FSA’s Response to Fixing LIBOR

22 02 2013

The Financial Services Authority’s Response to the Treasury Committee’s Second Report of Session 2012–13, Fixing LIBOR: some preliminary findings was published by the Committee on 21 February 2013. It is worth recalling that the Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Services Authority (FSA). And, of course, the FSA’s response makes rather interesting reading (see below).

But prior to setting out the FSA’s responses, it is apposite to note the Committee’s Chairman Mr Andrew Tyrie MP (Conservative, Chichester) comments who said that:

  • Our inquiry uncovered appalling behaviour and serious failings at many levels in Barclays; on the trading floors, on compliance desks and amongst senior management.
  • It is now clear that these failures were not limited to a single institution. The systemic rigging of important rates appears to have been pervasive in the banking industry over a long period of time.
  • Serious regulatory shortcomings also came to light. It is only right that the FSA has had to shoulder its share of the blame for this scandal.
  • Following the Treasury Committee’s inquiry, significant steps have been taken to reform LIBOR as well as to reform the culture and practices within our banks and regulators.
  • We must have more confidence that such behaviour will not happen again. Much work remains to be done.
  • The welcome adoption of judgement-led regulation can help.
  • Mervyn King has made clear that the new approach need not necessarily require greater resources.
  • What is clearly needed is a replacement of box-ticking intervention with the application of grey matter.
  • The Treasury Committee will consider the FSA’s review into its own awareness of inappropriate LIBOR submissions when it is finalised.
  • Some of the evidence we heard suggests early warning signs may have gone unheeded.

The FSA’s response is connected to parts of the Treasury Committee’s Second Report of Session 2012–13, Fixing LIBOR: some preliminary findings which were aimed at the FSA. A summary of the Committees concerns (in bold) and the FSA’s response are highlighted hereunder:

Paragraph 16 (self-disclosure of misconduct by Barclays and reputational damage)

Co-operation with an FSA investigation is a relevant factor in deciding whether it is appropriate to take action and in determining the appropriate sanction if action is taken. Barclays co-operated with the FSA and the US Commodity Futures Trading Commission (CFTC). As a result of that co-operation, Barclays identified and brought to the attention of the authorities much of the detail of the misconduct contained in the Final Notice in the course of these enquiries. The fact that the FSA will take such co-operation into account is reflected in the methodology used to set penalties. The FSA introduced a new penalties policy in 2010 to provide greater transparency on the fines imposed. The new policy, which applies to all behaviour which took place on, or after, 6 March 2010, is also intended to establish a more coherent and consistent framework and increase the amount of the penalties that are imposed. As the vast majority of the behaviour in the Barclays Final Notice took place before March 2010, the penalty was calculated under the previous policy.

Paragraph 17 (the desirability of encouraging other firms to confess their misdemeanours in a similar way)

The FSA’s flexible approach to its penalties policy also seeks to incentivise proactive disclosure. When assessing whether a penalty should be imposed at all, and if so, in what amount, the FSA has regard to matters such as whether the firm brought the breach to the FSA’s attention quickly, effectively and completely. Where a firm admits its own culpability and engages with the FSA in the executive settlement process, it can receive a substantial discount to the penalty. Early settlement has many potential advantages as it can result, for example, in the saving of FSA resources, messages getting out to the market sooner and a public perception of timely and effective action. It is in the public interest for matters to settle, and settle early, if possible. The subject of an investigation can benefit from a 30% discount if they settle early. This discount is reduced to 20% or 10% if the case is settled later in the process. In the case of Barclays, the Final Notice made clear that the firm qualified for a 30% discount as it agreed to settle at an early stage of the investigation. Prior to the application of this discount, the FSA had already taken Barclays’ co-operation into consideration in determining the penalty of £85 million which was then reduced to £59.5 million after discount.

So the benefits of co-operation with the FSA are cumulative.

Paragraph 39 (how will the FSA alter its supervisory efforts to counter weak compliance in future)

The Financial Conduct Authority’s new supervisory framework will focus much more clearly on ensuring that the interests of customers and market integrity are at the heart of how a firm is run. For high impact firms, the FCA will carry out firm-by-firm business model and strategy analysis to help the FSA form a view of where potential areas of conduct risk lie. Governance and culture, including a firm’s control framework, will be one of four key areas of focus for the FCA and will be subject to proactive, systematic supervision if identified during the analysis of a firm’s business model as an area of weakness. Governance and culture will also continue to be a key area of focus for small and medium-sized firms.

Paragraph 61 (Committee requiring the findings of internal FSA investigations to be published)

In its evidence to the Committee, the FSA said that it had committed to undertake an internal review into contacts with the FSA on LIBOR and its awareness of inappropriate LIBOR submissions. This will focus on the period 1 January 2007 to 31 May 2009. This work, which is being led by the FSA’s Internal Audit Division, is currently ongoing. It is expected to finalise this review in Q1 2013 and the FSA will revert to the Committee separately on this issue.

Paragraph 124 (FSA approving Barclays’ boss Bob Diamond’s appointment despite serious concerns his attitude to risk and a tendency to “push the limits”) and Paragraph 159 (FSA’s judgment to be resolutely clear about its concerns to senior figures in systemically important firms)

The FSA recognises the importance of being absolutely clear to firms about any concerns it has about senior figures. Under the ‘approved persons’ regime, certain functions within financial services firms (including ‘chairman’, ‘chief executive’, ‘director’ and ‘nonexecutive director’) are designated by the FSA as ‘controlled functions’. Only persons who have been approved by the FSA are allowed to perform those functions. Approval can only be granted where the FSA remains satisfied that the person is ‘fit and proper’ to perform the role in question. In all cases where the FSA approves the appointment of individuals to perform a controlled function, the FSA writes to the firm. It is worth noting that FSMA does not give the FSA scope to place conditions or set limitations on approvals. For example, the FSA cannot approve an individual to a position for a temporary period during a transitional phase for a firm, even if the FSA has concerns about the individual’s appropriateness beyond that period. However, where the FSA has specific concerns, it will continue to set these out in writing, clearly defining any issues that will need to be addressed by the individual or firm. The FSA will follow up on any concerns as part of its ongoing supervisory dialogue and take action where appropriate. Once the new regulatory framework has come into effect, the FSA anticipates that the PRA and FCA will write separately to the firm in situations where both have concerns about a senior appointment.

Paragraph 192 (that FSA needs power to remove senior executives but in its duty of care to shareholders needs recognition)

Once appointed, approved persons are expected to act in accordance with the Statements of Principle for Approved Persons, set out in the APER section of the FSA Handbook. If an approved person falls short of these standards, then the FSA, and in future the PRA and the FCA, will be able to take formal action against that person, subject to the procedures and safeguards set out in FSMA. However, the nature of the relationship between the PRA and systemically important financial institutions will be such that there may be situations where there is a loss of confidence in a senior executive. In such situations, the FSA recognises the importance of there being appropriate governance arrangements in place. Communicating any concerns about an individual to a firm’s Board, for the firm to then consider, will be a matter for the Chief Executive of the PRA, subject to consultation with the PRA Board.

Paragraph 7 (that the FSA lagged behind its U.S. counterparts and the delay has contributed to the perceived weakness of London in regulating financial markets)

The FSA noted the Committee’s concerns about when the former initiated its formal LIBOR investigations. This is an important issue. It was accepted that the CFTC was first to initiate enquiries. The FSA was aware of and engaged with the enquiries made by the US regulatory authorities during 2008 and 2009 and provided assistance to the CFTC from the outset of its investigation, by obtaining documents and information from Barclays. The FSA also received information from Barclays during this early stage of the investigation and continued to monitor the situation. Once evidence of potential wrongdoing emerged, the FSA considered it appropriate to take more active steps to investigate the issues, and appointed investigators under the relevant provisions of FSMA. The next phase of the investigation was conducted by the FSA in tandem with the CFTC and other US authorities as they became involved. For example, the first regulatory interviews were conducted on a joint basis in late 2010. Owing to the significant number of documents and individuals relevant to the investigation and the way in which the issues developed over time, this phase of investigation lasted until Spring 2012. The FSA then entered settlement negotiations with Barclays.

Paragraph 202 (that although otherwise empowered, the FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct).

The FSA has extensive powers to investigate specified offences, both regulatory and criminal (as set out in the Financial Services Markets Act 2000 or “FSMA” as above). These powers of investigation do not, however, extend to other offences not specified in FSMA such as theft, fraud and false accounting. The police and the SFO do have powers to investigate these offences so the FSA cannot use its powers specifically to obtain material relevant to these offences. The FSA may of course discover evidence of these more general offences whilst conducting investigations under the powers set out in FSMA. For example, it may discover evidence of fraud whilst investigating whether a regulatory breach has occurred, or a market abuse offence has been committed. In these circumstances, there is a well established procedure for discussions to take place between the FSA and the SFO (Serious Fraud Office) or other prosecutors about how to deal with that evidence. This is in accordance with the Prosecutors’ Convention, to which both the FSA and the SFO are signatories. Such discussions might lead to the SFO opening its own investigation. In circumstances where the FSA has concluded an investigation and commenced a prosecution for offences that are specified in FSMA, it can, and does, include other ancillary offences in the same case. For example, the FSA might, in bringing a case for insider dealing, also charge the same defendants with money laundering offences. However, where such an offence is the core of the misconduct, it is more appropriate for it to be taken forward by other prosecution authorities. The FSA will provide considerable assistance to this, as it did, for example, to the CPS Prosecution of Tomas Wilmot for conspiracy to defraud last year. In the case of Barclays, as the FSA became aware of evidence of potential fraudulent misconduct in the UK, it discussed this evidence with the SFO. The FSA concluded that none of the offences specified in FSMA were applicable to the case, and found that regulatory breaches by Barclays had occurred. Therefore, the FSA did not take forward a prosecution in relation to the issues at Barclays and the issue of whether to charge ancillary offences did not arise. The SFO has now opened its own criminal investigation into the matter and we continue to support that investigation. The FSA therefore does not think it is the case it took a narrow view of its powers in considering evidence of fraudulent conduct. However, there may be merit in considering further the scope of the FCA’s powers in the future.

FSA Penalties Policy

In respect of misconduct which took place before 6 March 2010, the factors the FSA takes into consideration when assessing whether a penalty is appropriate and, if so, the level of that penalty, include:

• Deterrence

• The seriousness of the breach

• The extent to which the breach was deliberate or reckless

• The person’s financial circumstances

• The amount of benefit gained or loss avoided

• The person’s conduct following the breach

• The person’s disciplinary record and compliance history, and

• Whether action was also being taken by other regulatory authorities

Moreover, the FSA also considers penalties in other comparable cases. There is no formal weighting of any of the factors, rather it is an assessment in the round. The FSA sets out in each of its published notices which of the factors set out in Decision Procedure and Penalties Manual it considers apply in that instance.

The new policy, which applies to behaviour on, or after 6 March 2010, introduced a five-step framework that is based on disgorgement, discipline and deterrence:

• Step 1: the removal of any financial benefit derived from the breach

• Step 2: the determination of a figure which reflects the seriousness of the breach

• Step 3: an adjustment for any aggravating and mitigating circumstances

• Step 4: allows the FSA to make an adjustment to ensure that the penalty has a deterrent effect, and

• Step 5: if applicable, a settlement discount will be applied

images-332These steps will apply in all cases but Step 2 differs depending on the type of case. For firms, where revenue is an appropriate measure the Step 2 figure will be 5%, 10%, 15% or 20% of the firm’s relevant revenue for the period of the breach. Where revenue is not indicative of the harm or potential harm that the breach may cause, the FSA uses an appropriate alternative.

For individuals in non-market abuse cases, the Step 2 figure will be 0%, 10%, 20%, 30%, or 40% of the individual’s gross remuneration and benefits for the period of the breach. Under the new policy, FSA takes into account at Step 3, mitigating circumstances which would tend to reduce the amount of any penalty imposed, such as proactive disclosure, the degree of co-operation during the investigation and remedial steps taken since the breach was identified. The FSA also considers aggravating factors that would tend to increase the amount of any penalty imposed.



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: