UK plans swift review in its bid to reform Libor

THE UK is seeking urgent reform of the key interest rate rigged by a number of banks, including Barclays, in a transatlantic scandal that is threatening to damage London’s reputation as a financial centre.

The government set the terms yesterday for a swift review of the London interbank offered rate (Libor) by regulator Martin Wheatley so that recommendations can be included in a draft law making its way through Parliament.

The Libor scandal has sparked a blame game among market watchdogs in the US and the UK, who are calling for direct regulation of the benchmark that is compiled and overseen by the banking industry.

Mr Wheatley, a top official at the Financial Services Authority (FSA), will look at how Libor is constructed and the feasibility of using actual trades rather than offered rates.

The review will also look at governance, the potential for alternative rate-setting processes and how to move to a new regime, which experts say could take time as many long- term contracts are pegged to Libor.

Sanctions for the abuse of Libor and whether the rate, supervised by its sponsor, the British Bankers’ Association (BBA), should be formally and directly regulated under UK law, will be examined.

“The benchmark rate is used globally for trillions of dollars worth of financial contracts. Therefore, it is clear that urgent reform of the Libor compilation process is required,” Mr Wheatley said.

The BBA, which had already begun a review of Libor setting in March, its second in four years, had no comment. The FSA and the Bank of England are taking part in that BBA review and its findings could be passed on to Mr Wheatley.

Mr Wheatley met members of the panel of banks that feed their date into the current rate-setting process yesterday. He will publish a discussion paper on Friday next week to kick off a four-week public consultation with final conclusions by the end of September.

The chancellor of the exchequer, George Osborne, will then consider how the recommendations can be incorporated into a financial services bill that is already making its way through Parliament.

The European Union’s executive, the European Commission, last week proposed making the rigging of market-set benchmarks illegal.

Other UK banks are also likely to be fined over Libor, following the $453m penalty paid by Barclays, at a time when lenders are already being punished for mis-selling products to consumers and businesses.

The Royal Bank of Scotland signalled on Sunday in a Guardian newspaper interview that it too faced a fine for its role in the rate-rigging scandal as authorities globally probe about 20 banks.

HSBC said it has been named as a defendant in US private lawsuits linked to Libor and its continental European counterpart Euribor. Lloyds, one of the “big four” UK banks, said last week that it has been subpoenaed in the Libor probes.

Mr Wheatley said the review will also consider any provisional policy recommendations for other market benchmarks in financial markets. This would likely include commodities markets benchmarks such as those for pricing Brent oil. Reuters