UK Government Drafts Legislation to Implement LIBOR Reforms Based on Wheatley Report

The UK Government has drafted legislation to implement the Wheatley report and reform of the London Inter-Bank Offered Rate (LIBOR) by bringing LIBOR within the scope of regulation and making the manipulation of LIBOR a criminal offense. The Government endorses every one of Martin Wheatley’s recommendations and is committed to implementing the necessary changes to legislation without delay. Indeed, in order to fast track the reform of LIBOR, the Government proposes to effect the reform through amendments to the Financial Services Bill, which is currently before Parliament. The Financial Services Bill creates a new twin peaks regulatory regime based on separate prudential and conduct of business regulators; the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). LIBOR is a benchmark used to gauge the cost of unsecured borrowing in the London interbank market and sets the price for hundreds of trillions of dollars worth of derivatives and other financial contracts worldwide.

The Wheatley report recommended that the new Financial Conduct Authority should regulate the submission to, and administration of, LIBOR and there should be criminal sanctions for any attempted manipulation. The British Bankers’ Association should make an orderly transfer of responsibility for LIBOR to a new administrator, selected by an independent committee. The new administrator should scrutinize submissions and regularly review the effectiveness of LIBOR. There should be a new code of conduct for submitters, approved by the Financial Conduct Authority. To improve this ability to corroborate submissions, the number of currencies and maturities for which submissions are made should be cut substantially to achieve a sharper focus on the more heavily-used benchmarks.

Under the draft legislation, the regulation of LIBOR-related activities will enhance the ability of the FCA to oversee firms’ conduct in respect of those activities. In particular, it will enhance the ability of the FCA to adopt specific rules in relation to the LIBOR process, which would, among other things, set out the systems and controls requirements that firms will need to have in place. The FCA will also supervise the conduct of both firms and individuals involved in the LIBOR process, including regular reviews of firms’ procedures as well as an assessment of performance of the activities. The FCA will be empowered to take appropriate regulatory action for any misconduct if a firm or approved person does not conduct itself or themselves with the standards set out in the applicable regulatory requirements.

The Government believes that, collectively, these changes will result in a clear and robust regulatory regime, which should in turn lead to the restoration of credibility and confidence in LIBOR, as outlined in the Wheatley review.

The draft would implement the Wheatley recommendation that there should be sufficient criminal sanctions for misconduct in relation to benchmarks, in order that the FCA can investigate and prosecute such behavior. The FCA will have statutory powers of investigation with respect to various offences under the Financial Services and Markets Act, including the making of misleading statements and practices under section 397 of the FSMA and other offenses such as insider dealing. However, the FCA will have no powers to investigate the suspected commission of an offense under the Fraud Act of 2006.

While LIBOR misconduct may fall within the scope of other criminal offenses, it is important that the FCA, as the body responsible for the supervision of conduct in the financial services sector, is able to conduct effective criminal investigations and prosecutions in this area. Indeed, there are also merits in the creation of a specific criminal offence that relates specifically to misconduct in relation to the setting of financial benchmarks.