Fixing LIBOR: some preliminary findings: Financial Services Authority Response to the Committee s Second Report of Session

Transcription

1 ` House of Commons Treasury Committee Fixing LIBOR: some preliminary findings: Financial Services Authority Response to the Committee s Second Report of Session Third Special Report of Session Ordered by the House of Commons to be printed 15 January 2013 HC 901 Published on 21 February 2013 by authority of the House of Commons London: The Stationery Office Limited 0.00

2 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue and Customs and associated public bodies. Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Mark Garnier MP (Conservative, Wyre Forest) Stewart Hosie MP (Scottish National Party, Dundee East) Andrea Leadsom MP (Conservative, South Northamptonshire) Mr Andy Love MP (Labour, Edmonton) John Mann MP (Labour, Bassetlaw) Mr Pat McFadden MP (Labour, Wolverhampton South West) Mr George Mudie MP (Labour, Leeds East) Mr Brooks Newmark MP (Conservative, Braintree) Jesse Norman MP (Conservative, Hereford and South Herefordshire) Teresa Pearce MP (Labour, Erith and Thamesmead) David Ruffley MP, (Conservative, Bury St Edmunds) John Thurso MP (Liberal Democrat, Caithness, Sutherland, and Easter Ross) Michael Fallon MP (Conservative, Sevenoaks) was also a member of the Committee during the inquiry. Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in printed volume(s). Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Chris Stanton (Clerk), Lydia Menzies (Second Clerk), Jay Sheth and Adam Wales (Senior Economists), Hansen Lu, Matthew Manning (on secondment from the FSA) and Duncan Richmond (on secondment from the NAO) (Committee Specialists), Steven Price (Senior Committee Assistant), Joanna Cunningham and Lisa Stead (Committee Assistants) and James Abbott (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Treasury Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is ; the Committee s address is treascom@parliament.uk

3 Fixing LIBOR: some preliminary findings: FSA Response 1 Third Special Report The Treasury Committee published its Second Report of Session , Fixing LIBOR: some preliminary findings on 18 August 2012, as House of Commons Paper No The Financial Services Authority s Response to this Report was received on 18 December 2012 and is published as an appendix. The response from the Financial Services Authority is in plain text and the Committee s conclusions and recommendations are in bold text. Appendix: Financial Services Authority Response 1. The FSA welcomes the Treasury Committee s report on Fixing LIBOR. We share the Committee s view of the importance of the issues raised during this inquiry and as part of our own investigations into LIBOR. 2. In particular, we welcome the Committee s view that the new judgement led approach to regulation being delivered by the FSA is the right one. We have already put in place a number of reforms in recent years including a tougher fines policy for enforcement cases and a completely new model of bank supervision. These will be taken forward by the new regulatory bodies: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). 3. We have considered the Committee s report carefully and we respond below to each of the specific recommendations for the FSA. 4. Barclays received a reduction in its fine because of its high degree of co-operation with the FSA in its investigation. Barclays also disclosed wrongdoing that it had itself found to the regulators. Any such disclosure is likely to have carried serious risk of reputational damage. Co-operation with inquiries needs to be encouraged by regulators, who need to take into account first mover disadvantage, but it does not excuse or diminish wrongdoing. Nor does the fact that others may have been engaged in similar practices. The FSA and its successors should consider greater flexibility in fine levels, levying much heavier penalties on firms which fail fully to co-operate with them. The FSA needs to give high priority to its investigations into other banks, including those largely owned by the taxpayer. (Paragraph 16) 5. Co-operation with an FSA investigation is a relevant factor that we take into account when deciding whether it is appropriate to take action and in determining the appropriate sanction if action is taken. This applies to individuals and firms under investigation. In Barclays case, it co-operated with the FSA and the US Commodity Futures Trading Commission (CFTC) in connection with the initial request for information from the CFTC in 2008 and with the investigations of the FSA and others as enquiries progressed. As a result of that co-operation, they identified and brought to the attention of the authorities

4 2 Fixing LIBOR: some preliminary findings: FSA Response much of the detail of the misconduct contained in the Final Notice in the course of these enquiries. The level of co-operation is assessed individually in each investigation into any firm or individual. 6. The fact that the FSA will take such co-operation into account is reflected in the methodology we use to set penalties. We publish details of how we impose penalties in our Handbook, in the Decision Procedure and Penalties Manual ( DEPP ). This policy makes clear the range of factors we take into consideration when assessing whether a penalty is appropriate and, if so, the level of that penalty, allowing for flexibility in the fines we impose. 7. We introduced a new penalties policy in 2010 to provide greater transparency on the fines we impose. The new policy, which applies to all behaviour which took place on, or after, 6 March 2010, is also intended to establish a more coherent and consistent framework and increase the amount of the penalties we impose. 8. It is worth noting, however, that the Financial Services and Markets Act 2000 (FSMA) requires us to apply the penalties policy that was in force at the time the misconduct occurred. As the vast majority of the behaviour in the Barclays Final Notice took place before March 2010, the penalty was calculated under the previous policy. 9. The approach we take under both the former and current penalties policy allows for flexibility in deciding whether to take action and, if so, what penalty is appropriate. The guidance in our Handbook makes it clear that, as well as considering issues such as the nature, seriousness and impact of the suspected breach, we will also consider the conduct of the person after the breach and specifically the degree of co-operation the person showed during the investigation of the breach. Our Handbook also makes it clear that proactive disclosure is relevant in deciding whether to take action at all. A more detailed overview of the factors we take into consideration under our current and former penalties policy is included as an appendix. 10. Although we have imposed a few penalties using our latest policy, it is still a relatively new policy and so we have no current plans to review it. Of course, as we take on more cases where the new policy applies, we will consider on an ongoing basis how well the policy is working in practice and whether it needs amending. Our overall approach to enforcement and penalties will also be subject to early consideration by the FCA Board to ensure it is satisfied with the approach. 11. A separate issue is that the FSA will also take into account whether an individual or firm has brought matters to our attention (this is dealt with below in response to paragraph 17 of the Treasury Committee s report). 12. Firms must be encouraged to report to the regulator instances they find of their own misconduct. While such a firm should still be required to pay compensation to any other party who has been disadvantaged by the misconduct, in cases where a firm makes a complete admission of its own culpability the FSA should retain flexibility in setting the fine payable. The FSA should have regard to the desirability of encouraging other firms to confess their misdemeanours in a similar way. The FSA may also need to re-examine its treatment of whistleblowers, both corporate and individual, in order to provide the appropriate incentives for the reporting of wrongdoing. (Paragraph 17)

5 Fixing LIBOR: some preliminary findings: FSA Response Firms are required by the FSA to deal with its regulators in an open and co-operative way, and to disclose to us appropriately anything relating to the firm of which we would reasonably expect notice (as set out in Principle 11 of the FSA s Principles for Businesses). Therefore, our expectation is that firms will self-report issues to us (whether enquiries are ongoing, as in Barclays case, or in any event). If firms do not comply with this obligation, we may decide to impose a penalty. For example, the FSA fined Goldman Sachs International 17.5 million in September 2010 for breaches of the FSA s Principles, including Principle As set out above, the flexible approach we take to our penalties policy also seeks to incentivise proactive disclosure. When assessing whether a penalty should be imposed at all, and if so, in what amount, we have regard to matters such as whether the firm brought the breach to the FSA s attention quickly, effectively and completely. 15. Where a firm admits its own culpability and engages with the FSA in the executive settlement process, it can receive a substantial discount to the penalty. Early settlement has many potential advantages as it can result, for example, in the saving of FSA resources, messages getting out to the market sooner and a public perception of timely and effective action. We therefore consider that it is in the public interest for matters to settle, and settle early, if possible. The subject of an investigation can benefit from a 30% discount if they settle early. This discount is reduced to 20% or 10% if the case is settled later in the process. In the case of Barclays, our Final Notice made clear that the firm qualified for a 30% discount as it agreed to settle at an early stage of our investigation. Prior to the application of this discount, the FSA had already taken Barclays co-operation into consideration in determining the penalty of 85 million which was then reduced to 59.5 million after discount. 16. In this way, the benefits of co-operation with the FSA are cumulative the fact of a firm s recognition of its own failings and remedial steps taken post-offending can result in a lower than otherwise penalty, which is then further reduced by the settlement discount. 17. In addition, we agree with the Committee that it is important that individuals and firms are appropriately incentivised to report and admit to wrongdoing. One of the ways in which information is currently received about regulated firms, individuals and other market participants is through whistleblowing. Whistleblowing is a way for people to raise issues with external bodies such as the FSA in the absence of assurance that the issue will be dealt with appropriately within the relevant organisation. We clearly set out on our website the different mechanisms by which individuals, firms and consumers may contact the FSA to express concerns about behaviour they may have seen, become aware of or even taken part in. These include the Market Abuse Hotline, the Contact Centre and the Consumer Helpline. In addition, we have a dedicated team for dealing with whistleblowers within our Financial Crime and Intelligence Department. 18. We take all information received from whistleblowers extremely seriously, working to protect the confidentiality of the whistleblower and to ensure that the information is followed up appropriately. We have recently improved the way we deal with allegations about firms who do not have fixed supervisory teams to help better manage and respond to them. We are also improving generally on the structure and IT in place to capture all firm and market intelligence to help ensure that the FCA intervenes early where appropriate.

6 4 Fixing LIBOR: some preliminary findings: FSA Response 19. We believe that these factors set out above provide a suitable incentive to firms and individuals who recognise that they have been involved in wrongdoing to approach the FSA and admit their culpability. However, we are mindful of the points made by the Treasury Committee and we will consider whether additional steps should be established to augment our current whistleblowing procedures. We are currently preparing a note on incentivising whistleblowing without moral hazard for the Parliamentary Commission on Banking Standards, as follow up to Martin Wheatley s oral evidence to the Commission on 25 October. 20. During this period of extremely weak compliance at Barclays, it was nonetheless subject to extensive regulatory oversight by the FSA. Despite the numerous ARROW visits that were conducted by the FSA during this period, we have seen no evidence that this weakness in compliance elaborated in the Final Notice was identified by the FSA in a timely manner, still less, dealt with. The FSA must report to this Committee on how it will alter its supervisory efforts to counter such weak compliance in future. (Paragraph 39) 21. Since 2008, we have increased the intensity of our supervision, including our focus on firms control functions and board oversight. The FCA and PRA will continue to build on this new approach to supervision, which will be focused on the risks to the statutory objectives of the two authorities. 22. Given the PRA s general safety and soundness objective, a key focus in the area will be on whether or not a board is effective in delivering a firm that is prudentially robust. Crucially, it will understand the circumstances in which the firm would fail and constantly ask the what if questions. The PRA will therefore assess board effectiveness and oversight of its control functions on an ongoing basis, using a variety of supervisory tools. The PRA will also expect a bank s control framework to be comprehensive in its coverage of the whole bank. 23. The FCA s new supervisory framework will focus much more clearly on ensuring that the interests of customers and market integrity are at the heart of how a firm is run. For high impact firms, the FCA will carry out firm-by-firm business model and strategy analysis to help us form a view of where potential areas of conduct risk lie. Governance and culture, including a firm s control framework, will be one of four key areas of focus for the FCA and will be subject to proactive, systematic supervision if identified during our analysis of a firm s business model as an area of weakness. Governance and culture will also continue to be a key area of focus for small and medium-sized firms. 24. The Treasury Committee looks forward to the result of the FSA s internal investigation, the existence of which was disclosed in evidence to us. The Committee will want the findings of that investigation to be published. (Paragraph 61) 25. In our evidence to the Committee, we said we had committed to undertake an internal review into contacts with the FSA on LIBOR and our awareness of inappropriate LIBOR submissions. This will focus on the period 1 January 2007 to 31 May This work, which is being led by the FSA s Internal Audit Division, is currently ongoing. We expect to finalise this review in Q and we will revert to the Committee separately on this issue.

7 Fixing LIBOR: some preliminary findings: FSA Response The FSA expressed concerns in connection with the appointment of Bob Diamond as chief executive to Barclays. The concerns were about an attitude to risk and a tendency to push the limits in areas where Mr Diamond was directly involved. The concerns were not, however, serious enough to prevent the regulator from approving his appointment. Barclays appears to have regarded the points raised by Mr Sants as issues rather than concerns. On the basis of the evidence it is unclear whether Barclays got the message. To avoid the scope for misunderstanding in future, the Committee recommends that the regulator set out clearly for firms any concerns it has about a senior appointment, listing any actions that it requires. It should ensure that a response is obtained in writing from the firm, undertaking to meet each of the requirements. Failure by the firm to show evidence that the regulatory messages have been seen and acted upon should be considered a serious matter. (Paragraph 124) 27. Judgement-led regulation, as recently demonstrated by the FSA, will require the regulator to be resolutely clear about its concerns to senior figures in systemically important firms. (Paragraph 159) 28. We recognise the importance of being absolutely clear to firms about any concerns we have about senior figures. Under our approved persons regime, certain functions within financial services firms (including chairman, chief executive, director and nonexecutive director ) are designated by us as controlled functions. Only persons who have been approved by us are allowed to perform those functions. Approval can only be granted where we are satisfied that the person is fit and proper to perform the role in question. 29. In all cases where we approve the appointment of individuals to perform a controlled function, we write to the firm. It is worth noting that FSMA does not give us scope to place conditions or set limitations on approvals. For example, we cannot approve an individual to a position for a temporary period during a transitional phase for a firm, even if we have concerns about the individual s appropriateness beyond that period. However, where we have specific concerns, we will continue to set these out in writing, clearly defining any issues that will need to be addressed by the individual or firm. We will follow up on any concerns as part of our ongoing supervisory dialogue and take action where appropriate. Once the new regulatory framework has come into effect, we anticipate that the PRA and FCA will write separately to the firm in situations where both have concerns about a senior appointment. 30. The regulatory authorities need to possess the ability to remove senior executives, but when they exercise this power, they should recognise their duty of care to shareholders. This issue should be examined by the Bank of England, the FSA and its successor bodies. (Paragraph 192) 31. Once appointed, approved persons are expected to act in accordance with the Statements of Principle for Approved Persons, set out in the APER section of the FSA Handbook. If an approved person falls short of these standards, then the FSA, and in future the PRA and the FCA, will be able to take formal action against that person, subject to the procedures and safeguards set out in FSMA. 32. However, the nature of the relationship between the PRA and systemically important financial institutions will be such that there may be situations where there is a loss of

8 6 Fixing LIBOR: some preliminary findings: FSA Response confidence in a senior executive. In such situations, we recognise the importance of there being appropriate governance arrangements in place. Communicating any concerns about an individual to a firm s Board, for the firm to then consider, will be a matter for the Chief Executive of the PRA, subject to consultation with the PRA Board. 33. The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal LIBOR investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets. (Paragraph 7) 34. We note the Committee s concerns about when the FSA initiated its formal LIBOR investigations and recognise that this is an important issue. While we accept that the CFTC was first to initiate enquiries, it may be helpful if we briefly explain our involvement in these early enquiries, prior to launching our own formal investigation. 35. We were aware of and engaged with the enquiries made by the US regulatory authorities during 2008 and 2009 and provided assistance to the CFTC from the outset of its investigation, by obtaining documents and information from Barclays. The FSA also received information from Barclays during this early stage of the investigation and continued to monitor the situation. Once evidence of potential wrongdoing emerged, the FSA considered it appropriate to take more active steps to investigate the issues, and appointed investigators under the relevant provisions of FSMA. 36. The next phase of the investigation was conducted by the FSA in tandem with the CFTC and other US authorities as they became involved. For example, the first regulatory interviews were conducted on a joint basis in late Owing to the significant number of documents and individuals relevant to the investigation and the way in which the issues developed over time, this phase of investigation lasted until Spring The FSA then entered settlement negotiations with Barclays. 37. The FSA has an obligation under section 2(1)(b) of FSMA to discharge its functions in the way in which it considers most appropriate for the purpose of meeting its regulatory objectives. Under section 2(2)(d) the reduction of financial crime is one of these objectives. Financial crime is defined in section 6(3) as including not only misconduct in relation to a financial market but also any criminal offence of fraud or dishonesty. The FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct in this case. (Paragraph 202) 38. The FSA has extensive powers to investigate specified offences, both regulatory and criminal (as set out in FSMA). These powers of investigation do not, however, extend to other offences not specified in FSMA such as theft, fraud and false accounting. The police and the SFO do have powers to investigate these offences so we cannot use our powers specifically to obtain material relevant to these offences. 39. We may of course discover evidence of these more general offences whilst conducting investigations under the powers set out in FSMA. For example, we may discover evidence of fraud whilst investigating whether a regulatory breach has occurred, or a market abuse offence has been committed. In these circumstances, there is a well established procedure for discussions to take place between the FSA and the SFO or other prosecutors about how to deal with that evidence. This is in accordance with the Prosecutors Convention, to

9 Fixing LIBOR: some preliminary findings: FSA Response 7 which both the FSA and the SFO are signatories. Such discussions might lead to the SFO opening its own investigation. 40. In circumstances where the FSA has concluded an investigation and commenced a prosecution for offences that are specified in FSMA, we can, and do, include other ancillary offences in the same case. For example, the FSA might, in bringing a case for insider dealing, also charge the same defendants with money laundering offences. However, where such an offence is the core of the misconduct, it is more appropriate for it to be taken forward by other prosecution authorities. The FSA will provide considerable assistance to this, as we did, for example, to the CPS Prosecution of Tomas Wilmot for conspiracy to defraud last year. 41. In the case of Barclays, as we became aware of evidence of potential fraudulent misconduct in the UK, we discussed this evidence with the SFO. The FSA concluded that none of the offences specified in FSMA were applicable to the case, and found that regulatory breaches by Barclays had occurred. Therefore, the FSA did not take forward a prosecution in relation to the issues at Barclays and the issue of whether to charge ancillary offences did not arise. The SFO has now opened its own criminal investigation into the matter and we continue to support that investigation. 42. We therefore do not think it is the case that we took a narrow view of our powers in considering evidence of fraudulent conduct. However, there may be merit in considering further the scope of the FCA s powers in the future. Appendix: FSA penalties policy In respect of misconduct which took place before 6 March 2010, the factors we take into consideration when assessing whether a penalty is appropriate and, if so, the level of that penalty, include: deterrence; the seriousness of the breach; the extent to which the breach was deliberate or reckless; the person s financial circumstances; the amount of benefit gained or loss avoided; the person s conduct following the breach; the person s disciplinary record and compliance history, and whether action was also being taken by other regulatory authorities. We also consider penalties in other comparable cases. There is no formal weighting of any of the factors, rather it is an assessment in the round. We set out in each of our published notices which of the factors set out in DEPP we consider apply in that instance. The new policy, which applies to behaviour on, or after 6 March 2010, introduced a five step framework which is based on disgorgement, discipline and deterrence:

10 8 Fixing LIBOR: some preliminary findings: FSA Response Step 1: the removal of any financial benefit derived from the breach; Step 2: the determination of a figure which reflects the seriousness of the breach; Step 3: an adjustment for any aggravating and mitigating circumstances; Step 4: allows us to make an adjustment to ensure that the penalty has a deterrent effect, and Step 5: if applicable, a settlement discount will be applied. These steps will apply in all cases but Step 2 differs depending on the type of case. For firms, where revenue is an appropriate measure the Step 2 figure will be 5%, 10%, 15% or 20% of the firm s relevant revenue for the period of the breach. Where revenue is not indicative of the harm or potential harm that the breach may cause, the FSA uses an appropriate alternative. For individuals in non-market abuse cases, the Step 2 figure will be 0%, 10%, 20%, 30%, or 40% of the individual s gross remuneration and benefits for the period of the breach. Under the new policy, we take into account at Step 3, mitigating circumstances which would tend to reduce the amount of any penalty imposed, such as proactive disclosure, the degree of co-operation during our investigation and remedial steps taken since the breach was identified. We also consider aggravating factors that would tend to increase the amount of any penalty imposed.