Britain’s Libor interest rate needs a “complete overhaul” in the wake of the Barclays rate-rigging scandal, the nation’s finance regulator will say Friday in an eagerly-awaited review.
The Financial Services Authority will make the key recommendation in an independent report commissioned by British finance minister George Osborne in the wake of this year’s notorious Libor affair.
“The reason we are here is that we have been misled. The system is broken and needs a complete overhaul,” FSA managing director Martin Wheatley was to say, according to an advance copy of his speech.
“The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust — it has torn the very fabric that our financial system is built on.”
He will argue that industry body the British Bankers’ Association must be stripped of its role in setting Libor, with the oversight process handed to a new group.
“The British Bankers’ Association clearly failed to properly oversee the Libor setting process and should take no further role in the administration and governance of Libor.
“Responsibility should be transferred to a new administrator. We are today starting an open tender process to invite organisations to take over the running of Libor.”
Wheatley will also argue that the FSA needs regulatory and sanctioning powers to punish those who attempt to manipulate Libor, which is used in a vast number of global financial transactions totalling at least $300 trillion.
“This is not a London issue. This is a global issue and is why I have been working in partnership with my counterparts in the United States, Japan, Switzerland, the European Union and elsewhere,” he will say.
The FSA will publish its full findings into the Libor affair at 0600 GMT on Friday.
The Treasury welcomed the report, adding it would respond when parliament reopens next month following the party conference season.
But Treasury minister Greg Clark said Friday: “Today’s independent report is very clear — the self-regulation of Libor has failed.
“It’s yet another example of the broken regulatory system that this government is committed to fixing.”
The scandal erupted in June when Barclays bank was fined £290 million ($470 million, 363 million euros) by British and US regulators for attempted manipulation of Libor and Euribor interbank rates between 2005 and 2009.
The FSA chief was meanwhile to take aim at other banks which have yet to be tainted by the Libor scandal that has rocked Barclays.
“One bank we know of made no effort at all to aid credible submissions and has now paid the price. Other banks will follow,” he will warn.
The London Interbank Offered Rate (Libor) is a flagship instrument used all over the world, affecting what banks, businesses and individuals pay to borrow money. Euribor is the eurozone equivalent.
The Libor is calculated daily, using estimates from banks of their own interbank rates. However, the system has been found to be open to abuse, with some traders lying about borrowing costs to boost trading positions or make their bank seem more secure.
“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,” Wheatley was to say.
Barclays was the first bank to be fined as part of a global probe into suspected manipulation of the twin interest rates that are crucial to the operation of short-term financing and global markets.
The FSA on Friday argued for a new regulatory structure for the Libor interest rate process, that will include “criminal sanctions for those who attempt to manipulate it”.
Libor submissions must be supported by “relevant trade data” and “proper record keeping” with “greater rigour and transparency”, Wheatley is to say.
He will add: “There is a clear lack of external accountability to safeguard that the incentives of those involved in this process are aligned with the wider interests of market participants, benchmark users and the public.
“Added to this, there is a lack of a comprehensive sanctions regime to ensure that those who manipulated the rate are brought to book.”
The Barclays scandal led to the resignations of three leading Barclays executives — chief executive Bob Diamond, chairman Marcus Agius and chief operating officer Jerry del Missier.
The fallout risks becoming much wider, however, with analysts claiming that the lender could face massive lawsuits, since mortgage rates passed onto customers were influenced by Libor rates.
Britain’s Serious Fraud Office is considering whether to bring criminal prosecutions over the rate-rigging scandal, while Prime Minister David Cameron has also launched a parliamentary inquiry.