The Financial services authority ignored 26 letters which made “direct reference”, or that should have been interpreted as referring to, the ‘lowballing’ of the London inter-bank offered rate (Libor), according to an internal audit report published today (5 March).
In spite of the stark revelations, the regulator’s internal report defends its actions overall, saying the oversight did not constitute a “major regulatory failure”.
Covering the period January 2007 to May 2009, the audit found the FSA “at all levels of management” was “aware of severe dislocation in the Libor market in the period from summer 2007 to early 2009”.
However, it said this dislocation reflected market conditions and “would have occurred even if lowballing had not occurred”.
It searched 17 million records, reviewed 97,000 documents in detail, and interviewed 20 FSA employees or ex-employees.
Of the 97,000 documents reviewed in detail, 26 were judged as providing a “direct reference to lowballing or a reference that could, in internal audit’s judgement, have been interpreted as such”.
The two clearest indications relating to a specific firm were the telephone calls from Barclays in March and April 2008, which were included in the FSA’s final notice against Barclays published on 27 June 2012.
The audit was triggered following the announcement of a fine against Barclays, after which the bank disclosed to the Treasury Committee 13 instances of communication with the FSA which raised the question of whether the authorities ought to have been aware of “inappropriate Libor submissions”.
Lord Adair Turner, chairman of the FSA, commissioned the audit to identify any other such communications from any firm or from media reports or other sources which might have provided relevant information to make a judgement on the appropriateness of the FSA’s response.
The report identifies important areas where the FSA should have performed better and makes “valuable recommendations” for the future, but does not suggest major regulatory failure on the scale identified in the reports into Northern Rock in 2008 or Royal Bank of Scotland in 2011.
The report concludes that the FSA’s focus on dealing with the financial crisis, together with the fact that contributing to and administering Libor were not ‘regulated activities’, led to the FSA being “too narrowly focused” in its handling of Libor related information.
