We shouldn't have trusted BBA: FSA admits Libor failings

The Libor scandal was undetected for so long due to FSA reliance on the British Banker’s Association oversight of the system and internal failings, a report from the regulator has found.

Staff should have investigated Libor distortions earlier it said, but had instead assumed that they reflected warped liquidity markets and relied on the BBA to ensure its own members due diligence.

‘We consider the FSA should have been more proactive before April 2008 in contacting the BBA to pursue the structural issues,’ said the FSA’s Audit Office post-mortem.

It added that Libor submissions were not a regulated activity, but that they should have nonetheless been more closely monitored under the FSA’s broad ‘principles for businesses’ rules.

‘We conclude that the FSA’s focus on dealing with the implications of the financial crisis for the capital and liquidity positions of individual firms, together with the fact that contributing to or administering Libor were not ‘regulated activities’, led to the FSA being too narrowly focused in its handling of Libor related information,’ said the auditors.  

‘This was both in terms of challenging and inquiring about that information, and considering its conduct responsibilities in relation to the principles for businesses and any potential for consumer or market detriment. Our view is strengthened by the fact that the FSA did go on to take enforcement action in relation to the FSA’s principles for businesses.’  

The report highlighted grey areas of regulatory responsibility which are likely to be clearer under the impending split in regulatory responsibilities between the Bank of England and the new Financial Conduct Authority later this year.

‘Manipulation and attempted manipulation of LIBOR was also unlikely to fall under the [FSA’s] market abuse regime,’ it added.

FSA chair Adair Turner insisted that the report largely exonerated the agency however, saying while there was evidence that banks had submitted low quotes there had been no evidence of systematic fraud.

‘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,’ said Turner.