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libor developments July 3, 2012

Posted by Bradley in : financial regulation , trackback

Yesterday, Marcus Agius, the Chairman resigned and then Bob Diamond, the CEO, resigned with Agius becoming full time Chairman and in charge of finding Diamond’s replacement. Jerry del Missier, the (recently appointed) COO (who was at Barclays Capital during the period of the Libor problems), also resigned. Mervyn King seems to have played a role in these developments. Monday’s announcement of Agius’ resignation was pretty clearly designed to protect Diamond. After all, the press reports before Monday focused on whether Diamond’s position was secure.

The Treasury Select Committee will hear from Diamond at 2pm on Wednesday.

The Chancellor made a statement in the House of Commons yesterday. He was very critical, asking, for example:

what urgent changes are needed in the regulation of LIBOR and other markets to prevent such abuse occurring again and to ensure that the UK authorities have the powers they need to hold those responsible to account; and the wider issue of what went so badly wrong in the culture of our banking system and the way it was regulated, allowing such fundamental failures of basic standards of conduct to go unchecked and unchallenged.

The interest rate manipulations were pretty shocking, but Osborne lives in a world where politicians have exaggerated their expenses claims and been over-friendly to unsavory news organizations. Perhaps he shouldn’t be so surprised.

A number of MPs pointed out that Osborne and other Conservatives hadn’t been so keen on regulating banks when they were in opposition. For example, here’s Glenda Jackson:

welcome the Chancellor’s commitment to broad-ranging and hard regulation for the British banking system—a position eschewed like the plague by his colleagues when they were in opposition. Will he guarantee that the powers given to the FSA will ensure that it is genuinely what many of my constituents have campaigned for for some time: a banking watchdog, not a lapdog?

Anyway, there will be a review of what needs to be done to fix regulation relating to this issue by Martin Wheatley, the chief executive designate of the Financial Conduct Authority. The review:

will include looking at whether participation in the setting of LIBOR should become a regulated activity, at the feasibility of using actual trade data to set the benchmark, and at making initial recommendations on the transparency of the processes surrounding the setting and governance of LIBOR.

His report will be produced “this summer” so that any conclusions can be fed into the new rules on financial regulation, either in the Financial Services Bill or legislation on banking reform.

The House of Commons spent some time wondering why what happened wasn’t a criminal offence (especially when they had constituents who had been charged with criminal offences over much smaller sums of money). That the SFO decided not to prosecute doesn’t necessarily mean it decided that no crime had been committed but could be based on concerns that it would be difficult to achieve a conviction.

The language of section 2 of the Fraud Act 2006 does seem to be broad enough to cover what was done. Under s. 2 a person commits fraud by dishonestly making a false representation, and intending by doing so to make a gain for himself or another. A false representation (which may be express or implied) is one which is untrue or misleading, where the person making it knows that it is, or might be, untrue or misleading.

False representations to the BBA about the rates at which Barclays could borrow funds in the interbank market could be seen as falling within this very general language. But the statute does not expressly cover statements whose effects are indirect. The explanatory notes on s 2. make it clear that the provision is meant to refer to representations made to the world at large (on a website) or to large numbers of people (such as phishing). But the explanatory notes seem to imply that what the section applies to is situations where representations are made directly to the victims of the fraud. There’s a specific provision for representations made to machines (such as ATMs). The explanatory notes state:

The main purpose of this provision is to ensure that fraud can be committed where a person makes a representation to a machine and a response can be produced without any need for human involvement. (An example is where a person enters a number into a “CHIP and PIN” machine.) The Law Commission had concluded that, although it was not clear whether a representation could be made to a machine, such a provision was unnecessary (see paragraph 8.4 of their report). But subsection (5) is expressed in fairly general terms because it would be artificial to distinguish situations involving modern technology, where it is doubtful whether there has been a “representation”, because the only recipient of the false statement is a machine or a piece of software, from other situations not involving modern technology where a false statement is submitted to a system for dealing with communications but is not in fact communicated to a human being (e.g., postal or messenger systems).

But this situation is different from the sort of indirect representations made in the context of any attempted manipulation of Libor rates. And this sort of uncertainty is problematic in the context of criminal statutes.

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