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Mr Speaker, I would like to update the House on the Financial Services Authority’s investigation into the manipulation of the setting of the LIBOR and EURIBOR interest rates.
The London Interbank Offered Rate or “LIBOR” and the Euro Interbank Offered Rate or “EURIBOR” are the benchmark reference rates which are fundamental to the workings of the UK, European and international financial markets, including markets in interest rate derivatives contracts.
These contracts may sound exotic but they are the bread and butter of our financial system and are used by businesses and public authorities every day, and they affect the mortgage payments and loan rates of millions of families and hundreds of thousands of firms, large and small.
LIBOR and EURIBOR are by far the most prevalent benchmark reference rates used in euro, US dollar and sterling interest rate derivatives contracts.
The outstanding interest rate contracts alone are estimated to be worth 554 trillion US dollars.
Yesterday, the FSA published notice that Barclays had on numerous occasions, acted inappropriately and breached Principles 2, 3 and 5 of the FSA’s Principles for Businesses.
As a result, the FSA have imposed a financial penalty of £59.5 million on Barclays.
In other words, the FSA reports that this Bank, on numerous occasions, did not conduct its business with due skill, care and diligence.
This Bank did not take reasonable care to organise its affairs responsibly and effectively, with adequate risk management systems.
And this Bank did not observe proper standards of market conduct.
As the FSA puts it, “Barclays’ misconduct created the risk that the integrity of LIBOR and EURIBOR would be called into question and that confidence in or the stability of the UK financial system would be threatened”.
Barclays are not alone in this.
The FSA is continuing to investigate the conduct of a number of other banks in relation to LIBOR.
The FSA is continuing to commit significant resources to its investigations into potential attempts to manipulate LIBOR.
The FSA is continuing to work with its counterparts overseas and with other authorities in the UK.
The investigations concern a number of institutions both based in the UK and overseas.
But it is already clear that the FSA’s investigation demonstrates systematic failures at the heart of the financial system at the time.
I want to thank Adair Turner and the team at the FSA for a very thorough piece of work.
But it begs three vital questions.
First, how was such failures allowed to continue undetected and unchecked - particularly in the two years before the financial crisis - when the FSA is clear that the most serious breaches occurred and the only motive was greed?
Second, what changes are needed to our regulatory system in the future to prevent such abuse occurring again, and to make sure the authorities have every power they need to hold those responsible fully to account.
And third, what further investigations are required into the activities at Barclays, what sanctions are available and what questions must the Chief Executive answer.
First, the FSA report is a shocking indictment of the culture at banks like Barclays in the run up to the financial crisis.
The email exchanges between derivative traders and the Libor submitters working read like an epitaph to an age of irresponsibility.
Through 2005, 2006, and early 2007, we see evidence of systematic greed at the expense of financial integrity and stability.
They knew what they were doing wrong.
“Keep a secret” one trader tells another in February 2007.
“If you breathe a word of this I’m not telling you anything else”.
Yet no one at Barclays prevents them.
And no one in the tripartite regulatory system knows anything about it.
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The FSA is clear that the most serious breaches of its Principles for Businesses occurred in the years leading up to the financial crisis.
Once the crisis is underway, Barclays’ concern switches from the greed of traders to concern from the management about the reputational risk to the firm.
To be fair, Barclays themselves raise concerns about the LIBOR with the FSA in late 2007 and 2008.
Yes, the financial system was experiencing a severe stress and markets were frozen.
It is clear that Barclays - and potentially other Banks - were still in flagrant breach of their duty to observe proper standards of market conduct and give citizens and businesses in this country and elsewhere proper transparent information about the true price of money.
Britain’s tripartite system of regulation failed us in war and peace - and the country has paid a very heavy price for that.
Mr Speaker, that brings me to the second question of how we prevent this ever happening again.
This Government is getting rid of the whole tripartite system.
The Financial Services Bill now before Parliament will create a new, far tougher regulatory system.
A new Conduct Authority will focus razor-like on market abuse and protecting consumers.
We have been reviewing with the FSA and the Bank of England the operation of the LIBOR regime - which was not regulated under the last Government’s Financial Services and Markets Act.
The market is already changing and the role of LIBOR is changing with it.
As part of our review into LIBOR and the strength of the financial regulatory architecture, we will examine if there are any gaps in the criminal regime inherited by this Government and we will take the necessary steps to address that.
I cannot comment today on possible criminal investigations for individuals involved in this activity.
The authorities are exploring every avenue open to them but the scope of the FSA’s criminal powers granted be the previous Government does not extend to being able to impose criminal sanctions for manipulation of LIBOR.
As part of our review into LIBOR and the strength of the financial regulatory architecture, we are examining whether strengthening the criminal sanctions regime for market abuse and market manipulation is warranted, and if so, we will provide for these powers quickly.
Also, next week, the Government will be publishing a consultation in response to the report on the failure of RBS and will consider the possibility of criminal sanctions for directors of failed banks where there is proven criminal negligence.
Under the previous government’s regime fines paid to the FSA are used to reduce the annual levy other financial institutions are asked to pay.
I am far from convinced that in all cases, this is the best use of the money.
We are considering amendments to the Financial Services Bill that ensure that fines of this nature go to help the taxpaying public, not the financial industry.
I have also asked my officials to urgently investigate whether this legislation could be applied to the fine imposed on Barclays Bank.
But it is clear that what happened in Barclays and potentially other banks was completely unacceptable, was symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees.
That brings me to the final point.
There are a number of individuals under formal investigation by the FSA, and this number is expected to increase as the investigations continue.
The Serious Fraud Office is aware of the matters under investigation and there are ongoing discussions between the FSA and the SFO about the evidence as it develops.
As far as the Chief Executive of Barclays is concerned, he has some very serious questions to answer today.
What did he know and when did he know it?
Who in the Barclays management was involved and who therefore should pay the price?
It is quite right that the Treasury Select Committee has asked him to appear urgently to account for himself and for his bank.
We all want to hear his answers.
The story of irresponsibility is not over yet.
Mr Speaker, our financial services should be a source of economic strength and national pride for this country.
But failures in our banks and financial system have cost the country billions and put thousands out of work.
Those responsible should be held responsible.
We want our Financial Services to support the creation of jobs and prosperity for millions.
This Government is sweeping away the regulatory system that failed.
It will protect taxpayers.
Punish wrong doing.
And put right the wrong of the age of irresponsibility.