Wheatley review proposes handing regulation of Libor to FSA

FCA chief executive designate Martin Wheatley has recommended the FSA be given the authority to regulate Libor as part of a wide-ranging set of proposals to ensure the rate-rigging scandal does not occur again.

Given a speech today at Mansion House, in London, Wheatley recommended the Financial Services and Markets Act be amended to allow the regulator to prosecute the manipulation or attempted manipulation of Libor and key persons in the submission process be FSA approved persons.

Wheatley also proposed the creation of a new body to administer Libor submissions, stating that the British Bankers’ Association, which has been responsible for administering Libor since 1986, had “failed” to properly oversee the Libor setting process.

Wheatley has today opened a tender process to invite organisations to take over the running of Libor. Financial Reporting Council chairman Lady Sarah Hogg has agreed in principle to chair the panel once it is established. Daily Libor submissions will still largely depend on estimates from panels within the banks although Wheatley wants hard transaction data to be used where possible.

Wheatley says: “Governance of LIBOR has completely failed resulting in the sort of shameful behaviour that we have seen. This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.

“That is why I am recommending that the FSA is given clear and extensive powers to ensure that regulation is able to cover the offences, and that there is enough clout to punish those who break the law.”

As part of the review, Wheatley recommended a number of measures that can be put in place in the short-term, while the larger structural changes are put in place. He suggested the BBA remove currencies from Libor which lack a sufficient amount of trade data to corroborate submissions over the next 12 months.

This, he says, will reduce the number of Libor reference rates from 150 down to 20, a point where he says the market could be “confident there is a real market to underpin the rates”.

The publication of Libor submissions will be delayed on a three-month rolling basis, although the new oversight committee and the FSA will still have access to these rates. Wheatley said the publication of submissions had actually facilitated manipulation as opposed to increasing transparency, as was originally intended.

Wheatley also wants to increase the number of banks which participate in the submission process to make the rate more representative of the market as a whole. He is also encouraging banks to rethink how they use Libor for the transactions they undertake and whether another reference rate might be more appropriate.

His report also considers the viability of alternatives to Libor in the longer term and offers key features any new adopted reference rates should have if adopted in other parts of the world.

The problems with Libor came to light in June when Barclays was fined £290m for its role in rigging the reference rate. Chairman Marcus Agius and chief executive Bob Diamond both resigned in the wake of the scandal.

Reports state Royal Bank of Scotland could face a fine in the region of £300m for its role in the scandal.