The City watchdog yesterday admitted that staff had been aware of Libor fixing for nearly three years before it finally launched an investigation into what has rapidly turned into banking's biggest scandal.
Releasing the findings of an internal audit into its conduct, the Financial Services Authority said there were 26 separate occasions when the practice of banks deliberately "lowballing" their Libor submissions was raised with staff. The practice was indirectly referred to in a further 48 documents, emails or other communications. These "red flags" were raised with staff at "all levels" of the organisation.
But the audit cleared the FSA of the type of systemic failure found in relation to its supervision of Northern Rock in the run-up to the mortgage bank's collapse.
The report found that the FSA had not been aware of the more serious scandals of traders colluding to fix rates to benefit their trading positions before it launched its inquiry into Libor.
None the less, the publication drew a rebuke from Andrew Tyrie, chairman of the Treasury Select Committee, who said it showed there was something "amiss" at the watchdog. He said it "confirms the Treasury Committee's concerns that the FSA was slow to act on evidence it received relating to Libor manipulation".
The FSA originally came under pressure to act after Barclays disclosed to the committee 13 instances of communication between the bank and the regulator in which it raised the possibility of firms making inappropriate Libor submissions in order to avoid negative media comment (lowballing). Those 13 are included in the 26.
Such lowballing was a feature of Libor rates during the financial crisis. A bank's Libor submission is based on what it expects to pay to borrow from other banks. During the crisis, some banks lowered their submissions in an attempt to show they were good risks and not under pressure.
The report criticised the FSA for being "too narrowly focused" in the way it handled evidence of this and of failing to see that problems with the interest rate went beyond "structural weaknesses" in the way that they were complied, under the auspices of the British Bankers' Association.
It attacked the FSA for failing to consider the impact on either consumers or the financial markets that Libor fixing might have. It said the watchdog should have paid heed to its responsibility for overseeing banks' conduct in relation to its "principles of business" rules. It was through those rules that banks including Barclays, Royal Bank of Scotland and UBS have been heavily fined, even though Libor setting was not then a regulated activity.
Lord Turner, chairman of the FSA, said the watchdog's successor bodies must learn lessons. He added: "All of the authorities, both UK and US and elsewhere, only discovered trader manipulation [of Libor rates] as a by-product of inquiries launched into potential lowballing. This raises important issues about the regulatory tools best suited to identifying such market manipulation."