to this globally important benchmark and repair the damage to London’s reputation caused by this behaviour and the failure of the regulatory sector to prevent it.
This statement sets out the Government’s response to the Wheatley review of LIBOR.
The Wheatley review made 10 main recommendations:
1. The new Financial Conduct Authority should regulate the submission to, and administration of, LIBOR—and that there should be criminal sanctions for any attempted manipulation.
2. The British Bankers’ Association (BBA) should make an orderly transfer of responsibility for LIBOR to a new administrator, selected by an independent committee.
3. The new administrator should scrutinise submissions and regularly review the effectiveness of LIBOR.
4. There should be a new code of conduct for submitters, approved by the Financial Conduct Authority.
5. LIBOR should, as far as possible, be corroborated by transaction data in line with the guidelines in the review.
6. To improve this ability to corroborate submissions, the number of currencies and maturities for which submissions are made should be cut substantially to achieve a sharper focus on the more heavily used benchmarks.
7. Submissions should be published, but after three months to avoid the incentive for banks to try to flatter their perceived credit standing and reduce the opportunity for collusion.
8. The Government should provide the Financial Services Authority with a reserve power to compel banks to submit to LIBOR.
9. All market participants should consider whether LIBOR is the most appropriate rate for their needs and to ensure that their contracts have workable contingency provisions.
10. The UK, European and international authorities should establish clear principles for global benchmarks.
The Government fully endorse every one of these recommendations. All institutions involved in the process of setting LIBOR should implement them. For those recommendations that require Government action, we will take it without delay.
The Government will bring forward amendments to the Financial Services Bill to implement those recommendations that require primary legislation. These amendments will enable the submission of rates to benchmarks such as LIBOR and the administration of such benchmarks to be brought within the scope of regulation. The power to regulate these activities will be vested in the new Financial Conduct Authority. Existing offences covering the making of misleading statements, under section 397 of the Financial Services and Markets Act, will be extended to capture the making of misleading statements to manipulate benchmarks such as LIBOR. The Financial Conduct Authority will have the lead role in investigating the possible commission of such offences and bringing prosecutions.
Most people expect that the law should be respected and enforced at all levels of society. If someone breaks the law, they should be punished. Where the crime is serious, the punishment should reflect this. The Government also intend to legislate to enable the Financial Conduct Authority to make rules requiring authorised persons to contribute to the LIBOR setting process. Draft legislation and further details of these measures will be deposited in due course in the Libraries of both Houses.
But statutory regulation and criminal enforcement alone are insufficient. LIBOR is a mechanism created by the market for use by the market. That is why it is right that some of Mr Wheatley’s recommendations fall to the industry to implement.
The Government agree with Mr Wheatley that, in order to restore credibility to the LIBOR setting process, the BBA should give up its operational role with regards to the computation, administration and governance of LIBOR. My noble Friend Baroness Hogg has agreed to chair a panel of independent experts tasked with identifying an appropriate successor to the BBA.
Other urgent reforms will be implemented by the BBA and, in time, by the new LIBOR administrator—such as phasing out the benchmark rates for those currencies and maturities wherever they are not heavily used by the market and there is an available alternative.
The recommendation to consider the use of benchmarks in other financial and commodities markets will be taken forward through the relevant international bodies. These discussions have already commenced in the Financial Stability Board, the International Organisation of Security Commissioners (IOSCO) and the institutions of the European Union. The Government stand ready to work with their international partners to ensure that we can have confidence in the integrity of all major global benchmarks.
The Government recognise that the LIBOR scandal cannot be seen as an isolated incident. There are wider standards of integrity and ethics in banking which have compromised the confidence and trust between banks and the businesses, customers and general public they exist to serve.
Parliament has established the Parliamentary Commission on Banking Standards under the chairmanship of Mr Tyrie and including similarly respected Members of both Houses. We all look forward to receiving the recommendations of the commission by early next year.
The financial services industry is of great importance to this country. It employs, directly and indirectly, 2 million people, in every part of the United Kingdom. The essential condition for the functioning of the financial services industry is trust. The behaviour that has been uncovered in the LIBOR scandal corrodes that trust, and the behaviour of a few has tainted the reputation of an industry in which the vast majority of people have been proud to work, not least because it has been associated with integrity and responsibility.
We owe it to all of those people as well as to the millions of people who rely on the financial services industry in their day-to-day lives and in running businesses to restore that reputation for probity and strength. The reforms that Martin Wheatley has recommended are a significant step towards achieving this goal.