Banking: LIBOR and EURIBOR

Lord Deighton Excerpts

Tuesday 12th February 2013 Lords Chamber

[Lord Bates]

To ask Her Majesty’s Government what plans they have to review the working of the Financial Services Authority’s executive settlement procedures in the light of discounts applied to fines levied as a result of misconduct in relation to the setting of the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR).

[The Commercial Secretary to the Treasury (Lord Deighton)]

My Lords, the Financial Services Authority awards discounts for early settlement of cases involving financial penalties, as it considers early settlement to be in the public interest. The Government take the manipulation of LIBOR and EURIBOR very seriously. We accepted the weekly review recommendations on LIBOR, and are implementing them in full. Furthermore, we are ensuring that the money raised from these fines will go to specific causes which demonstrate the best of British values.

[Lord Bates]

I am grateful to my noble friend for that Answer. Does he agree with me that the manipulation of these rates by some banks was a deeply cynical fraud against borrowers in times when they could least afford it, and that while the fines levied by the FSA on those responsible may be at record levels they were a small fraction of the profits made by those institutions? The fines were substantially less than those imposed by the US regulator. Due to the FSA’s executive settlement procedures, those responsible received over £100 million in discounts on the fines levied so far. Would it not be more in keeping with the way in which banks treat their own customers if the FSA was now to scrap early-settlement discounts and replace them with a system of late-settlement penalties?

[Lord Deighton]

My Lords, my noble friend makes an important point about the seriousness with which we are addressing this attempted manipulation of LIBOR rates. On the specific question of the penalties, the Financial Services Authority is the independent regulator. It is mandated to set all the rules on regulatory matters. That includes decisions about using early-settlement discounts as a way of managing the process. It considers it in the public interest to settle matters in cases involving financial penalties as early as possible and to provide incentives. There are many advantages in early settlement. It helps consumers to get compensation earlier than would otherwise be the case and prevents cases being contested at the regulatory decisions committee, which could cost a lot of time and money.

[Lord Barnett]

My Lords, does the noble Lord find it as astonishing as I do that, on an issue such as interest rates, which is obviously of great concern both nationally and internationally, nobody in the Bank of England or the Treasury had the faintest idea about what was going on with LIBOR?

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[Lord Deighton]

My Lords, I absolutely accept the noble Lord’s observation that it is really a swingeing indictment of the financial system that a benchmark as critical as LIBOR—which is responsible for settling about $300 trillion-worth of transactions—could be manipulated in this way. Once this was uncovered, however, the Government have moved extremely swiftly, appointing Martin Wheatley, the chief executive-designate of the Financial Conduct Authority, to do a review. He came up with a 10-point plan, which has been implemented in full. The Financial Services Act was amended to make sure that LIBOR activities were brought within statutory regulation; we created a new criminal offence to ensure that it could be followed up in that way and the FSA has now been given the power to compel banks to participate in LIBOR setting.

[Lord Higgins]

My Lords, would my noble friend agree that the general public are somewhat bemused by the large sums of money involved in these transactions and are even more puzzled as to why there seem to be very few people who have been either prosecuted or convicted with penalties affecting the individuals concerned? Could my noble friend comment on that?

[Lord Deighton]

My Lords, with respect to the sanctions and penalties, I would point out that there are ongoing criminal investigations with the Serious Fraud Office. Three arrests were made at the beginning of the year, so it is clear that we are determined to follow through on picking up on criminal activity where that can be proven to have taken place.

[Lord Eatwell]

My Lords, before asking my question, I wonder if the noble Lord could clarify part of his answer to the noble Lord, Lord Bates, where he referred to the “attempted” manipulation of LIBOR. Is he saying that the manipulation failed? Turning to the Question, when I was a member of the Regulatory Decisions Committee of the Financial Services Authority, discounts on penalties were offered for early settlement only in cases where either the firms had reported their own failings or they had offered exceptional levels of co-operation. Did either of these circumstances apply in this case to British banks prior to measures taken by the American authorities?

[Lord Deighton]

With respect to the noble Lord’s question on whether the attempt was successful, I think that is actually the issue. The FSA’s review found that it was unclear whether the manipulation did result in a change of rates, so that is an open question. On the degree of co-operation shown by the firms under investigation, I understand that the firms were entirely co-operative. Of course, they are all under new management and, effectively, are the new brooms trying to sweep clean. I am afraid that I cannot layer together the timing of that co-operation vis-à-vis the application of the US penalties, but I am happy to look into that and get back to the noble Lord.

[Lord Forsyth of Drumlean]

Are the Government comfortable with very senior executives in the FSA, who are after all responsible for deciding those penalties, being able to move rapidly into employment with the banks at seven-figure salaries?

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[Lord Deighton]

My noble friend makes a good observation. Clearly, there were some gaps in the historical supervisory structure, which is why we have passed the Financial Services Act reforming entirely the regulatory apparatus around this business. Of course, the FSA is about to be replaced by a combination of the Financial Conduct Authority, the Financial Policy Committee and the Prudential Regulation Authority. We now have a new regime surrounding this arena. I share my noble friend’s concern that moving from gamekeeper to poacher needs to be managed closely.

[Lord Campbell-Savours]

Are the penalty levels to which the noble Lord referred set in legislation? If so, can we not change the legislation?

[Lord Deighton]

The penalty levels are a matter for the FSA. In 2010, it re-established the code under which it assesses the fines to make them more transparent. It is an area which has been recently reviewed.

[Baroness Kramer]

My Lords, may I at least commend the FSA for a new penalty regime which affected misbehaviour after 6 March 2010 and finally had some serious fines behind it? However, I still recommend the US system of triple damages. Does the Minister agree that it is crucial that the Government and all politicians stand behind the regulator in fierce enforcement and tough penalties? It was the slack that we saw cut for the banks under the previous Government that demonstrated to people that government and the regulator seemed to be on the side of the banks and not the people or the taxpayers?

[Lord Deighton]

My noble friend makes an extremely good point that under the new regime it is critical that government and regulators are seen to work together and to represent the interests of the consumers.