Friday 29 June 2012

Financial penalty imposed on Barclays

Update - Addendum 2nd July

Update - Addendum 30th June 

On 27th June, the Financial Services Authority (FSA) announced the imposition of a penalty of £59.5 million on Barclays Bank plc for misconduct relating to the London Interbank Offered Rate (LIBOR) and the European Interbank Offered Rate (EURIBOR).   The power of the FSA to impose such a penalty is to be found in section 206 of the Financial Services and Markets Act 2000.

Barclays agreed to settle at an early stage of the FSA’s investigation and therefore qualified for a 30% discount under the FSA’s executive settlement procedures. Were it not for this discount, the FSA would have imposed a financial penalty of £85 million on Barclays.  The BBC has published an interesting article - How did the FSA calculate Barclay's fine? 

For those wishing to see the detail of this convoluted matter, the Final Notice (issued under s390 of the Financial Services and Markets Act 2000) is essential reading.

The LIBOR and EURIBOR are benchmark
reference rates fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.  Barclays breached Principles 2, 3 and 5 of the FSA’s Principles for Businesses through misconduct relating to its submission of rates which formed part of the LIBOR and EURIBOR setting processes. There was a risk that Barclays’ misconduct would threaten the integrity of those benchmark reference rates.

Principle 2 is requires firms to conduct their business with due skill, care and diligence.

Principle 3 relates to management and control - A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.  It is particularly here where Directors and Senior Management may be at fault.

Principle 5 requires firms to observe proper standards of market conduct.

With regard to Principle 3, the Final Notice states at para. 15:

"Barclays breached Principle 3 from January 2005 until June 2010 (the “Relevant Period”) by failing to have adequate risk management systems or effective controls in place in relation to its LIBOR and EURIBOR submissions processes. Barclays had no specific systems and controls in place relating to its LIBOR and EURIBOR submissions processes until December 2009 (when Barclays started to improve its systems and controls)."

This is, by any standards, a serious managerial failure.  It is not the purpose of a blogpost to try to tease out where the exact responsibilities for the company's failures lie.  Directors have a number of duties imposed upon them by law - see Companies Act 2006 Part 10 and, in particular, Part 10 Chapter 2. Many of the statutory duties found in the 2006 Act are founded on pre-existing legal rules as developed by the courts in decided cases.

The current Group Chief Executive is Mr Robert Diamond and he has faced calls for his resignation (BBC).  Mr Diamond has had a lengthy association with Barclays and has been Group Chief Executive since 1st January 2011.  He succeeded Mr John Varley who was Group CE from 1st September 2004 to the end of 2010.

Read the Statement by the Chancellor of the Exchequer 28th June.

Details of the structure of Barclays including its Board of Directors and Executive Committee may be seen in the 2011 Annual Report - (though changes may have occurred since the report's publication).

Addendum 30th June:   Some politicians are calling for a judicial inquiry into Banking practices - see The Guardian 30th June - Ed Miliband calls for public inquiry into banks .  From the public viewpoint there is perhaps merit in this but, as I believe the Leveson Inquiry is beginning to demonstrate, politicians perhaps need to be careful what they wish for.  IF an inquiry were to be set up, it would surely need to investigate the tripartite regulatory regime put in place during the Labour years.  This regime involved the Bank of England, the Financial Services Authority and HM Treasury.  Given that the Treasury was part of the regulatory system, the actions of Ministers might come under the microscope.  Meanwhile, and looking increasingly like a man out of his depth, Sir Mervyn King (Governor of the Band of England since July 2003) is reported as saying to the banks, with masterful understatement, "You cannot go on like this" - Guardian 30th June - Mervyn King tells banks: you can't go on like this.

See the important report of the Independent Commission on Banking (September 2011) and the government's response of December 2011.  The response promised a "full package of reforms by 2019."  In June 2012, a White Paper was published - "Banking reform: delivering stability and supporting a sustainable economy."  This tells us that the government will introduce all necessary legislation as soon as Parliamentary time allows and not later than the end of the Parliament in 2015.  Banking reform is not a simple matter but one has to wonder at the government's priorities when House of Lords Reform is about to consume a huge amount of Parliament's time.

Addendum 2nd July:  Mr Marcus Agius (Chairman of Barclays) resigned - Daily Mail 2nd July.  Further, the possibility has been raised that a telephone conversation between the Bank of England and Barclays may have resulted in Barclays acting to reduce their LIBOR submissions - "Daily Mail 2nd July   On this, para 176 of the FSA's Final Notice is of interest:

"Concerns were again raised to Compliance in relation to an instruction to reduce LIBOR submissions given by senior management on 29 October 2008. This instruction was given following a telephone conversation between a senior individual at Barclays and the Bank of England during which the external perceptions of Barclays’ LIBOR submissions were discussed. No instruction for Barclays to lower its LIBOR submissions was given during this telephone conversation. However, as the substance of the telephone conversation was relayed down the chain of command at Barclays, a misunderstanding or miscommunication occurred. This meant that Barclays’ Submitters believed mistakenly that they were operating under an instruction from the Bank of England (as conveyed by senior management) to reduce Barclays’ LIBOR submissions."

See also Telegraph 2nd July - Chairman Marcus Agius resigns over rate rigging though Mr Agius will remain in post until a replacement is found.  This could take some time!

The Prime Minister announced that a Parliamentary Committee of Inquiry will look at this issue and he stated that the Serious Fraud Office was considering whether criminal offences have been committed.  Parliamentary Committees have power to require witnesses to take an oath and thereby make them subject the law of perjury.  This power is not usually used but the Prime Minister stated that it would be used in this instance.

The Financial Services Bill before Parliament commences its Committee Stage in the Lords on 3rd July 2012.  The Financial Services Authority will become the Financial Conduct Authority with redefined functions.

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