The LIBOR case: How financial institutions came to rig a $350 trillion market

Laven Partners stresses the need for better deterrence and a culture change

The Financial Services Authority (FSA) recently fined Barclays Bank £59.5m for misconduct relating to the London Inter-Bank Offered Rate (LIBOR) and the Euro Inter-Bank Offered Rate (EURIBOR). Following the political backlash associated with this scandal, the Serious Fraud Office (SFO) has decided to launch a formal criminal investigation.

Barclays is possibly not the last bank to be fined in this affair which spreads beyond the UK. In fact, it now seems that manipulating LIBOR has been a common practice in the industry for decades. Barclays has already been fined £130m by the US Community Futures Trading Commission (CFTC), and £100m by the US Justice Department (a total £290m therefore).

Barclays’ fines albeit striking, are very far from what the public may deem sufficient. Indeed £290m is just about 1/10 of the £2.7bn bonus pool Barclays paid out in 2011. This fine is a wakeup call but hardly the deterrent it should be.

This incredible and terribly damaging story for London, the UK and every banker in the world stems from the now so familiar failure of a regulated body applying an objective and reliable standard of review to every segment of the industry. The absolute failure of a major global bank to respect what would be seen by the public as simple compliance is a major blow to the attempts to regain the trust of the electorate in financial institutions.

One has to ask, where were the regulators and why did they fail to act? The fact that this fraud was carried out over a number of years is troublesome. In effect, no government bodies, including the Bank of England and the FSA, thought it was their role to monitor and regulate the LIBOR market.

As highlighted by Emily Thornberry, MP for Islington South & Finsbury and Shadow Attorney General, “the problem is not with the law, but with the ability and willingness to enforce it”. This scandal has highlighted the fact that the FSA and the SFO are not correctly equipped to deal with such matters whether before or after they arise. They lack tools for the purpose of deterrence and cannot effectively bring criminal charges.

What will be done to improve things is not clear. The usual calls for better ‘Chinese walls’ as proposed by the Vickers report have already been made, including from Bart Chilton, commissioner of CFTC, calling for a ‘sturdy firewall’ between bank workers involved in setting the LIBOR rate and traders.

For now the banking world has become so officially influential, present in most governments worldwide, that things have gone from bad to worse. We are still a long way from changing that trend and the worry is that if we do not see a reaction now within the financial industry we may see a revolutionary backlash that will actually destroy parts of our fragile economy.

It remains to be seen whether the SFO will have the necessary resources to formerly charge individuals, notably senior executives, associated with this scandal. The US criminal proceedings may offer a more interesting development particularly considering the tendency of US laws to reach beyond their frontiers. In Singapore, the Monetary Authority of Singapore has begun investigations into SIBOR rates, Singapore’s equivalent of LIBOR.

It is clear that in the near future LIBOR manipulators will face criminal charges, as the activity will become criminal under EU’s Market Abuse Directive and similar regulations overseas.

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