MercoPress. South Atlantic News Agency

Libor rate-rigging: UK regulator failed to act on warnings of “low-balling”

FSA was distracted by the financial crisis, which forced the UK government to bail out a series of banks, Chairman Turner said in a statement.

The UK Financial Services Authority repeatedly failed to act on warnings that banks were trying to rig inter-bank lending rates (mainly Libor) at height of the financial crisis, according to an internal review published Tuesday by the regulator.

The report, commissioned by the FSA in the wake of Barclays bank £290 million settlement with regulators over attempted rate-rigging, shows the regulator either ignored or failed to follow up on a series of red flags highlighting problems with the rates.

Between 2007 and 2009, the FSA said it found 26 pieces of correspondence citing direct references to “low-balling”--where banks understated their borrowing costs to make their funding positions look stronger. These include two telephone calls from Barclays’ managers flagging problems with rate-setting process.

The regulator also said it overlooked an article in the Wall Street Journal highlighting problems with the London Inter-bank Offered Rate, LIBOR, because the article wasn't widely read within the FSA. “The information received should have been better managed” the FSA concluded in its report.

The 102-page internal review is the latest black eye for the regulator, which is set to be disbanded in April. A parliamentary committee recently questioned why the FSA only started its investigations into rate-rigging two years after US authorities. This inaction had damaged London's reputation as a financial center, the committee said.

Libor is set every day in London, based on data submitted by big banks on how much it costs them to borrow money from other banks.

During the financial crisis, as banks' borrowing costs soared, some banks submitted artificially low data to conceal their escalating problems. Separately, employees at several banks sought to manipulate rates to benefit their trading positions.

The FSA has long argued that Libor wasn't high on its list of priorities. The regulator was distracted by the ongoing financial crisis, which forced the British government to bail out a series of banks, FSA Chairman Adair Turner said in a statement.

“The FSA had no formal regulatory responsibility for the Libor-submission process,“ said Mr. Turner. ”As a result, the FSA did not respond rapidly to clues that low-balling might be occurring.“

To assess its own performance, the FSA reviewed its correspondence with a series of industries bodies including banks and the Bank of England between September 2007 and May 2009. The regulator fed 97.000 pieces of correspondence into a database and then searched for the term ”Libor.“ The results show 74 instances where issues surrounding rates appeared. In total FSA searched 17 million records and interviewed 20 FSA staff or former staff.

The report concluded that it hadn't found ”major regulatory failure” that matched the scale of the FSA mishandling of it supervision of Northern Rock and Royal Bank of Scotland Group PLC (RBS), both of which needed government rescue in 2008.

The report stated that the FSA had received no evidence that traders were rigging the rates for profit. Nevertheless, the regulator should have been more pro-active before 2008 in contacting the British Bankers Association, which oversees several rates, to root out problems, the report said. The FSA “was too narrow” in its handling of information related to Libor, the report said.

“A particularly important lesson is the need to have staff focused on conduct issues even when the world rightly assumes that the biggest immediate concerns are prudential; and vice versa,” Mr. Turner said in a statement Tuesday.

Two UK banks, RBS, Barclays and Swiss UBS have been fined for rigging Libor and other benchmark rates, with others expected to settle similar charges soon.

The Bank of England, which also came under fire from UK lawmakers, said in a statement on Tuesday it was widely known that the Libor market had effectively closed as the 2007-09 financial crisis unfolded. “This report shows that, where the Bank was aware of market rumours about the process for setting Libor, it passed them promptly to the regulator - the FSA”.