Libor may be scrapped in wake of rate rigging

An initial discussion paper by Martin Wheatley, who heads conduct regulation for the Financial Services Authority, outlined a number of proposals to overhaul the way the rate is set, which suggests regulators should be given more powers to prosecute traders.

Other proposals include using more hard data to set the rate and introducing a standard procedure to corroborate submissions, while alternative benchmarks should be considered for setting key rates that affect important financial transactions.

The Wheatley Review, which was ordered by Chancellor George Osborne after Barclays was hit with a £290m fine for Libor manipulation, said any move to using new rates would need to be carefully planned to limit disruption.

Mr Wheatley said: “The attempted manipulation of Libor and its European equivalent Euribor has cast a shadow over the industry at large and the construction and governance of the benchmarks themselves.

“Trust in a vital part of the financial system has been lost, and timely action is needed to regain it.”

Libor is an indicator of how much banks are charged to borrow money. It is a key benchmark in the financial services industry and is used to set the price of hundreds of trillions of dollars of contracts across the world.

However, the Libor scandal revealed that the system, currently overseen by the British Bankers’ Association, has been abused by traders who lied about their bank’s borrowing costs, in order to benefit their colleagues’ trading positions or make the company seem more secure. Yesterday’s report considered looking for alternatives to Libor or cleaning up the system to restore trust in it.

One possibility would see Libor setting regulated, or overseen by an independent body with a code of practice.

Individuals within banks who supply rates could be made to go through an approval process with the regulator, which could be given more powers of prosecution.

The paper allows four weeks for banks and other parties to respond, and final recommendations are expected to be published by the end of next month.

The fast pace of the review is designed to allow its findings to be implemented in the Financial Services Bill, which is being discussed in the House of Lords.

Peter Vicary-Smith, chief executive of Which?, said: “Mr Wheatley has said it’s vital to rebuild trust in the Libor setting process, but the bigger job is to rebuild trust in banking that has been shattered by one scandal after another.”

The Chancellor said: “We’ve got to have a financial system we can all trust.

“This review shows the Government is acting swiftly and decisively to address the failings of Libor and put right what went wrong.”