Internal FSA review finds failings over Libor

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

FSA large 480

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 two clearest indications relating to a specific firm were the telephone calls from Barclays in March and April 2008, which were included in the FSA’s final notice on Barclays published on 27 June 2012.

The report makes six key recommendations to implement including improved information management, escalation of information, record-keeping, monitoring of non-regulated activity, clear responsibility for Libor regulation under the new 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: “There are important lessons to be learnt about effective handling of information. These are identified in the report and will be taken forward by both the FCA and PRA management.

“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.”

Turner says the scandal raises questions about how best to supervise firms, suggesting a greater focus on whistleblowers, accountability of senior management and intense self-reporting of suspicious activity.

Libor submission and administration will be regulated activities from 1 April and the FSA, together with the new Libor administrator, will agree appropriate market monitoring and oversight.