The Financial Services Authority will conduct a review into the escalation of information within the new ‘twin peaks’ regulatory regime that comes into force next month following criticism of its communications in an internal audit into its handling of the interbank lending rate scandal.
According to the report published today (5 March), the FSA ignored 26 messages which made direct reference to the ‘lowballing’ of Libor submissions.
The report concludes that the FSA should have made sure communications were better analysed, circulated and escalated if necessary.
The report recommends the Financial Conduct Authority and Prudential Regulation Authority establish effective working arrangements for the circulation, sharing and escalation of information, including to whom information should be circulated and the action required of the recipient.
Responding to recommendations made by the report, FSA management said a “short review” ahead of the two new bodies coming into force “will allow both regulators to make a judgement on the balance between introducing clear guidelines, high level principles or staff training, in order to improve information flows.”
The report questioned whether there might be other significant non-regulated activities, where wrongdoing by regulated firms in relation to those activities could breach the FCA and PRA Principles for Businesses, pose a threat to the safety and soundness of those firms, or potentially cause significant consumer or market detriment.
The report also recommends:
• that FCA and PRA senior management consider how such activities will be identified and assessed by the new regulatory authorities’ risk and governance frameworks, so that risk-based prioritisation decisions can be made in relation to them.
• that the FCA satisfies itself that there is a clear division of responsibilities relating to LIBOR between the authorities (in the new regulatory framework), including for receiving and sharing LIBOR-related information and for acting on that information where necessary.
• that the FCA (in consultation with the PRA if necessary) establish clear internal roles and responsibilities relating to LIBOR.
• that FCA and PRA senior management embed appropriately the lessons from the Report in the cultures of the regulatory authorities.
• that as an important element in developing the desired culture of the FCA and PRA, alertness to the need to share intelligence appropriately should be reinforced as a principle for all staff behaviour.
• that the FCA and PRA senior management should clarify responsibilities in relation to the use of information from external sources including analysts’ reports, media articles and market data.
• that the FCA and PRA establish effective working arrangements for the circulation and sharing of information, including to whom information should be circulated and the action required of the recipient.
• that the FCA and PRA establish effective working arrangements for the escalation of information to senior management.
• that in developing their records management policies, the FCA and PRA include success measures and key performance indicators that take into account the lessons raised in the review and the review’s inherent data limitations.
Lord Adair Turner, chairman of the FSA, said: “A particularly important lesson is the need to have staff focused on conduct issues even when the world rightly assumes that the biggest immediate concerns are prudential; and vice versa. The new ‘twin peaks’ model of regulation will deliver this.
“The Report also reveals that while some information was available relating to lowballing, there is, for the period covered, no evidence of any information, direct or indirect, available to the FSA which indicated that traders were manipulating Libor for profit. All of the authorities, both UK and US and elsewhere only discovered trader manipulation as a by-product of enquiries launched into potential lowballing.
“This raises important issues about the regulatory tools best suited to identifying such market manipulation. More intense supervision may not be the most appropriate lever. Better whistleblowing procedures, greater accountability of top management, and more intense requirements for self-reporting of suspicious activity may turn out to be more effective tools.”
