Fixing LIBOR: some preliminary findings - Treasury Contents

7  Enforcement

The penalty levied by the FSA

194. A penalty of £59.5 million was imposed on Barclays Bank, reflecting a 30% reduction from the baseline penalty figure of £85 million which the FSA decided to impose owing to mitigating factors, in particular Barclays' level of co-operation with the investigation.[294]

195. The Committee was concerned to establish how the baseline figure was calculated, and whether it appropriately reflected the gravity of the misconduct, bearing in mind it represented approximately 1% of Barclays Bank's profit of £5,879 million before tax in 2010-11.[295] The FSA's Final Notice lists the factors taken into account when setting the level of fines under its Decision Procedures and Penalties Manual, but does not discuss the weighting given to each factor.[296]

196. Tracey McDermott, acting director of enforcement and financial crime at the FSA, explained that the FSA did not apply a formula when calculating penalties. Instead, there was a list of factors which were taken into account:

    The penalty is set in accordance with our penalty policy that was applicable to misconduct at the time. We are required by the Financial Services and Markets Act 2000 to publish a statement of our policy. At the time, there was no arithmetical calculation that applied. We take into account a number of factors, including the seriousness of the misconduct and including the level of co-operation during the investigation.[297]


    We believe that it was appropriate. I think, as has been shown amply by this case, the impact of enforcement action is not just about the level of the penalty; it is also about what comes out in the public domain and the reputational impact that follows. This was the most significant penalty we have imposed. It was almost twice the highest penalty we have imposed in the past. That reflected our view that this was the worst misconduct.[298]

197. The Committee regrets that the FSA's acting director of enforcement and financial crime did not take the opportunity to explain how the factors the regulator takes into account had been applied to Barclays in this case. We are concerned about the lack of transparency in the way in which the FSA calculated the amount of the fine.

Criminal enforcement


198. We recognise that the definition of market abuse punishable by financial penalty under section 123 of the Financial Services and Markets Act 2000 (FSMA) is insufficiently wide to capture the manipulation of the LIBOR rate. The LIBOR rate is not designated a qualifying investment for the purposes of the legislation. It is also not possible for the FSA to commence a criminal prosecution under section 397(3) of the Financial Services and Markets Act 2000 against Barclays, the submitters or derivatives traders for engaging in a course of conduct which created a false or misleading impression as to the market in or the price or value of a relevant investment. LIBOR is not classified as a relevant investment for the purposes of this section of the Act.

199. The Committee urges the Wheatley review to consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation, of the LIBOR rate and other survey rates. They should also consider the case for widening the definition of the criminal offence in section 397 of FSMA to include a course of conduct which involves the intention or reckless manipulation of LIBOR and other survey rates.


200. Notwithstanding these limitations, the Committee asked the FSA about its power to bring criminal cases. Lord Turner told the Committee that:

    My understanding is that the FSA is not able to bring a criminal case in the UK. If it falls within the category of fraud, which is a general category of malfeasance quite separate from financial regulation, the Serious Fraud Office has a right to look at it, and we have been in contact with the SFO throughout this. I think that it announced a week or so ago that it would increase its focus on this issue. In the UK, this issue—as I understand it, but I would defer to my legal expert here—is not one where we, the FSA, have an ability to bring a criminal case, whereas there are some other specific categories of market manipulation where we are able to bring criminal cases.[299]

This statement was refined by Tracey McDermott:

    [...] we are not a general fraud prosecutor. We have specific powers to prosecute particular offences, and I am sure that you will be aware that we have spent quite a lot of time and energy on prosecuting both section 397 offences and indeed insider dealing offences in recent years. What we do not have is a remit to prosecute false accounting, conspiracy and so on in a general sense. We could prosecute it as ancillary to one of our main offences, so if there was a markets offence, you could throw in money laundering as well, but our investigative powers are limited to the offences that we have the ability to prosecute.[300]

201. Tracey McDermott subsequently confirmed that the FSA was also able to prosecute non-financial market offences in its capacity as a private prosecutor.[301] This is consistent with the ruling of the Supreme Court in the case of R v Rollins in 2010.[302] However, when asked whether there was enough evidence of fraudulent conduct to commence a criminal prosecution in this case, Tracy McDermott responded that "[this] is not our specialist area of expertise. It is not where our fees are raised to prosecute, that is to focus on the FSMA offences".[303]

202. The FSA apparently believes that its fees are not raised for the purpose of prosecuting offences other than those set out in FSMA. The Committee is concerned by this. The FSA has responsibility for regulating the key participants in financial markets. The FSA's decision whether to initiate a criminal prosecution should not be influenced by the fact that its income is derived from firms which it regulates. The FSA has an obligation under section 2(1)(b) of FSMA to discharge its functions in the way in which it considers most appropriate for the purpose of meeting its regulatory objectives. Under section 2(2)(d) the reduction of financial crime is one of these objectives. Financial crime is defined in section 6(3) as including not only misconduct in relation to a financial market but also any criminal offence of fraud or dishonesty. The FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct in this case. The Committee recommends that the Government, following the Wheatley review, should consider clarifying the scope of the FSA's, and its successors', power to initiate criminal proceedings where there is serious fraudulent conduct in the context of the financial markets.


203. Tracey McDermott explained that there was a protocol between the FSA and the Serious Fraud Office (SFO) which provided that the FSA did not take the lead in prosecuting general fraud offences.[304] In this case, there was some discussion between the FSA and the SFO with reference to the artificial fixing of LIBOR but the purpose and content of the discussions, when they took place or those present, was not clear from her evidence.[305]

204. According to Ms McDermott, initially the SFO was keeping a "watching brief" to see whether it should take any action and there were meetings in 2011 at which information was shared.[306] The liaison between the FSA and the SFO was described as "constant",[307] although she said "it wasn't us saying, 'Oh, you should believe us that there's something dreadful going on here'. We were sharing evidence and information with them throughout".[308]

205. The SFO announced on 2 July 2012 that:

    The Serious Fraud Office has been working closely with the Financial Services Authority during its investigation into recently reported issues in relation to LIBOR. Now that the investigation into the issue of regulatory misbehaviour has concluded, the SFO are considering whether it is both appropriate and possible to bring criminal prosecutions.

    The issues are complex and the assessment of the evidence the FSA has gathered will take a short time, but we hope to come to a conclusion within a month.

    The SFO is aware of investigations in other jurisdictions and is working with the relevant authorities.[309]

On 6 July the SFO formally accepted the LIBOR issue as a matter for investigation. The Serious Fraud Office announced on 30 July that:

    the Director of the Serious Fraud Office, David Green QC, is satisfied that existing criminal offences are capable of covering conduct in relation to the alleged manipulation of LIBOR and related interest rates. The investigation, announced on 6 July, involves a number of financial institutions.[310]

206. The Serious Fraud Office (SFO) is now conducting a criminal investigation into LIBOR. The Committee was surprised that neither the FSA nor the SFO saw fit to initiate a criminal investigation until after the FSA had imposed a financial penalty on Barclays.

207. The evidence in this case suggests that a formal and comprehensive framework needs to be put in place by the two authorities to ensure effective relations in the investigation of serious fraud in financial markets. The lead authority must be clearly identified for the purposes of an investigation, and formal minutes of meetings between the authorities must be maintained. We recommend that the Wheatley review examine whether there is a legislative gap between the responsibility of the FSA and the SFO to initiate a criminal investigation in a case of serious fraud committed in relation to the financial markets.

294   Barclays fined £59.5 million for significant failings in relation to LIBOR and EURIBOR, FSA Press Notice, 27 June 2012 Back

295   Barclays Bank Plc Annual Report 2011 Back

296   FSA Final Notice, 27 June 2012, p 44 Back

297   Q 1088 Back

298   Q 1091 Back

299   Q 1104 Back

300   Q 1105 Back

301   Qq1140-1 Back

302   [2010] UKSC 39, see in particular Lord Dyson at paragraph 17 of the judgment Back

303   Q1143 Back

304   Q1143 Back

305   Qq1143 , 1201 Back

306   Qq1145, 1146, 1199 Back

307   Q1147 Back

308   Q1151 Back

309   SFO press release, 2 July 2012 Back

310   SFO press release, 30 July 2012 Back

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© Parliamentary copyright 2012
Prepared 18 August 2012