On March 5, The FSA published a report and management response concerning the manipulation of LIBOR. The report finds that the FSA was aware of disruption in the LIBOR market during the period between summer 2007 and early 2009, but such disruption may have been solely caused by volatile market conditions at the time. Nevertheless, the report concludes that the FSA should have considered whether manipulation of the benchmark interest rate was taking place.
The report recommends improvements in the sharing of intelligence between the soon to be established new financial regulatory authorities (FCA and PRA), to ensure that future indications of misbehavior in the LIBOR market are not ignored or missed.
An investigation by the Serious Fraud Office into the manipulation of LIBOR, which has so far resulted in the arrest of three men, is ongoing.
On February 21, the Treasury Select Committee published the FSA’s response in relation to its August 2012 report on LIBOR. The report had criticized the FSA for being behind the US regulator in formally investigating market rumors relating to the artificial rigging of LIBOR rates and made several recommendations for improvement in the future.
In its response, the FSA challenges accusations that it was too slow to investigate the manipulation of LIBOR rates, stating instead that it had worked closely with the Commodity Futures Trading Commission since 2008 to examine allegations of rate-rigging. The FSA noted that it has increased the intensity of its supervision since 2008, and will continue to do so following the separation into a “twin peaks” regulatory system. The FSA also disputes the view that it interpreted its powers to initiate criminal proceedings for fraud in relation to rate-fixing too narrowly, and instead reiterates its mandate to consult with the Serious Fraud Office (and other prosecutors where necessary) where there is evidence of offences which are beyond the scope of its own powers of investigation.
On February 6, the FSA issued a final notice to RBS imposing a fine of £87.5 million for misconduct in submitting rates for the calculation of LIBOR. RBS’ misconduct included the manipulation of submissions and several failings in respect of risk management systems and controls (including ongoing failings to identify inappropriate LIBOR submissions), as well as RBS’ collusion with other LIBOR panel banks and brokers in setting rates.
The FSA stated that the significant financial penalty of £87.5 million is intended to reflect both the widespread nature of the misconduct, as well as the harm caused to market participants and the integrity of the UK financial system. In related actions, RBS has agreed to pay $324 million to the US Commodities and Futures Commission and $150 million to the US Department of Justice.
On January 15, the British Bankers’ Association (BBA) published a submission made to the Chairman of the Parliamentary Commission on Banking Standards. The Commission was established in July 2012 with a remit to consider and report on professional standards in the UK banking sector, particularly in light of the LIBOR investigations.
The submission sets out potential ways in which banking standards might be raised, which are summarized in the covering letter to the submission as follows:
- strengthening the existing framework by increasing regulatory training, focusing on enforcement, extending the scope of the existing approved persons regime to cover an increased number of roles and putting in place an overarching requirement for all bank employees to adhere to the approved persons principles;
- establishing an overarching professional standards body to promote existing standards and produce guidance/set additional standards for the training of all bank employees;
- and establishing the Banking Standards Review Council as an independent body to monitor ethical and professional standards in UK banks and to uphold an industry wide code of conduct.
On December 19, 2012, the FSA announced that it had fined UBS £160 million for misconduct relating to LIBOR and EURIBOR. The FSA’s final notice found that the misconduct was extensive and widespread, occurred in various locations around the world including Japan, Switzerland, the UK and the USA and, between 1 January 2005 and 31 December 2010, included:
- The adjustment of UBS LIBOR and EURIBOR submissions to benefit UBS traders’ trading positions;
- Colluding with interdealer brokers to manipulate the Japanese Yen LIBOR submissions of panel banks to the benefit of UBS traders; and
Adopting LIBOR submissions directives whose primary purpose was to protect UBS’s reputation.
On December 27, 2012, Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York dismissed an action brought by Woori Bank against RBS Securities and related entities claiming fraud, negligent misrepresentation, and unjust enrichment. Woori alleged that defendants knowingly marketed CDOs based on RMBS that had a greater risk than their ratings suggested, and that RBS fraudulently and negligently induced Woori to buy those CDOs. Further, Woori alleged that RBS concealed or failed to properly disclose their efforts to manipulate LIBOR rates. The court dismissed the fraud claim because Woori’s allegations did not specifically connect RBS’s alleged knowledge of problems or suspect behavior to the transactions at issue. Further, the court found that Woori was unable to show with sufficient specificity any facts that demonstrated RBS had created an inherently unfair transaction by failing to disclose information and accordingly dismissed the negligent misrepresentation claim. Decision.
On December 11, the Serious Fraud Office (the SFO) published a press release stating that three men had been arrested and interviewed in relation to its investigation into the manipulation of LIBOR. Although the three men have not been charged with wrongdoing, the move is being reported as indicative of a shift of focus in the LIBOR investigation away from institutions and onto individuals, as well as a shift of focus away from banks and onto brokers.
On November 28, HM Treasury published a consultation paper on draft secondary legislation to regulate LIBOR and make its manipulation a criminal offence.
The draft Financial Services and Markets Act (Regulated Activities) (Amendment) Order 2013 proposes two new regulated activities:
- providing information in relation to a regulated benchmark (currently LIBOR is the only proposed regulated benchmark, although there is provision to add others); and
- administering a regulated benchmark.
A further draft order, relating to “misleading statements” specifies the investments, activities and benchmarks in relation to three new criminal offences dealing with making misleading statements and conducting misleading practices. These offences will be created by draft amendments to the Financial Services Bill 2012-2013 and will result in the repeal of section 397 of the Financial Services and Markets Act 2000.
It is intended that the Financial Services Bill will receive royal assent before the end of 2012 and that the draft secondary legislation will be considered by Parliament in early 2013. Comments on the consultation must be submitted before December 24.
On November 6, the Ministers of Finance and Central Bank Governors of the G20 published a communiqué following their meeting on November 4 – 5 in Mexico City. The communiqué stated that the G20 Ministers of Finance remain committed to the full, timely and consistent implementation of the financial regulation agenda, and in particular:
- welcome the recent decision by European leaders to agree on a legislative framework for a single supervisory mechanism by January 1, 2013;
- agree to put in place legislation and regulation for OTC derivatives reforms promptly, and to act by the end of 2012 to identify and address issues with the cross border application of existing rules;
- commit to make the necessary changes to resolution regimes to allow for the resolution of systemically important financial institutions;
- call for the publication of finalised policy measures for the oversight and regulation of shadow banking in time for the G20 St Petersburg summit on June 8, 2013;
- are concerned about the slow progress towards a single set of high quality accounting standards; and
- welcome action taken to address weaknesses and restore confidence in LIBOR and in other benchmark and index setting practices.
On September 7, the Global Financial Markets Association (GFMA) published a letter setting out principles that it proposes to assist in the setting of global financial benchmarks such as LIBOR. The principles outline a set of best practice standards for conducting benchmark price assessments. The principles state that the overall responsibility for the benchmark process lies with the entity or group that develops and issues the benchmark (the “sponsor”). The Principles are grounded in three fundamental sponsor obligations, which GFMA believe should be applied in a manner commensurate with the significance of the benchmark:
- Governance: A sponsor should ensure that there is an appropriate governance structure for oversight of the benchmark;
- Benchmark Methodology and Quality: A sponsor should employ sound design standards in devising the benchmark and ongoing processes related to its operations; and
Controls: A sponsor should ensure that there is an appropriate system of controls promoting the efficient and sound operation of the benchmark process and should implement such a system of controls.