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
LEGAL LACUNAE
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.
POWER TO PROSECUTE
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.
THE FSA AND THE SERIOUS FRAUD OFFICE
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
| 
