Attempting to manipulate Libor interest rates should be made a criminal offence, Britain's chief financial regulator will say today as part of a devastating indictment of the rate-fixing scandal.
The scandal, which led to Barclays paying £290m in fines, involved traders trying to manipulate the rates on which the price of $300 trillion of financial contracts depend, to boost their bonuses.
In a speech to be delivered today to coincide with the publication of his report into the affair, Martin Wheatley, chief executive of the new Financial Conduct Authority, will describe the system as "broken" and say traders' attempts to game it have "torn the very fabric that our financial system is built on".
He will also say the British Bankers' Association should be stripped of its responsibilities for overseeing the setting of Libor as part of a 10-point improvement plan, describing its approach as "careless" and saying people were right to be upset at how "badly run" it has been.
In addition to criminal penalties for those who try to manipulate Libor, Mr Wheatley will call for new laws to bring it under regulatory oversight.
He will say that it would be impossible to scrap Libor because in many cases viable alternatives do not exist and it would cause too much disruption. But he wants to see alternatives developed in the long term.
His proposals will see a sharp reduction in the number of Libor reference rates, from 150 to around 20, with several time periods dropped, in addition to certain currencies, including the Canadian, Australian and New Zealand dollars, as well as the Swedish and Danish kroner.
Banks may also be forced to submit data to Libor, to prevent them from dropping out and getting a "free ride".
And that data should be based on actual transactions rather than what the banks expect to pay.
A committee chaired by Baroness Hogg, the chairman of the Financial Reporting Council, will be set up to select a new organisation to oversee and publish Libor rates.
Mr Wheatley will also issue a stark warning to those involved in setting other benchmarks in the City to ensure that they are kept clean. A huge range of prices, including gold, silver, some agricultural products and oil, are set without regulation and, it is feared, are susceptible to manipulation.
Mr Wheatley will say: "Whilst other benchmarks vary greatly in design and application, I hope that those responsible for them will be able to draw some important lessons from my report on Libor, and that it will help stimulate wider debate on benchmarks.
"In particular, I consider that it should be possible to develop a set of overarching principles that can be applied to all major benchmarks, to promote robustness and credibility across the markets."
Mr Wheatley will add: "Libor needs to get back to doing what it is supposed to do, rather than what unscrupulous traders and individuals in banks wanted it to do. The evidence we have seen in relation to this manipulation paints a clear and damning picture about the prevalence of the wrong incentives, and the sorts of behaviour that has allowed."
Greg Clark, Financial Secretary to the Treasury, will say of the report: "Libor is a hugely important international benchmark and this report makes a series of comprehensive and practical recommendations designed to restore its credibility. The Government will respond, in full, once Parliament returns."
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