28 Jun 2012

Review of criminal powers in wake of Barclays scandal

As the value of bank shares fall sharply in the wake of the Barclay’s banking rates scandal, the government is exploring ways to toughen up the criminal system and Bob Diamond breaks his silence.

In a statement to the House of Commons, Chancellor George Osborne said the government was reviewing the criminal sanctions regime as a response to the “systematic failures at the heart of the financial system”.

Mr Osborne was speaking the day after US and UK financial authorities demanded £290m in penalties from Barclays for manipulation of Libor, the measure of inter-bank lending.

Angela Knight, outgoing chief executive of the British Bankers’ Association (BBA), which owns the Libor trademark, was asked by Channel 4 News if Barclays was guilty of criminal behaviour.

“I don’t know at this stage any more than I’ve seen in the reports that are public, but I do think that there will undoubtedly be some further work that is undertaken by the authorities and we’ll just have to wait and see what the outcome is,” she said, adding that the BBA was not responsible for punishing Barclays.

Mrs Knight was also asked about the BBA’s responsibility for Libor and said the rate was set by “third parties”, adding: “We have already got a big review under way, one in which our authorities are involved. By that I mean the Bank of England, the Treasury and of course the FSA, and what we are doing is taking what is now in the public domain as a consequence of that investigation and it will be considered by that review process.”

Does responsibility lie with the BBA? Read more from FactCheck: Anatomy of a banking scandal

Barclays’ chief executive breaks his silence: Read his full response here
Late on Thursday evening, Bob Diamond broke his silence in an open letter to the Treasury Select Committee chairman, denying that senior staff knew what was happening, and saying that rogues traders were acting “purely for their own benefit”. Mr Diamond said he would be “happy to attend” the committee’s meeting on Friday.

He said that Barclays’ two Libor issues were separate and “wholly unrelated”. The first, he named as traders’ attempts to influence the bank’s submissions, which he said was an attempt to benefit their own desks’ trading position, rather than boosting Barclays’ as a whole.

This practice was limited to a small number of rogue traders, he added, and senior staff were not aware of the requests by traders when they were made. But he acknowledged that control systems should have been better.

The second issue, according to Mr Diamond, relates to the Libor setting process during the credit crisis. Authorities found that Barclays had reduced its submission to try and protect the bank’s reputation. “The unwarranted speculation regarding Barclays’ liquidity was as a result of its Libor submissions being high relative to those of other banks,” he wrote. “At the time, Barclays’ opinion was that those other banks’ submissions were too low given market circumstances.”

But he acknowledged: “Even taking account of the abnormal market conditions at the height of the financial crisis, and that the motivation was to protect the bank, not to influence the ultimate rate, I accept that the decision to lower submissions was wrong.”

Shares plummet

Banking shares plummeted throughout the day in response to the scandal. Barclays saw the most severe impact with the value of its shares falling 15.5 per cent – wiping around £3.7bn off the value of the business.

Other banks also suffered share price falls including Royal Bank of Scotland (11.45 per cent), Lloyds Banking Group (3.9 per cent) and HSBC (2.58 per cent).

In a statement to the House of Commons, Mr Osborne said: “As part of our review into Libor and the strength of the financial regulatory architecture, we will examine if there are any gaps in the criminal regime inherited by this Government and we will take the necessary steps to address that.

Systematic failures

“I cannot comment today on possible criminal investigations for individuals involved in this activity.

“The authorities are exploring every avenue open to them but the scope of the FSA’s criminal powers granted be the previous Government does not extend to being able to impose criminal sanctions for manipulation of Libor.

An estimated $36trn of financial products worldwide have rates based on Libor and the measure has knock-on effects on the public through payments like mortgages and loans.

It strikes me that that is almost certainly criminal and there needs to be a proper investigation. Boris Johnson

Mr Osborne was keen to lay the blame for the relaxed regulatory environment that allowed “systematic failures at the heart of the financial system at the time” at the door of the Labour Party and former economic secretary to the Treasury Ed Balls, stressing the coalition’s intention to act:

“As part of our review into Libor and the strength of the financial regulatory architecture, we are examining whether strengthening the criminal sanctions regime for market abuse and market manipulation is warranted, and if so, we will provide for these powers quickly.

“Also, next week, the Government will be publishing a consultation in response to the report on the failure of RBS and will consider the possibility of criminal sanctions for directors of failed banks where there is proven criminal negligence.”

He added that it was imperative that Barclays chief executive Bob Diamond face “serious questions”, and welcomed the Treasury Select Committee’s request that Mr Diamond appear before it soon.

Very, very dodgy

Earlier today Labour leader Ed Miliband and Mayor of London Boris Johnson called for police investigations into the scandal. Mr Miliband, in a speech to Unite, said those members of staff at the bank who had “rigged the system to the cost of ordinary borrowers” should not get away with a “slap on the wrist.”

“When ordinary people break the law, they face charges, prosecution and punishment,” he said. “We need to know who knew what when, and criminal prosecutions should follow against those who broke the law. The same should happen here.”

Mr Johnson said: “To manipulate an interest rate for gain looks to me like a very, very dodgy practice indeed. And I hope that the whole thing is fully investigated and those who are liable pay the price.

“It’s not for me to say who is culpable in this, but plainly banks have been forthcoming in getting their dirty linen out there and I think the whole banking industry now needs to come clean about what has been going on.

Mr Osborne also said today that the Government would look into changing what happens with penalties paid to the FSA.

Under current rules, fines paid to the FSA are use to reduce the annual levy paid by other financial institutions. Mr Osborne said he was “far from convinced that, in all cases, this is the best use of the money.” He said he was exploring whether the Barclays penalty paid to the FSA could be returned to the tax-payer.