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City regulator says industry will no longer be allowed to self-regulate inter-bank lending rate

Bankers who broke Libor rules will face prosecution Regulator will take Libor rigging suspects to court

Nick Goodway
Friday 28 September 2012 22:28 BST

Bankers who attempt to manipulate Libor face criminal prosecution under proposals outlined by the City's top financial regulator yesterday.

Martin Wheatley, head of conduct at the Financial Services Authority, also recommended that the British Bankers' Association be stripped of responsibility for overseeing the inter-bank lending rate, in response to the industry's failure to self-regulate.

Mr Wheatley, who was commissioned by the Chancellor, George Osborne, in July to review Libor after Barclays staff were revealed to have fiddled the rate, said: "Trust in a vital part of the financial system has been badly damaged.

"The report sets out my plans for reforming what has become a broken system and to help restore the trust that has been lost. 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."

His recommendations were broadly welcomed by politicians and bankers. Sir Mervyn King, the Governor of the Bank of England, said: "The Bank very much welcomes the Wheatley review's proposals to improve the functioning, governance and regulation of Libor and would want these to be implemented as soon as possible.

"Over the medium to long term, further thinking will be needed to meet the challenge of benchmarks based on thinly traded markets, especially when they are quote-based."

Barclays admitted Libor rigging earlier this year and paid £290m to regulators in the UK and US. Another dozen banks are being investigated, including Lloyds Bank and Royal Bank of Scotland.

Andrew Tyrie, chairman of the Treasury Select Committee, said: "The Wheatley review is a welcome initial step. If it has got this right, it could mark at least the end of the beginning of the clean-up operation."

He added: "It has rightly stripped the BBA of responsibility for Libor – their handling of it was a disaster."

Mr Wheatley's report made a number of major recommendations including:

* Introducing a new regulatory structure for Libor, with criminal sanctions for those who try to manipulate it.

* Transferring oversight of Libor from the British Bankers' Association to a new body.

* A requirement for banks to back up their submissions with evidence of relevant transactions.

* A code of conduct for market participants and regular audits.

* Ask more banks to submit Libor rates to make it more representative.

* Detailed technical changes to refine the way Libor is put together, to make it much harder to manipulate.

The Financial Secretary to the Treasury, Greg Clark, said: "Today's independent report is very clear – the self-regulation of Libor has failed. It's yet another example of the broken regulatory system that this Government is committed to fixing."

Mr Wheatley said: "I have concluded that Libor can be rehabilitated through a comprehensive and far-reaching programme of reform. Although the current system is broken, it is not beyond repair, and it is up to regulators and market participants to work together towards a lasting and sustainable solution."

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