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Barclays Libor probe warns of return of 'Governor's eyebrows' rule
The Barclays Libor scandal has shone a light on an unsettling return of the 'governor's eyebrows' rule, a policy that allows Mervyn King to act without discussion.
The Barclays Libor scandal has shone a light on an effective return of the 'governor's eyebrows' rule – a historic central bank policy that allows Mervyn King and his successors to dismiss senior banking executives without discussion.
In a lengthy report into the manipulation of London's interbank lending rate, the cross-party committee of MPs said that not only did the Financial Services Authority (FSA) give in to public pressure to come down hard on Barclays, it exposed the possibility of the Bank of England's governor reigning all-powerful over the UK's financial services sector.
During the Treasury Select Committee (TSC)'s hearings into the Barclays scandal, much was made of King, his deputy Paul Tucker and FSA chief Lord Adair Turner's involvement in the low-balling of Libor rates and the subsequent resignations of senior Barclays executives Bob Diamond, Marcus Agius and Jerry del Missier.
The TSC said that King's involvement was 'difficult' to justify, even though the governor defended his actions by saying the Bank of England would take on responsibility for the banking system when the FSA is split into a two-tier monitoring system, establishing the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The TSC argued: 'The FSA did not intervene with respect to Diamond’s future prior to, or on Wednesday 27 June 2012, when the FSA final notice was published. The FSA only appears to have intervened on Friday 29 June, two days after the publication. This perplexed Marcus Agius who told us “we went from Wednesday, [27 June] when Bob Diamond had the support of the regulators, to Monday night [2 July], when we were told in no uncertain terms he did not have the support of the regulators”.
'This about-turn by the FSA appears to have been the result of the vociferous public and media reaction in the days following the publication of the final notice. If this is indeed the case, then what many would consider the right decision was taken for the wrong reasons.'
The TSC, which is chaired by MP Andrew Tyrie, said the actions of the Bank of England and FSA had exposed 'implicit and potentially arbitrary power' for King (pictured) to force out senior figures in the financial services industry.
The TSC said: 'The return of the "governor's eyebrows" - which many will welcome on this occasion - comes with the need for corporate governance safeguards. In this case, the governor of the Bank of England and senior FSA staff did discuss the issue and acted in concert. There was, as a result, some minimal check and balance.
'However, once the Bank of England assumes full responsibility for financial stability and macro-prudential supervision, even this minimal check and balance will disappear. The governor of the Bank of England will stand all-powerful and able, by dint of raising his eyebrows, effectively to dismiss senior banking executives without discussing it with, or consulting, anyone. This is unsatisfactory.'
In conclusion to the 122-page study and the earlier hearings into the Libor scandal, TSC chair Tyrie said that every witness who appeared before the committee agreed Barclays' actions were 'disgraceful', however the committee also felt that discussions between Diamond and the Bank of England were used as a 'smokescreen' when the furore refused to die away.
Tyrie said: '[The actions] were made possible by a prolonged period of extremely weak internal compliance and board governance at Barclays, as well as a failure of regulatory supervision...as the report points out, it remains possible the information released in the Barclays file note, regarding a dialogue between Mr Tucker and Diamond, could have been a smokescreen put up to distract our attention and that of outside commentators from the most serious issues underlying this scandal.'
As a result, the committee has called for action in a number of areas, including higher fines for firms that fail to co-operate with regulators, the need to examine gaps in the criminal law, and a much stronger governance framework at the Bank of England. Barclays was fined a record £290 million after it admitted to manipulating Libor, and earlier this week it emerged that UK banks will now face the wrath of US regulators for the same thing.
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
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