Banks will be compelled to be part of Libor under new rules, says Taylor Wessing partner Laurence Lieberman

Laurence Lieberman, a partner in the financial disputes group at international law firm Taylor Wessing, says that banks should prepare themselves for forced participation in setting Libor rates.

It’s not surprising if banks are getting nervous about continuing to participate in submitting rates for Libor, for a variety of reasons, particularly given the heavy fines imposed by regulators on some banks.

Libor plays a crucial role in the efficient operation of our financial markets, but the UK Financial Services Authority cannot (on an ongoing basis) currently compel Libor participating banks to continue to submit to Libor.

This is a serious lacuna in the regulator’s powers given the potentially catastrophic effect of a large number of banks withdrawing from Libor would have.

This is addressed in the draft UK Financial Services Bill, which will give the Financial Conduct Authority (the part-successor to the FSA) a new power to compel banks to submit to Libor, with sanctions for non-compliance, including potentially a withdrawal of their continued authorisation.

It’s quite a serious power that the FCA is being given to force the banks to participate. It’s an example of the new regulatory body intervening in markets in the most serious cases which has been one of the main mantras in the run up to the introduction of the FCA.

One of the reasons that banks might be weighing up the burden of continuing to submit to Libor are the onerous new compliance proposals.

There are numerous measures aimed at strengthening oversight of Libor, which follow recommendations by the Wheatley Review (Martin Wheatley pictured) and are being supported by the UK government.

Submitting to Libor will become a regulated activity overseen by a new body and no longer by the British Bankers Association. At the individual level, people will need to be approved by the FSA to submit or manage the process and so will be held accountable if they get it wrong.

It is also proposed by Wheatley that there is an amendment to the Financial Services and Markets Act which makes it an offence to manipulate or attempt to manipulate Libor.

The new oversight body will introduce a heavy compliance burden on banks with extensive record keeping required, regular audits of their Libor systems, along with improvements and investments in their systems and controls. That has a cost implication in terms of IT spend and management time in making sure the banks comply with the code of conduct.

It will be an increased cost and responsibility when previously submissions were made on a voluntary basis as part of a relatively informal and unaccountable system.

 

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