FSA did not challenge the banks enough, says audit

An internal FSA audit into its handling of the Libor-rigging scandal has found it should have been more “inquiring and challenging” towards banks and recommends it change its processes in response.

The report looked at whether the regulator could have spotted problems earlier during the period from January 2007 to May 2009.

This period focuses on the so-called lowballing of rates when banks over-stated their financial strength during the crisis. Barclays claims there were 13 instances of communication between the bank and regulator over lowballing, prompting the review.

The audit found “many” communications that indicated Libor disclocation but accepted the FSA was focussed on market dysfunction in the wake of the financial crash.

It searched 17 million records, reviewed 97,000 documents in detail, and interviewed 20 FSA employees or ex-employees. The report identified 26 documents providing a direct reference to lowballing or a reference that could, in the internal audit’s judgement, have been interpreted as such.

The report recommends the regulator improves information management, escalation of information, record-keeping, monitoring of non-regulated activity, clear responsibility for Libor regulation under the new ‘twin peaks’ regulatory regime and improved culture at the regulator.

In the past year, the FSA has fined Barclays, UBS and the Royal Bank of Scotland over Libor-rigging.

FSA chairman Lord Turner says: “A particularly important lesson is the need to have staff focused on conduct issues even when the world rightly assumes that the biggest immediate concerns are prudential; and vice versa. The new ‘twin peaks’ model of regulation will deliver this.”