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Mr Speaker, I would like to update the House on the investigations of the Financial Services Authority, the US Department of Justice and the US Commodities and Futures Trading Commission into the attempted manipulation of the setting of the London Interbank Offered Rate or “LIBOR” interest rates.
As Members will be aware, LIBOR is a major benchmark reference rate which is fundamental to the workings of the UK and international financial markets. Both Barclays and UBS have previously been fined by the authorities for attempted rate-manipulation, and whilst other financial institutions are under investigation, today’s reports relate specifically to RBS.
Details of the RBS case
Findings published today by the Financial Services Authority show that certain individuals in RBS also sought to manipulate LIBOR submissions. This is an extremely serious matter, motivated by greed.
The FSA found that RBS breached two of its Principles for Businesses:
- Between October 2006 and November 2010, it repeatedly breached the proper standards of market conduct, required by the FSA’s Principle 5. It made LIBOR submissions that took into account its derivatives trading positions, or which took into account the profit and loss of its money market trading books; and it also sought to manipulate the submissions of others by colluding with Panel Banks and Broker Firms. The breaches of Principal 5 relate to LIBOR rates in three currencies: Japanese yen, Swiss franc and US dollar;
- Secondly, from 2006 to as recently as March 2012, RBS failed to have the necessary risk management systems and controls required by the FSA’s Principle 3. There was a failure to identify and manage risks of inappropriate submission; an absence of any submissions-related systems and controls until March 2011; and inadequate transaction monitoring systems throughout.
Furthermore, in response to a specific request by the FSA as a result of its enquiries into LIBOR, RBS attested to the FSA in March 2011 that its LIBOR related systems and controls were adequate. It transpires that RBS’s systems and controls were inadequate, and so RBS’ statement to the FSA was incorrect.
These findings are grave: at least 219 requests for inappropriate submissions were documented. And at least 21 individuals including at least one manager were involved in the inappropriate conduct.
The individuals involved in the misconduct were located not only in the UK, but in Japan, Singapore, and the US.
In light of these findings, the FSA has rightly imposed a fine of £125m on RBS, reduced to £87.5m for early payment. This figure is less than the £160m fine imposed on UBS but greater than the £59.5m fine imposed on Barclays, in proportion to the scale of the offences committed.
Also today, the US Commodities and Futures Trading Commission has announced that it has found RBS guilty of similar offences in the US, and has imposed a fine of $325m. The US Department of Justice has also announced a fine of a further $150m and in addition has reached a deferred prosecution agreement with RBS Plc and RBS has accepted one criminal charge for wire fraud relating to its Japanese securities subsidiary.
Holding individuals to account
The Government is clear that any organisation or individuals found guilty of this sort of wrong doing must take full responsibility, and should be punished, if appropriate, by the civil and criminal law.
The FSA’s report identifies that at least 21 individuals were actively involved in the misconduct, including Derivatives traders, RBS’s primary LIBOR submitters and one Manager. Of these, 8 resigned, 6 have been dismissed, and all of the remainder are going through a disciplinary process.
In light of the findings in Barclays last year, the Serious Fraud Office has launched a criminal investigation into attempted LIBOR manipulation across a number of financial institutions, to which it is rightly committing a large amount of its resource, including a 40-strong team. As the Chancellor has previously said, where laws have been broken in this country, the Government and the relevant authorities will continue to have all the resources they need to make sure those guilty are brought to justice.
But this action against the perpetrators is clearly not sufficient. It is right that, in the face of misconduct of this scale, responsibility is taken at senior levels.
That is why although the report clears senior management of any involvement or knowledge in the misconduct, it is right that John Hourican, who has led the investment bank since 2008, will leave RBS after handing over his responsibilities. He will receive his minimal contractual entitlement of 12 months notice and his other contractual entitlements. He will forfeit 100% of his unvested bonus and his long term incentive plan awards that are subject to clawback, totalling £5.1m, as well as forfeiting any bonus he would have received in 2012.
Cost of fines
This still leaves the question of very substantial fines that RBS will have to pay. While it is right that RBS faces the full force of regulatory action in light of this misconduct, the Government believes that it would clearly be wrong for the taxpayer to foot the bill.
In the case of the FSA fines, the Government has changed the system so that all revenue from fines will be used to the benefit of the taxpayers. We have made provision in the Financial Services Act 2012 for all such fines - net of enforcement costs - to go to the Exchequer. So when RBS pays the FSA £87.5m in fines, everything after enforcement costs will flow directly back to the taxpayer.
Thanks to this reform, the Government has been able to announce previously that £35million of fines imposed during 2012 will be used to support Britain’s Armed Forces community, with an additional £5million going to the Imperial War Museum.
Money raised by British authorities from banks for their misdemeanours and recklessness in financial markets will be used as a force for good and go to people and causes which demonstrate the best of British values. This will include military good causes which will provide lasting support to service men and women who provide an invaluable service to the country, as well as their families and veterans. Specific details will be announced in due course.
In the case of CFTC and DoJ fines, I am clear that the taxpayer should not foot the bill. That is why, on this occasion, these fines must be met in full from past, present and future reductions in bonuses and variable remuneration for RBS.
The Government supports the action that Stephen Hester and the RBS board have rightly taken in response to the very serious issues that have been identified.
The House should know that this has been a complex, meticulous and coordinated investigation between the international regulatory authorities. I wish to thank all three parties for their diligence and cooperation in identifying and punishing those responsible.
The Government has made clear that the Royal Bank of Scotland must take every step necessary to ensure that this scandal never happens again. The structure and culture that allowed these events to take place must be changed fundamentally.
And it also requires ensuring that RBS is focussed on the right priorities. That is why the Government supports RBS’ statement that it will continue to shrink its investment banking operations and focus on serving its core corporate customers. This smaller, more efficient Markets business will be good for RBS’ customers, UK businesses in particular.
Today’s findings are a further demonstration of the importance of the tough and swift action this government took in response to the first findings of attempted LIBOR manipulation, concerning Barclays in June 2012.
LIBOR manipulation happened in many countries. But no country has responded as quickly as decisively as Britain has now done.
The Chancellor commissioned Martin Wheatley, the chief executive designate of the Financial Conduct Authority (FCA), to review LIBOR and the corresponding criminal sanctions regime. Just 13 weeks later his review was published and the Government accepted his recommendations in full in October last year.
The Government immediately proceeded to implement these reforms through the Financial Services Act which received Royal Assent in December. Secondary legislation has been published in draft and will be debated in the coming weeks, introducing the new regulatory and criminal sanctions regime underlying LIBOR and other benchmarks.
LIBOR activities will be within the scope of statutory regulation, including the submission and administration of LIBOR. And where people have broken the law, Government will ensure that the authorities will have all the resources they need to make sure they are punished.
The BBA is being replaced as operational LIBOR administrator. Baroness Hogg is chairing an expert panel that will identify an appropriate successor.
This Government strongly supports the various international initiatives taking place on wider benchmark reform. To restore trust, it is essential that any reform proposals are co-ordinated at a global level to ensure consistency in the way benchmarks are governed and regulated.
Wider reform context
More broadly, this case reinforces the need for the changes already put in train by this Government to rebuild confidence in our banking system overall, and to ensure that such events are not repeated.
Reform of regulatory architecture
The previous regulatory regime failed. No institution was clearly focused on financial stability or conduct issues.
The Financial Services Act, which received Royal Assent at the end of last year, establishes a new system of focused financial services regulators:
- the Financial Policy Committee (FPC) to oversee macroprudential regulation
- the Prudential Regulation Authority (PRA), to ensure the stability of individual banks and
- the Financial Conduct Authority (FCA), as a new, independent and specialist conduct regulator capable of focussing on exactly the types of issues we have heard announced today.
There are also broader issues to be tackled in relation to the culture and professional standards of the banking system.
The Commission on Banking Standards, comprised of expert representatives from both the Commons and the House of Lords, has been established to do exactly this: to identify ways of both raising professional standards but also protecting the consumer from the inherently more risky world of investment banking.
I want to thank members of the Banking Commission for the important work that they are carrying out.
In conclusion, Mr Speaker, this is another day of shame for Britain’s banks - and it is vital that we recognise it as such.
Not because Britain stands alone in this and similar scandals - which, as we know, is very far from being the case - but because Britain must stand out in the way that we put things right.
So, let there be no excuses.
Instead, let us have enduring, fundamental, reform.
And, yes, let us have justice too.
Any organisation or individuals found guilty of a crime must take full responsibility, and should be punished by law.
While the ordinary taxpayer must not, and will not pay the price of their misdeeds.
If, in the process, we hold our financial sector to higher standards than elsewhere in the world, then that is nothing to shrink away from.
Indeed, it is something that we must not only welcome, but actively pursue.
That is why we have already put in place a vastly stronger system of regulation so that misconduct can be prevented, not just punished.
And is why we look forward to the further recommendations that will be made by the Parliamentary Commission and Banking Culture and Standards.
‘My word is my bond’, is the motto on which the City was built - and we must re-build that bastion of confidence here in Britain: The best place in the world to do business.
But the worst place in which to abuse the trust on which free enterprise depends.