Watchdog: Disgraced Libor could be killed off

New City regulator set to make changes to restore trust in the financial system
  • @TheIndyBusiness

Libor interest rates could be scrapped in an attempt to restore trust in the financial system, the head of the new city watchdog will say in a speech today.

Martin Wheatley, who will run the Financial Conduct Authority, will argue that "the existing structure and governance of Libor is no longer fit for purpose and reform is needed".

"Trust in a vital part of the financial system has been lost," he will say in the wake of attempts to fix the rate by traders at a number of banks in what has become the biggest City scandal since the financial crisis.

That scandal claimed another scalp yesterday as Bank of Tokyo-Mitsubishi suspended a third trader in connection with regulators' investigations into the affair.

Scrapping Libor would send a shudder throughout the City because of the sheer number of products whose price depends on it. Mr Wheatley, who leads the Libor review, will say he accepts that "any migration to new benchmarks would require a carefully planned and managed transition, in order to limit disruption to the huge volume of outstanding contracts that reference Libor".

But he will say there will be no compromise on the need for reform: "Our core purpose will be to make sure financial markets work well so that consumers get a fair deal."

Mr Wheatley was the number two at the London Stock Exchange before he left for Hong Kong, where he became the head of its financial regulator and established a reputation as a hardliner.

He will argue that poor conduct in the City is not only about fraud but extends to "a range of activities that exploit differences in expertise or market power and can all too often result in conflicts of interests".

"What's clear to me is that such conduct is not a victimless act simply because it takes place between sophisticated market participants. It's clear from the reaction to the Libor scandal that consumers think it's important."

Another option for reform could include forcing all banks to join a new Libor calculation system and making the people who submit returns to it liable for criminal prosecution if they submit false data.

Currently Libor is calculated from the rates banks say they expect to pay to borrow money from other banks. It is compiled by Thomson Reuters under the auspices of the British Bankers' Association. Membership of the Libor panel is voluntary. Regulators fear the limited number of banks involved makes it open to manipulation, which is why banks could be forced to contribute to its replacement.

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Fitch, the credit rating agency, last night raised the prospeot of cutting Standard Chartered's rating as a result of allegations that the bank broke sanctions against Iran. The agency said the bank's AA minus status could be downgraded when there was "more clarity" over the situation. Increasing numbers of shareholders were voicing concerns about the bank's strategy of fighting the allegations. It says only "99.9 per cent" of the $250 billion in alleged money-laundering was questionable. But, as one shareholder said: "Even if it's only $14 million they have still committed a crime." Another added: "Who knows what else the regulators could dig up if they really wanted a fight?" Deloitte's role as consultant to the bank is also coming under scrutiny. It was also involved in HSBC's money-laundering affair.

Jim Armitage