Parliamentary Commission on Banking Standards - Minutes of EvidenceHL Paper 27-III/HC 175-III

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Oral Evidence

Taken before the Joint Committee

on Thursday 10 January 2013

Members present:

Mr Andrew Tyrie (Chair)

The Lord Bishop of Durham

Mark Garnier

Baroness Kramer

Lord Lawson of Blaby

Mr Andrew Love

Mr Pat McFadden

Lord McFall of Alcluith

Lord Turnbull


Examination of Witnesses

Witnesses: Huw Jenkins, former Investment Bank Chief Executive Officer, UBS, Jerker Johansson, former Investment Bank Chief Executive Officer, UBS, Dr Marcel Rohner, former Group Chief Executive Officer, UBS, and Alex Wilmot-Sitwell, former joint Investment Bank, Chief Executive Officer, UBS, examined.

Q2021 Chair: Thank you very much for coming to give evidence today. I would like to begin by asking you, Mr Rohner, how you rate this as a scandal in terms of banking scandals in history.

Dr Rohner: I was shocked when I read about it. I felt embarrassed and ashamed.

Q2022 Chair: How big is it?

Dr Rohner: It is in a series of scandals that happened at UBS, some under my watch. That makes it all together bigger.

Q2023 Chair: Is it the biggest in Swiss banking history?

Dr Rohner: When I look back at the time I was managing it, I felt the fight for the survival of the bank was in some ways going deeper than this specific misconduct of a group of people.

Q2024 Mr McFadden: Mr Jenkins, the FSA notice says that their relevant period is 2005 to 2010. Can you tell us your responsibilities within the bank during that period?

Huw Jenkins: I was global head of equities until May 2005. I then took over as CEO of the investment bank in May 2005 and I stepped down in September 2007, and stayed on as a consultant to Mr Rohner but with no executive responsibility until 2008.

Q2025 Mr McFadden: So you were CEO of the investment bank for roughly the first half of the period that the FSA are looking at?

Huw Jenkins: Correct.

Q2026 Mr McFadden: Okay. In the evidence that we have received so far about other banks, we have often been told that these activities are by a small group of traders. I just want to establish the scale of this, according to the FSA’s final notice. It says that there were 800 documented requests for manipulation of Japanese yen LIBOR, around 90 of sterling and a small number in other currencies. It talks about 40 identifiable individuals being involved, and a number of other banks being involved. The FSA use the phrase in paragraph 32 of the final notice, "The manipulation of submissions was routine, widespread and condoned". This wasn’t a small group of rogue traders, was it? This was deep in the culture of the bank.

Huw Jenkins: It was an extremely pervasive part, clearly, of this business area. The thing that shocked me-like Mr Rohner, I was very shocked and upset when I read about this report and what had happened on my watch-is that I think the interest rate and STIR area accepted this as sort of normal practice. That deeply shocks me because it’s clear, with a very simple reading of what happened, that this was completely abhorrent and completely against fair and transparent markets.

Q2027 Mr McFadden: So you’re not claiming that there was a small group of rogue traders; you are accepting that this was widespread in the business practice of the bank in that area.

Huw Jenkins: I am accepting that it was widespread within that business area. I think there are vast other parts of the bank where the highest ethical standards were adhered to throughout this period.

Q2028 Mr McFadden: But given your acceptance that it was widespread in that business area, is it really credible for us to be told that no executives were aware of what was going on?

Huw Jenkins: I know that you find it hard to believe that, but it was indeed the case. During my period as CEO of the investment bank, the issue of LIBOR submissions, or the issue of the conflict with respect to LIBOR submissions, was never raised in any forum. I believe that the report indicates that there were five internal audits over this five-year period where nobody identified this as being a conflict, which, with the benefit of hindsight, is very hard to believe, but it’s a fact.

Q2029 Mr McFadden: What does that say about the worth of those internal audits?

Huw Jenkins: They clearly failed to pick up a material conflict. I cannot deny that.

Q2030 Mr McFadden: Let me quote to you the FSA’s verdict on the controls in place at the bank. Paragraph 26 of the FSA’s final notice says that "UBS had no systems, controls or policies governing the procedure for making LIBOR submissions." In 2008, a review was carried out-I will come on to this in a minute with your successor-which the FSA says was "inadequately performed…inadequate in …design and…inadequately implemented." Is it not the case not only that this problem was pervasive in the practice of the bank, but that the supposed compliance and control procedures were hopelessly inadequate-in fact, worthless?

Huw Jenkins: Two comments, if I may. One is that the compliance and control procedures in this instance were clearly inadequate. We endeavoured to identify significant risks and ensure that they were adequately monitored and controlled; this risk was not identified. As Mr Rohner mentioned, in the experience of the last five years, our systems failed in several other areas as well. I fully accept that the compliance and control system did not keep up with the business.

Q2031 Mr McFadden: In terms of the time scale, the FSA says that the relevant period it considered was 2005 to 2010. Other documents presented to us show that LIBOR manipulation went back at least to 2001. Do you accept this was going on before the period that has caught the attention of the FSA and the CFTC?

Huw Jenkins: I have not seen any of those documents, so I cannot comment, but it does seem to me, as we discussed at the outset, that it was a very ingrained, entrenched part of the business practice in this area, so it would not surprise me that it had been going on before then.

Q2032 Mr McFadden: What do you think this says about the culture that existed in UBS?

Huw Jenkins: It clearly raises issues about how focused people were on the long-term value and protection of the bank-its brand and its customer trust. It raises issues about how people were focused on achieving short-term performance and did not put the interests of customers first. That is clearly the case. I would like to add, however, that I accept that this was pervasive in this business area, but I do not accept that it was pervasive throughout the bank. I know you will find it difficult to believe, but the bank I worked for, I believed, was wholly ethical, well controlled and very responsive to issues.

Q2033 Mr McFadden: So if we were to ask, for example, if there were any other regulatory fines in other business areas during this period, would the answer be no, or would we in fact find that UBS also had problems in other areas of its business?

Huw Jenkins: UBS had clearly had problems in other areas.

Q2034 Mr McFadden: So this is not isolated, is it?

Huw Jenkins: Not isolated. The point I was trying to make was that I do not believe that the culture throughout the bank was of the same nature as the issues we are discussing here.

Q2035 Mr McFadden: When did you personally find out there was a problem with LIBOR manipulation at UBS?

Huw Jenkins: Not until I read about it in the press in 2011.

Q2036 Mr McFadden: So, long after you had left?

Huw Jenkins: Yes.

Q2037 Mr McFadden: I would like to go along the row and ask all of you when you found out there was a problem with LIBOR manipulation at UBS.

Dr Rohner: I found out about it from press reports that UBS had started an investigation. I think it was in 2010 or 2011-I do not exactly remember the time.

Jerker Johansson: The same-from the press. I believe it was somewhere around 2011.

Alex Wilmot-Sitwell: In 2011.

Q2038 Mr McFadden: So all of you were in senior positions-CEOs of the investment bank or higher-and you are all telling us that you knew nothing about widespread, sustained manipulation of LIBOR by a group of traders in your bank connected with traders at other banks until you read about it in the press. What does it say about the worth of the management at UBS, when you have to find out what is going on in your own bank, among your own traders, by reading about it in the newspapers? Would anybody like to comment on that?

Chair: Why don’t you have a go, Mr Jenkins?

Huw Jenkins: Pardon?

Chair: Why don’t you reply?

Huw Jenkins: Look, clearly I am deeply sorry that we did not spot this. It is clearly a failing in our systems and controls and in our culture that it was not highlighted through whistleblowing or other checks and balances in the system. I believe that where issues were raised, or where we identified these kinds of conflicts and risks, we responded promptly and properly. At the end of the day, this issue was not raised and genuinely we were not aware of it.

Q2039 Mr McFadden: Mr Johansson, you were Mr Jenkins’s successor, is that correct?

Jerker Johansson: That is correct. I started on 17 March 2008 as the CEO of the investment bank.

Q2040 Mr McFadden: You have just told us that you didn’t know about this until you read it in the press, but UBS carried out a specific review of its LIBOR submissions in 2008, didn’t it?

Jerker Johansson: I now know that from reading the FSA report.

Q2041 Mr McFadden: So you didn’t know when you were the chief executive of the investment bank that your own bank was carrying out a review of the conduct of its LIBOR submissions?

Jerker Johansson: That was not brought to my attention. If I can put this in context, when I started at the bank in March 2008 I was made responsible for a group of approximately 20,000 people. That coincided with the beginning of the real financial crisis. I had to rely on the communication that existed in the bank to bring to my attention issues that were important. I accept that I had a responsibility to actively seek out information and things that concerned me. However, I failed to recognise this LIBOR issue as being one of those issues.

Q2042 Mr McFadden: I am afraid I find this extraordinary. You have told us not only that you were not aware of what these traders were doing, but that even when there was an internal review within the bank about what they were doing you, their ultimate boss, did not know it was taking place.

Jerker Johansson: I believe the internal review was done by compliance, which is separate from the business unit. If compliance do not bring it to the attention of the management of the investment bank, we would not know.

Q2043 Mr McFadden: So who at executive board level had responsibility for these reviews, which the FSA has described as inadequate in design and implementation?

Jerker Johansson: That would be the legal department.

Q2044 Mr McFadden: Did you even talk to the legal department?

Jerker Johansson: I talked to the legal department about issues that they brought to my attention, and I talked to the legal department about issues that I wanted to have clarified. As I said, I had to rely on the communication effort and the system that existed to bring it to my attention.

I would also say that when I was made responsible for the investment bank, I felt that there were three key priorities for me, and in those I think that I was extremely active. One was to reduce the balance sheet of the bank, which had grown to enormous proportions. The second was to reduce the risk level and, as much as possible, manage the very substantial risks that were on the balance sheet of the investment bank, for which I was responsible. Lastly, as the new chief executive, I spent an enormous amount of time introducing myself to all parts of the investment bank and trying to make sure that I got as close to the business as I possibly could by communicating transparently, travelling to various locations and talking to our people and our clients about what was going on at the bank.

Q2045 Mr McFadden: Well, if you were doing all this meeting and greeting of different parts of the business, didn’t you meet the people who were doing the LIBOR submissions or their managers?

Jerker Johansson: I would certainly have met their managers, and they did not bring that up and I did not ask about it. I did not see it as being one of the key risk areas for the bank at the time. That was clearly a mistake.

Q2046 Mr McFadden: To call it a mistake is a little mild. The picture that has been presented is one of gross negligence of what was going on within the business.

Jerker Johansson: I think that it is a failure, yes.

Q2047 Mr McFadden: Let me ask you how much the bank was making from this, because you would have been interested in your balance sheet. One particular trader who was at the heart of this-the senior yen trader-generated a total of $260 million in profits for UBS during his time there. He did it on an exponential scale. He generated $40 million in 2007, $80 million in 2008 and $116 million in 2009 before he left for a job at another bank. Were you aware of the rapid growth in profits from areas such as yen derivative trading? Did you ever ask any questions about why the probability of this trading had grown so much?

Jerker Johansson: I started on March 17, and I left in April 2009.

Mr McFadden: Which is pretty much the period that I am talking about.

Jerker Johansson: Well, for 2009, I do not think that we would have had all the information about the first quarter by the time-.

Q2048 Mr McFadden: What I am asking is, were you aware that there was a growing centre of profitability on yen derivative trading?

Jerker Johansson: No, I was not.

Q2049 Mr McFadden: You were not. Can you tell us what kind of personal reward would have gone to a trader who generated $260 million in profit for the bank? Ballpark?

Jerker Johansson: That is heavily dependent on the capital and the risk that were involved in generating those profits. I do not know what exactly the metrics were of the profitability of that business, but in my evaluation of the fixed-income business, I felt that capital and risk had been underpriced and therefore the profitability of many of these businesses were really overstated compared with the resources of the bank that were used in generating them.

Q2050 Mr McFadden: Do you accept that, if a bank or a trader makes profit by artificially manipulating a trade and fixing the odds in the bank’s favour, that is effectively stealing from the person on the other end of the trade?

Jerker Johansson: I think that that is absolutely right.

Q2051 Mr McFadden: So the bank was engaged in widespread stealing from its clients.

Jerker Johansson: I think that the bank failed and made a number of mistakes that have been covered by the report.

Q2052 Mr McFadden: Presumably, during the course of this period there were various statements. I have the latest one: the code of business conduct and ethics at UBS. It is full of very grand statements about social responsibility and ethical and responsible behaviour. You would have had statements like this during the period you were in charge of the bank.

Jerker Johansson: Absolutely, yes.

Q2053 Mr McFadden: What were they worth in relation to the actual conduct that we are talking about today?

Jerker Johansson: As it relates to this group of individuals, clearly they were not followed or lived up to. I believe that, in the conduct of people in banking, it is much more about culture and values than about code of conduct statements. Codes of conduct tried to put on paper the way in which we all were expected to act in conducting the business of the bank.

Q2054 Mr McFadden: That is what I am asking, really What are these statements worth in relation to the actual conduct? I suggest to you that they are worthless.

Jerker Johansson: In this case, I think you are right. One of the reasons why I was trying to have a very transparent and visible leadership style was because I felt that the values of the bank had to be expressed from the top and that, as we were going through an extremely difficult period of time, one of the key things we had to do was to communicate those realities to the members of the bank so that they felt that they were getting the information they needed in dealing with clients and the problems.

Q2055 Mr McFadden: But leadership is about knowing what is going on in your business. You didn’t know what was going on in your business. You were in blissful ignorance of the widespread manipulation of interest rates and, indeed, as you have told us, in ignorance of an internal review of those practices which was carried out while you were the chief executive of the investment bank. What does that say about your leadership?

Jerker Johansson: Well, that part of it is a failure, which I accept. But I would also say that you have to put this in the context of the environment that we were in as we went through 2008. So my focus as head of the investment bank was to make sure that we were prudent in the way we managed our risk. I spent a lot of time proactively making sure that we were marking our positions correctly, which I think is very important. I spent a lot of time dealing with clients and employees to make sure they understood what was going on.

Q2056 Chair: On this failure of leadership you have described, Mr Johansson, you do agree that it was negligence, don’t you?

Jerker Johansson: I think I would describe it as a failure, yes.

Q2057 Chair: As negligence?

Jerker Johansson: I don’t quite understand the precise difference between negligence and failure.

Q2058 Chair: In that case you would agree that it is negligence, as you can’t tell the difference.

Jerker Johansson: Okay.1

Q2059 Chair: Perhaps I could turn to you again, Mr Rohner. We have just heard a really appalling catalogue-actually, we have not by any means articulated all of it. How personally responsible, as deputy chief executive and then chief executive of UBS, do you feel for this?

Dr Rohner: I feel accountable for what has happened in the bank under my watch. When I was leading it I tried whatever I could do to remedy all the problems which surfaced.

Q2060 Chair: We have just had described to us a completely worthless control procedure, haven’t we?

Dr Rohner: The control procedures worked in some parts and obviously did not work in other parts, which is why I think they were not completely worthless but they were not sufficient to do what they were supposed to do. It is also almost like a paradox: I felt we came from a period when we were known for having really good controls, and also in part by early failures where we learned a lot, and we had very strong credit risk control at the beginning of the 21st century. We came very well through the technology bubble. In hindsight I feel that we relied too much on what we thought was going well. We had overestimated our abilities in the area of risk control. It was also almost that we had in many ways too much of it.

When I spoke to the shareholders at my first annual general meeting in 2008, I addressed the issue that we had a mechanistic reliance on risk processes, which in many ways sometimes led to an abdication of self responsibility by some other people, so they felt that if control says yes, or the report is okay, then we can do that. While it was filled with best intentions and it had a period when it worked well, it was clearly inadequate once the bank grew to the size and complexity it had in 2006 and 2007, which is why I feel that reducing the complexity of the institution is critically important to creating an environment which is manageable and controllable.

Q2061 Chair: Do you agree with Mr Johansson that that there was board negligence?

Dr Rohner: No. I feel that we tried as best we could with the best of intentions. In many ways and on many occasions, we were successful, and in others, we had to recognise, once all these things happened, that it was insufficient and inadequate.

Q2062 Chair: Do you agree with Mr Jenkins that this business otherwise was wholly ethical and well controlled?

Dr Rohner: When I look at the entire bank, for all the years I was there, and particularly for the years I was at the helm, I see 80,000 people of whom the vast majority were good. They tried to do their very best and worked very hard, and they suffered tremendously from all the problems we had. The people at the bank are neither worse nor better, but there was obviously an environment2-more than in other places-that led people to do bad things.

Q2063 Chair: I just want to be clear. You are saying that you were not responsible but that you were accountable, and that there were mistakes but that you were not negligent?

Dr Rohner: If you ask me about my personal responsibility, I would say that I did the best I could.

Q2064 Chair: Yes. You told us that you knew nothing whatever about LIBOR and very little about the LIBOR market. Is that correct?

Dr Rohner: Yes, that is correct.

Q2065 Chair: During your period as chief executive, you gave a presentation in London to investors in December 2007, which is still on the UBS website. In it, you set out what you considered to be your competitive strengths. Do you remember that presentation? You led it.

Dr Rohner: That was presumably around the first capital raising, but I do not recall the details of the presentation.

Q2066 Chair: When you are chief executive, do you pay particular attention to high-growth, high-margin areas of your business?

Dr Rohner: When I was chief executive, the way I recall those 20 months is that from almost the first day I was in there we were in a state of crisis.

Q2067 Chair: So you were not looking at high-growth areas?

Dr Rohner: I was?3

Q2068 Chair: You were not looking at high-margin areas. In this dark sea of crisis, you were not looking at even the odd glimmer of light that seemed to be showing up as high-growth, high-margin activity?

Dr Rohner: My time was split between different things. In my recollection today, the strongest and most testing time-

Q2069 Chair: I am sorry to interrupt, but I am just trying to pose the question: don’t all chief executives keep an eye out for outliers-very good and very bad? If they have a very good outlier, don’t they keep an eye on that and find out why they are making money and why that part of the business is growing? Were you not doing that?

Dr Rohner: I agree with that in normal times, but the times when I was leading this institution were so extreme that I was permanently fighting for survival. We had three capital raises within 10 months. I had about eight profit warnings that I had to report and huge losses in five out of six quarters. The focus really was how to raise enough capital and reduce the risk quickly enough to create enough liquidity to see through this unprecedented term.

Q2070 Chair: Mr Rohner, I have a presentation in front of me that you gave in London in December. The presentation, which is still on the UBS website, sets out to investors what you consider to be the core strengths that needed to be maintained and consolidated. Under the heading "competitive strengths" it sets out high-growth, high-margin businesses. Do you remember what they were?

Dr Rohner: We were always-

Q2071 Chair: Do you remember any of them?

Dr Rohner: Yes, we were always differentiating ourselves because we had a very large wealth-management business, which we considered one area of growth. We also had, in comparative terms, a very strong business in Asia, and in Switzerland we had a very high market share in the retail business, which was not a business that was growing fast. On those strengths we wanted to set out our future strategy. Within the investment bank we had had for decades a very strong equities business.

Q2072 Chair: I am just asking what you emphasised in this presentation. I have it in front of me, so I am just seeing whether you can remember as a high-growth, high-margin part of your business. I am absolutely flabbergasted that you cannot remember; in fact, I find it almost incredible. I’ll tell you. There was only one: structured LIBOR. In this presentation, the only area listed as a core strength in maintaining and consolidating your leadership as a bank, the only area listed as a high-growth, high-margin business, is structured LIBOR. Before you gave that presentation, didn’t you ask, "How are we making all this money? How are we growing this LIBOR part of our business?"

Dr Rohner: It was a presentation from 2007 on the occasion of the first capital crisis. I do not recall the details of the presentation.

Q2073 Chair: Yes, but this isn’t a very detailed part. Only one area of your business activity is identified-it is structured LIBOR. Even though you gave that presentation, you still want us to believe that you do not know anything about LIBOR, that you did not know anything about LIBOR and that you never asked any questions about the LIBOR market even though there were those huge extra profits pouring in as a result of the exceptional activities of an outlier yen trader.

Dr Rohner: I assume that this was one area mentioned in the context of several others.

Q2074 Chair: No, it was not.

Dr Rohner: I cannot recall the details.

Q2075 Chair: This is the jewel in the crown of your fixed-income business, the only bright light.

Dr Rohner: I cannot recall that specific-

Chair: You have no explanation for that. Okay, we will move on.

Q2076 Baroness Kramer: Perhaps you could help me a little with chronology. If I have this right, Mr Jenkins stepped down as chief executive and chairman of the investment bank in September 2007 and Mr Johansson took up those roles in March 2008, so we had an interim period, Mr Rohner, when you effectively took on those roles yourself. Is that a reasonable interpretation of the arrangements?

Dr Rohner: That is correct.

Q2077 Baroness Kramer: I am looking to cover a period that is bookended by two rather interesting financial articles. The first was in August 2007. I am just going to pull up the CFTC commentary on it.

Bloomberg published an article on 9 August 2007 commenting on a surge in USD LIBOR submissions for overnight tenors in a number of contributing banks, including UBS. The article commented on UBS’s submission particularly because it was 65 basis points higher than the previous day’s submission.

There were discussions with journalists before that article came out. Looking at the CFTC: "Prior to the publication of the article, an inquiry from Bloomberg reverberated within UBS, causing concern as the press sought further comment from UBS and as UBS was to announce quarterly results the following week. In alerting senior Group Treasury members about the media inquiry, an employee commented, ‘Given that we are announcing our results next week this will need urgent attention.’"

Were you alerted as part of that conversation and media flurry? You were going to be out there making announcements and responding to the press, and to shareholder queries. Were you alerted by those events, Dr Rohner?

Dr Rohner: At the time, I was not alerted about that. I read about this Bloomberg article and I read the reports in preparing for this hearing. On 9 August, I was-

Q2078 Baroness Kramer: I am sorry, can I stop you for a second? Did you not, as a chief executive, get key cuttings on a daily basis of reports that clearly were being read by your shareholders and other stakeholders in your bank? Was there not some mechanism that would have drawn that kind of headline news to your attention?

Dr Rohner: I received every day a press cutting which contained hundreds of articles-each day, in the morning. I certainly did not always read through all the press articles, particularly around these days. We had a group executive board meeting. On 9 August, we had in London a full-day board meeting preparing the release of the second quarter results. That was my first presentation of quarterly results.

On 9 August, I recall that that was the first time when the real problem of financial crisis broke out. It was actually in the equity trading area. After the board meeting, we were notified that we incurred losses of several hundred million in the equity trading area, then I had to reconvene the board of directors to rewrite the forward-looking statements. On Tuesday the 14th, I had my first balance sheet results press conference. I had the problem that I had to present on one hand the best quarter results ever in the history of the bank, and at the same time, a very bleak outlook statement because of the turmoil that had just about started. I had the entire weekend in preparation, with communications, with legal and with investor relations for that press conference on Tuesday. I was under the most intense pressure during those five days, and I just could not imagine reading these press articles and to follow through that-I just couldn’t.

Q2079 Baroness Kramer: Bloomberg is not exactly a sideline. This was a buzzing issue. It was certainly racing around your organisation, and presumably a lot of other banking organisations, such that one of the board members, one of the senior staff, or somebody would not have drawn to your attention that there was something fundamentally impacting the reputation of the company. UBS certainly reacted to that article, did it not?

Dr Rohner: The way I read it, they did. Apparently, they said it was an error, and then made some comments about what should be done. That is what I read from the same sources as you.

Q2080 Baroness Kramer: Perhaps it was rather more substantial than comments about what we had done, because the instructions then went down to, as it were, adjust the way in which LIBOR submissions were reported: "It is highly advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets. Fixing risk and PNL thereof is secondary priority for now." Obviously, there is no reference to any of the responsibilities that are associated with providing accurate numbers for LIBOR. I quote from the CFTC: "This direction stemmed from a desire to ensure that UBS’s LIBOR submissions did not convey to the media or market what UBS believed to be an inaccurate message". This was not, in any way, conveyed to you, any member of your board or any of your colleagues? You said earlier that something was happening within a group of traders who were somehow off-radar, but I am struggling to understand how something on this scale and this central was off-radar, but I guess you are telling me that it was. Would you say it was accurate-I am now reading over my colleague’s shoulder-that, when the traders were talking, they said that all "senior management…want to show the world we are the strongest bank with loads of liquidity. We’d lend at 0 US! Has been a lot of media focus on barclays libor fixes so they are paranoid." Somewhere in senior management, the word was going down. Where in senior management was that view being expressed and being permeated effectively through your organisation?

Dr Rohner: The way I understand these comments from these traders-I can only read from the same sources you are reading from-is that it was somebody in group treasury making a comment or giving guidance. I can, to some degree, understand, early in August, when the financial crisis started, that they were concerned about the signal that gyrations in the LIBOR market could send. They felt, apparently, that they managed the situation accurately; obviously, that was wrong. The rules of the submission are clear: there is nothing to err or whatever; you must just submit in an accurate way. As the crisis progressed, there was an indicator, which was on the radar of everybody, I think-the credit default spread, or the insurance to pay against UBS-specific default risk. That is an over-the-counter market totally unrelated to liquidity issues, and that was all over the place. Everybody knew about what was going on in UBS-certainly from the capital raising onwards. The credit default spreads were showing all the signals of the problems we had. In that sense, the additional information from LIBOR would not have been substantially different.

Q2081 Baroness Kramer: Let me speak, then, to Mr Johansson. If I understand the previous explanation, there were plenty of market signals that UBS faced significant problems, but the LIBOR submission actually suggested it was doing rather well and was on the low end. Other banks were agreeable to lending at very favourable rates to UBS, and one would think that the illogic of that would have struck quite quickly. You must have done some homework before you accepted the job and took it on. Were you aware of any of these issues before you started, or did you become aware of them, or pursue them, as you started?

Jerker Johansson: When you say "these issues", what do you mean specifically?

Q2082 Baroness Kramer: Well, the LIBOR fixing continued, so when you came on board in March 2008, a systemic daily low balling of the LIBOR rate was still standard operating procedure.

Jerker Johansson: Right. I was not aware of that at the time, as I said earlier.4 Prior to starting with the bank, I did, indeed, look at, and try to make a judgment on, whether the bank had enough capital and what the financial situation was. I agree with Marcel that the main barometer in the market of how well or poorly the bank was seen was really the CDS spread. LIBOR is an industry indication, and I looked at LIBOR primarily as an indication of the pressure in the banking system. The spread between LIBOR and the risk-free rate was increasing at this time for the industry, and that indicated the stress in the interbank funding market.

Q2083 Baroness Kramer: I do not dispute that, but UBS was coming in well below-its submissions were all at the low end. That is precisely the point, is it not? It suggested that your bank was not experiencing the same kind of credit risk and stresses that others were facing. I am just amazed that that did not set off an alarm bell.

Jerker Johansson: I did not know what the LIBOR submissions of UBS were. I was only aware of the publicly published number or what the LIBOR composite was at that time and that is-

Q2084 Chair: That is what the question is about. That is what Susan Kramer is asking you. We are asking you about that. We are asking you whether you were surprised by the relatively low number.

Jerker Johansson: I did not know about that low number. I was not aware of what number UBS was submitting to the British Bankers Association in its calculation of LIBOR.

Q2085 Baroness Kramer: So reports from the head of asset and liability management would not have made it to chief executive, chairman, board or to anybody with a responsibility for raising a flag. Is that what you are saying?

Jerker Johansson: The asset and liability management was a group function, and therefore I would only be made aware of what was going on there either through the group executive board or through someone communicating with me directly about something that was relevant to the investment bank.

Q2086 Baroness Kramer: So who in senior management was responsible for providing the instructions to low ball?

Jerker Johansson: I think you are referring to a period in 2007.

Q2087 Baroness Kramer: Yes. Well, it goes on well into 2008. It does not change until, interestingly, April 2008, when another article comes out. I will talk about that briefly but then hand over to one of my colleagues.

Jerker Johansson: I do not know who they were referring to in senior management.

Q2088 Baroness Kramer: In April 2008, there was an article in The Wall Street Journal, and I find it hard to believe that anybody in the senior management of any banking institution is not on the lookout for articles about their institution in The Wall Street Journal. If there is anything that they can be sure that shareholders will read, it has to be that one. That article drew attention to the discrepancies between LIBOR submissions and your actual issuance rates, which is a point that your staff had made. I am looking at the one of the derivatives traders asking "if we are [issuing commercial paper] at 2.81% and that is 3m libor…why aren’t we putting our 3m rate in at 2.81%"? Your own folks had noticed it and so, apparently, had The Wall Street Journal. You surely saw that article.

Jerker Johansson: I do not recall seeing that article.

Q2089 Chair: But would you have seen it? Did you generally read what The Wall Street Journal said about UBS?

Jerker Johansson: Yes, I read the papers, but at that time I was three weeks into my new job and travelling between the different offices. We were also in the middle of raising $15 billion of capital, for which I was responsible.

Q2090 Baroness Kramer: Does that not make the situation more serious? UBS’s credit worthiness is under the spotlight and here is a major article in a major paper that identifies something that, prima facie, certainly looks rather fishy about an organisation attempting to demonstrate its integrity. Does somebody in your organisation not respond to that? If your internal processes are not passing up information, surely this is one of the occasions where there was external information as well?

Jerker Johansson: That is correct, but I remember, for instance, meeting investors at the time and I do not remember that coming up as one of their concerns. The primary focus in our rights issue and, frankly, in both the internal and external communication at the time was surrounding the capital situation of the bank.

Q2091 Chair: Of course, but surely you grasp the incredulity of this Committee about your evidence? You are saying that you just did not know, did not notice, did not want to follow up and did not think to ask a question about a Wall Street Journal article on the crucial question, as you have just acknowledged, that you were concentrating on, namely the capital rating.

Jerker Johansson: I can only tell you that at the time this did not come up as an issue as I recall it. I remember there were many other issues that I was very focused on, and most of the conversations whenever I was in front of an investor, a client or a group of employees would be surrounding our capital, our profitability and whether we would be able to deal with the risk on the balance sheet.

Q2092 Lord Turnbull: You claim that you were not aware of what the ALM people were doing because they were in the group, but the man on your right was the group, so surely you, Dr Rohner, should have known about it, even if Mr Johansson, whom we are not entirely convinced by, did not.

Dr Rohner: I will explain the context in which we operated. One characteristic of the financial crisis was that banks would not lend any money to one another any more. The LIBOR rate is obviously important, and it has many different functions. One is a reference function, but with respect to funding the unsecured inter-bank market, it had no significance any more. It was always a relatively small part of our funding. The balance sheet was $2.2 trillion when I took over, and of that perhaps 1% was ever unsecured inter-bank funding. That 1% went away entirely, so when the inter-bank market was in distress, it meant that we could not get any funding there, and the whole focus in that crisis was on raising capital and creating liquidity. We did not have liquidity problems. That was the one thing we started very early on in the crisis to manage with great attention, and we created a liquidity buffer, so that we could always meet liabilities that would leave the bank. That liquidity buffer in that period was of the order of magnitude of $150 billion to $170 billion, so we did indeed have on our balance sheet a high level of liquidity. There was absolute zero access to the unsecured inter-bank funding market. The indicator of credit worthiness for us-it was in normal daily papers and quoted by news channels all over the place-was the CDS spread. By April 2008, all the issues about UBS’s problems, the entire composition of our risk positions, and the challenges with respect to capital-raising were in the open and public, and that is why in our primary focus in that period it just had no significance.

Q2093 Lord Turnbull: Clearly people here thought it was important.

Dr Rohner: Yes. I think they dealt with it in the way they think they had to deal with it, which we now know and see clearly was wrong, but when someone believes that they are doing the right thing, they may not feel that they need to escalate.

Q2094 Chair: Well, the level of the board’s ignorance seems to be staggering to the point of incredulity.

Q2095 Lord Lawson of Blaby: I would like to follow that up quite precisely because it seems that Mr Johansson was going to enormous trouble to make sure he knew nothing about anything, and it is possible that the rest of you have assumed that curious management style. Let me be specific. As the
Chairman pointed out, when you gave the presentation to investors in December 2007 on capital raising-that is very important-you put up a slide with a matrix of various activities that UBS were in, and there were quite a lot. But there was only one activity in the matrix that was described as one of the "Core strengths to maintain/consolidate leadership" and as a "High growth/high margin business"-only one, and that was structured LIBOR. So, surely you knew how much the bank was making in profits from structured LIBOR. I would like you all, in turn, to say, in your capacity as responsible bosses, whether you knew when you were making that presentation to potential investors what the bank was making from structured LIBOR.

Dr Rohner: I held a presentation, which is clear. I called-

Q2096 Lord Lawson of Blaby: Yes or no?

Dr Rohner: No.

Q2097 Lord Lawson of Blaby: And the other three-did any of you know what UBS was making? This was presented to potential investors as the greatest contribution to profitability or growth for UBS and yet none of you, you say, had the faintest idea how much profit you were making from it.

Chair: This was the jewel in the crown of your fixed-income business, the only thing-

Huw Jenkins: I would say the answer is that, of course, one of the most important business areas in fixed income was structured LIBOR, which is interest rate derivatives. So, just to be clear, LIBOR in the name is based on the fact that it uses the LIBOR curve to set the rates, but it is an interest rate derivative business.

Q2098 Lord Lawson of Blaby: I referred to it as structured LIBOR for the very simple reason that that is what you described it as in your own slide when you did the presentation, but let us now go on to the structured derivatives and use that term. The structured derivatives business was extremely profitable and growing rapidly. As Pat McFadden pointed out, it emerged from the investigations that one trader alone, over a period of three years, made for the bank-presumably he made a lot for himself in bonuses-a quarter of a billion dollars in yen derivatives alone. You must have known that. Or did you not know it?

Dr Rohner: During 2008 the investment bank had a loss of $37 billion.

Q2099 Lord Lawson of Blaby: No, this was over three years, and 2008 was one of the three years, but what was happening to the investment bank as a whole is a separate issue, anyhow.

Dr Rohner: But during 2007 it made a loss of, I think, $14 billion.

Q2100 Lord Lawson of Blaby: Yet the structured derivatives are making this enormous amount.

Dr Rohner: I was aware, as a chief executive, of the overall profitability of the bank, but I cannot, five years after that, recall profit numbers of a sub-business of a business that generated huge losses.

Q2101 Lord Lawson of Blaby: Maybe you cannot remember it now, but you would have known at the time where the investment bank was making losses and where it was making profits, presumably.

Dr Rohner: Yes.

Q2102 Lord Lawson of Blaby: So you would have known that this astonishing profit was being made from yen derivative trading.

Dr Rohner: Not specifically of the yen derivative trade. We had businesses in fixed income which were huge global businesses with hundreds of people, such as credit derivatives-I appreciate the clarifications by my colleague because I could not recall that part of the slide-which were profitable, and others which made losses. But down to the level of an individual currency within an individual business is not something that I would have looked at.

Q2103 Lord Lawson of Blaby: Sorry, but a quarter of a billion dollars in profits is not peanuts, is it?

Dr Rohner: I assume that the number is a revenue number, and the total revenue-

Q2104 Lord Lawson of Blaby: Well, it is not a new number; it emerged in those years and you should have known this. This is part of a wider vision, because this derivatives trading was proprietary trading. Because I would have thought that this is a matter of bank policy, were you aware what proportion of UBS profits were being made from proprietary trading? I say that particularly because it is interesting that your successors, who appeared before us yesterday, said that UBS has abandoned proprietary trading. They are now client-centred, because they accept that there is a conflict of interest between proprietary trading and serving clients. Were you aware of that conflict of interest? What did you think about it? Were you aware of, or can you tell us, what proportion of UBS’s profits in those years-I will accept answers from any of the four of you-were from proprietary trading?

Dr Rohner: I recall that we had splits-we tried to understand the sources of revenue from the perspective of what is proprietary trading and what is client-facing. I do not recall off the top of my head what the split was. Where I can respond is that after the huge losses we incurred from the sub-prime problems, which led to all these deep problems in the bank, we concluded that proprietary trading activity has to be drastically reduced and we have set out a strategy accordingly. It is also on a presentation, which is still on the intranet of UBS, which I had at my last quarterly results presentation, together with Jerker Johansson. We basically set out a plan for a drastically reduced investment bank with practically a full exit from all the proprietary trading businesses.

To answer your question precisely, there are sometimes challenges to delineate clearly what activity is proprietary trading and what is not, particularly when there are businesses where the bank would hold certain securities on the balance sheet to cater for client needs. Even there, we have concluded and decided that it has to be drastically reduced. Call it a conflict of interest, but I think that is a very general characterisation, which is in my view sometimes a correct assessment, but for other trading activities, it is not. However, we felt that carrying out these activities in the future is not the right use for our resources, capital and funding.

Q2105 Lord Lawson of Blaby: Before I ask Mr Rohner one final question, would any of you like to add anything to what he has just said? No?

It is quite clear from the evidence we have had that the top management of UBS during the period we have been considering were grossly incompetent. The question I would like to ask you is whether you think that was peculiar to UBS or whether you think that it is part of a wider problem in investment banking. You did hint at this, Mr Rohner, when you talked about the size and complexity. Do you think that in organisations of the size and complexity of UBS at that time, particularly when they employ a lot of clever people whose intellect has trumped their ethical standards, there is a serious, perhaps insuperable, problem of management which applies not merely to UBS, but to other investment banks globally?

Dr Rohner: First of all, we clearly have to acknowledge, and I do acknowledge, that UBS was among those banks that had more serious problems than others. Others clearly did better than we did. A few had very serious problems too.

I came clearly to the conclusion-I said that in my speech I quoted from before and I said it shortly before I left-that this business has grown to a complexity which is difficult to manage. The control span got too wide, which in my view is one of the major underlying drivers of the recurring problems there were. That is why I concluded that the most important thing is to reduce dramatically the complexity of the business. That is one thing I think is important, and it means less innovation and being in fewer businesses.

We said in our shareholder report that, for example, in fixed income it was a "me too" strategy. We embarked on things that we were just not really fit for, as it turned out. There are also other issues that I think play a role, and one thing is that we also acknowledge and recognise that the capital required to run the business was too small. In UBS we had a very huge funding base and we could use that money to fund the investment bank. That was something that we decided to stop, because we said that cheap funding was one source of rapid growth for the industry as a whole. I think these complexity problems, even if they are better managed at other places, should be addressed. I also think the business should be addressed-this is already done in many regulations-by raising massively the capital requirements, which makes it more expensive. If it is more expensive, it will be more carefully selected which businesses are run.

Q2106 Mr Love: I want to come back to the twin articles that appeared, one in Bloomberg in August ’07 and the second in The Wall Street Journal in April 2008. Mr Johansson, you told us here this morning that you were focused almost exclusively on capital raising. Would you not accept that your job in capital raising was based on confidence in UBS and that twin articles successively in Bloomberg and The Wall Street Journal were likely to call into question that confidence? Therefore, it was of the utmost importance that that should be brought to your attention. Would you agree with that?

Jerker Johansson: I would agree with that, but I would also say that at the time, when I was dealing with investors, employees and clients, the focus as it related to the sustainability of UBS as a bank was much more on the CDS spread, because that was an individual indication of how the market priced the risk of UBS.

Q2107 Mr Love: When you were chief executive, one of the consequences of the Wall Street Journal article was that within the organisation the treasury function decided to change the approach to LIBOR from going low to being what they termed "middle of the pack." Were you aware of any of that, or any of the discussions that went on? Were you told that that was a decision that was taken?

Jerker Johansson: I was not, and again I say that treasury was a function that was done by the group and therefore did not involve the investment bank directly, so it was not part of the groups that reported to me.

Q2108 Mr Love: Mr Jenkins, you were chief executive when the Bloomberg article came out. As a consequence of that, you decided to go low. When did you find out about that?

Huw Jenkins: I do not recall the Bloomberg article. Just to go back to the comments that Mr Rohner made, in August 2007 there was a seismic shift in the markets. We experienced for the first time daily swings in our P and L, which were of a magnitude a multiple of what we had ever seen before. Our primary focus over those months was addressing how we would deal with our third quarter results and how we would mark the sub-prime book. I do not recall the issue being raised.

Q2109 Mr Love: Let me come back to you, Mr Johansson, because of course at the time-this is in April 2008-the financial crisis was looming. Bear Stearns had gone bust or out of business in March of that year. UBS’s creditworthiness was on the line. The Wall Street Journal article could have been, and in many ways was, critically influential in that area. How come you and other senior managers in the investment end of the business knew nothing about it?

Jerker Johansson: I don’t think it was having a big impact on the market at the time, and with hindsight I agree that it should have, but at the time, as I said, I think the market looked at UBS as in the process of correctly marking down and getting on top of the very substantial financial risk that was on the balance sheet, going through a capital raising, which was an essential part of strengthening the bank, and which I think in the end was a successful capital raising exercise, and when we met with investors the focus was very much on the future of the bank and what strategy we were going to pursue, as we-as Marcel described very well-changed and reduced the size of the investment bank as part of the bigger UBS.

Q2110 Mr Love: But again, someone in the bank, in the treasury function, took a decision to change the strategy on LIBOR as a result, presumably- because it happened the next day-of that article appearing in The Wall Street Journal. Surely people at senior levels in the investment bank, and indeed the bank generally, would have been at least aware of that, if they had not taken the decision themselves. Perhaps I will ask Mr Johansson, and then Mr Rohner, to respond to that. You are stretching belief to its limit to get us to believe that in these important decisions you were completely unaware, at a time when the credit rating of the bank was under challenge, when you were trying to raise money, when the future of the bank was at stake. Yet you are telling us you never knew about these articles, or the decisions that were taken as a result of them.

Jerker Johansson: I understand your sentiment but I can only reflect to you that I did not know the article at the time, and I also am comfortable to say that it was not the primary concern of our investors, in looking at the creditworthiness and sustainability of UBS at the time. The capital raising-the success of the capital raising-as well as the overall information that we were releasing at this time about our balance sheet, was really what the investors and our stakeholders were focused on, including employees and clients.

Dr Rohner: There was from my perspective no news value whatsoever from this article. The questions, exactly as you explained it, about the creditworthiness of UBS, the viability of UBS, the problems we had with risk-they were all in the open. It was all there. People were focused on how we actually managed the crisis in the business. For our primary concern, funding, it had no relevance. That is why people at treasury had no reason from their perspective to notify, and from our perspective there was nothing of relevance to manage the problem at the time, which was coming from such an article.

Q2111 Mr Love: Let me go on briefly to ask you questions about the change in LIBOR policy; because if we track it according to the report-and I don’t think anyone has challenged this-in August 2007 the policy was changed on an instruction from the treasury department to err on the low side. In April 2008, as a result of the Wall Street Journal article, it changed to middle of the pack. In early June 2008 when some concerns were expressed about the middle of the pack policy they changed to tracking commercial paper issuance rates; but that only lasted very briefly because there was some concern expressed as a result of that: back to the middle of the pack.

There were two issues related to that. First, the critical importance of these decisions. They are not decisions that are taken by middle managers in an organisation. Secondly, the manipulation on a grand scale-almost an industrial scale. Are you expecting this Commission to believe that no one at a senior level knew about, was informed about or actually took the decision on these four separate changes to LIBOR policy? Mr Johansson, you were not responsible for all of those, because you were not there all the time-there was a variety of managers; but for the occasion that you were there, can you understand the scepticism that this seems to have all occurred at a middle level somewhere in the treasury department, without reference to anyone who was running the organisation?

Jerker Johansson: I can understand the scepticism. From reading the reports that I now have read, I fully understand that it looks very strange that that issue was not escalated within the bank. But that does not change the fact that it was not escalated within the bank. That is also confirmed in the report. Therefore, we did not know about it. I also think that for anyone having the responsibility that I had during this period, with hindsight I wish I had looked into it. I accept that. But I honestly don’t know how at the time it could have been seen to have been one of the most critical issues for the head of Investment Bank to focus on, not knowing of the irregularities that were taking place in that setting mechanism.

Q2112 Mr Love: Dr Rohner, what does this catalogue of disasters tell us about the management of the bank at the most senior level? Out of touch, unaware, not knowing how the bank was actually operating-how would you describe it?

Dr Rohner: First of all, as I said before, I accept accountability for that. In that sense I also came to the conclusion at the end of 2008-09 that I should resign. Part of it clearly has to do with these failures. Errors means that we made mistakes and we were unaware and out of touch in some things. On the other hand, we also managed through a crisis in very good ways in other parts, which I think should be part of the assessment of the entire period. I think we were fast in capital raising, faster than anybody else. We addressed issues once we recognised them, but I also accept the accountability for the mistakes made.

Q2113 Chair: And responsibility?

Dr Rohner: Yes.

Q2114 Chair: Mr Johansson, do you understand the annoyance from anybody listening when you describe what went on as irregularities?

Jerker Johansson: I did not mean to minimise-

Q2115 Chair: Okay; why don’t you try another word just to give us a feel for what you think?

Jerker Johansson: Having read the reports, I am appalled by what was happening. I am appalled by the tone of the communication between the different individuals involved.

Q2116 Chair: Earlier you agreed and you still do, I hope, that some of this amounted to stealing.

Jerker Johansson: I think it amounts to that, yes. It is clearly misrepresenting something in a way that led to a gain for whoever was managing that business.

Q2117 Chair: Is it fraud? Is it theft?

Jerker Johansson: I don’t know what the right word is to describe it.

Q2118 Chair: In a colloquial sense, not in a legal sense. But in what the man in the street would understand.

Jerker Johansson: I think that if you misrepresent in your filing what your funding cost is and then you make a gain on another part of the book and you are the same person responsible for both, then that is clearly something that the man on the street, as you said, would consider as tantamount to stealing.

Q2119 Chair: And fraudulent?

Jerker Johansson: I think stealing is fraudulent, yes. If you are trying to-I am not enough of a lawyer to know the difference between stealing and fraud.

Q2120 Chair: I am not asking you to give me a lawyer’s view. We would be here all day. And we have been here some time already. I am asking you to give me your view as a non-lawyer and you are giving me your view.

Jerker Johansson: I did, yes

Chair: Thank you.

Q2121 Lord Turnbull: Between you, you sought to portray the LIBOR failure as localised, the responsibility of a small number of traders, not reflecting the culture of the organisation as a whole and that senior management knew very little about it. But if you go beyond LIBOR, the UBS record is pretty shameful as well. You had the Asia 2 desk fraud, where KPMG said, "Persons involved in the unauthorised trading did not circumvent controls, as there were none in place that would have prevented unauthorised transactions". That is about as bad as it gets, isn’t it? Were you aware that there were problems in this area of the business?

Dr Rohner: I do not understand which case you are referring to.

Q2122 Lord Turnbull: You do not understand? It is called the Asia 2 desk fraud, and it involves UBS wealth management. Part of it eventually led to the accusations against Mr Pottage, which were successfully appealed against.

Dr Rohner: Okay, I understand.

Q2123 Lord Turnbull: You were not aware of shortcomings in that area before that happened? It was not on your list of concerns?

Dr Rohner: No.

Q2124 Lord Turnbull: On a bigger scale, there was the case of UBS and the cross-border business with US clients in which UBS client managers actively helped US citizens to hide assets from the internal revenue service, leading to a DOJ fine of $780 million. At that time, that was as big as anyone had ever had. Was this again not known to senior management?

Dr Rohner: That was a settlement with the DOJ and as such I cannot comment on it. I am not allowed to.

Q2125 Lord Turnbull: What this tells us is things were rotten not just in a small area. There were serious problems in other points of the bank. You then have UBS’s very large losses in sub-prime, and you commissioned a report from Professor Straumann. His conclusion was that the business model of the organisation was flawed. Do you agree with that?

Dr Rohner: I felt that Professor Straumann wrote a thorough and balanced report. As I said before, I came to the same conclusion myself, at the helm of UBS, that we have to change the business model.

Q2126 Lord Turnbull: An article in the Financial Times said that UBS "was neither the sole, nor the first, bank to believe that it was possible to achieve exceptional balance sheet growth without having to undertake massive increases in risk exposure". It is saying that it is not that you were casino gamblers hoping that you would go on making money, but effectively that you were naive for not realising the risks that came from this very large expansion. Is that now an accepted view within the organisation as a whole?

Dr Rohner: If it is accepted today, I don’t know. You refer to the article in the Financial Times, which appeared after the publication of the LIBOR case and said that UBS was not fraudulent but naive and reckless or something like that. Although I would not use all those words, I felt that the article was a very good summary of the problem. I agree with it.

Q2127 Lord Turnbull: And can I ask Mr Wilmot-Sitwell, as the person who has been in the organisation most recently, has this message been fully absorbed and is it being acted on?

Alex Wilmot-Sitwell: I believe so. As you correctly said, I left the organisation last April, but I think in the period since 2009 there has been a massive acceleration of a process that was started previously of simplifying the business, making it less complex and reforming it around core competence. I think there are some huge lessons to be learned from this whole period, in which there were, as you mentioned, some other events as well.

Q2128 Lord Turnbull: Where did this flawed business model originate? On whose watch? Is this the Ospel-Wolfley era. Do you feel some culpability yourself for pursuing this growth without adequate regard to risks and the controls that should come with it?

Dr Rohner: I was a member of the group executive board for some years and deputy, that is why it would be easy and cheap to point to predecessors and not accept accountability for building up the bank as it was. We did it with all best intentions. Many things were good, and some things were bad. All together, it is clear and obvious from the result that it has to be changed.

Q2129 Lord Turnbull: One implication as you, Dr Rohner, said when talking about the rewards to the traders, was that capital was understated. They were running more risks than was previously realised. Therefore, profit was overstated but presumably the bonuses that were paid out were based on the overstated profit. Is that right?

Dr Rohner: I think that Mr Johansson said that he was worried about our share of profit, but if you are trading with capital that turns out to be much smaller than the risk inherent in it, there is an overblown profitability not in an accounting sense, but in an economic sense. It does not reflect adequately. That is why I strongly believe that capital is so important to make the business more expensive that the profits reflect the true risks. There are many elements that we have come to realise should be changed. I also feel that attributing the profits to individual traders is wrong. A trader can only be profitable because he has an entire bank behind him. He needs resources.

Q2130 Lord Turnbull: Is it still going on where people are being paid not out of cash profits that have been earned, but book profits based on an underestimation of the true capital risk?

Dr Rohner: That is unfortunately the case. It is wrong. It should be a real profits bottom line of the entire institution and not what an individual makes just because they have the entire institution behind them.

Q2131 Lord Turnbull: Can I ask the three of you whether you personally benefited from that system?

Huw Jenkins: Given the fact that I was rewarded based on the performance of the group, no. To clarify one point, the issue was not that the capital was not there for the group, but that the capital was not allocated down to the individual trading desk.

Q2132 Lord Turnbull: You do not think that there was an overstating of the profits of the organisation itself.

Huw Jenkins: No, sir. You could argue about some of the accounting convention around long-dated derivatives, for example, but if you were to look at the capital that was supporting the overall accounting profit of the group, that was truly stated.

Lord Turnbull: I am unconvinced.

Q2133 Chair: What were you paid, Mr Jenkins? What was your total remuneration in each of the relevant years, roughly?

Huw Jenkins: Most of it turned out not to be available to me ultimately as a result of changes in share price and some money I gave back. It was in the multiple millions of pounds.

Q2134 Chair: Can you give us a rough idea? A low multiple or a higher multiple.

Huw Jenkins: I think that it was about £10 million a year.

Q2135 Chair: About £10 million a year, roughly, and what did you give back?

Huw Jenkins: In terms of the share price, the share component of it and money I gave back, probably half of that.

Chair: Which came out of the £10 million.

Q2136 [unassigned]

Q2137 Lord Turnbull: My final question is that you have this two-tier board system-where was the group board in all this? The supervisory board.

Dr Rohner: I think this idea of governance in two tiers is a good idea in good times. My personal impression was in a crisis of the magnitude we went through, it is dysfunctional. It does mean that the supervisory board has all the responsibility, but they cannot act operationally. I had to act operationally, but had to go and always consult with the board, plus regulatory authorities and other parties. That made the decision-making a complete nightmare. It was in many ways impossible. It was a squaring of the circle. The stakeholders had such diverging expectations and if we then include employees, shareholders and clients, and then regulatory authorities and the broader public, it was impossible.

Q2138 Lord Turnbull: But that system is still in place today.

Dr Rohner: That system is still in place. It is by many parties-serious parties-called state of the art to have these dual systems. I personally doubt, after all the experience, that this is really good.

Q2139 Chair: I think it would be very helpful to the Committee if you could set out in a short note after this meeting, as soon as you reasonably can, your views on that point in a little more detail, drawing on your own experience as far as you can. Would you be prepared to do that for us? I think it might help us to think through any recommendations we may make to improvements in corporate governance.

Dr Rohner: I would very much appreciate doing so.

Q2140 Mark Garnier: Mr Jenkins, I think you started at UBS at 1996 and you became head of equities for the Americas in 2000. What is your background in the investment banking world? More or less, after you left university, how did your career progress and what side of the business did you specialise in, in very general terms?

Huw Jenkins: Very generally, virtually all of my career was in the equities department or in the investment banking department.

Q2141 Mark Garnier: So you were in a customer-facing, income-generating business. How about you, Mr Johansson?

Jerker Johansson: I have a very similar background. I joined Morgan Stanley after business school and started in equity capital markets, then had the same job as Huw had at UBS, running the global equity business.

Q2142 Mark Garnier: So you were very much in a customer-facing, income-generating side of the business. Dr Rohner, was it a similar type of thing?

Dr Rohner: I was from 2000 onwards in wealth management.

Q2143 Mark Garnier: But prior to that. What I am interested in is where you have come from. What is your background?

Dr Rohner: I am an economist by training, and then I was in market risk control.

Q2144 Mark Garnier: So you are more of a back-room specialist.

Dr Rohner: Yes.

Q2145 Mark Garnier: That is very interesting. Mr Jenkins, you became head of global equities in 2005. The one trader that Lord Lawson talked about earlier, who made a quarter of a billion US dollars-you were in charge when he was recruited, I think in 2006.

Huw Jenkins: Yes, so I would have been in charge when he was recruited.

Q2146 Mark Garnier: Do you remember the process of recruiting him?

Huw Jenkins: No, sir.

Q2147 Mark Garnier: Not at all?

Huw Jenkins: Not at all.

Q2148 Mark Garnier: We have talked about the amount of money he has made. What would a good trader make for you at UBS-somebody who is being reasonably successful?

Huw Jenkins: How long is a piece of string?

Q2149 Mark Garnier: What would be the mean return of a reasonably okay trader? The average return.

Huw Jenkins: I think it would be in the $25 million to $35 million mark.

Q2150 Mark Garnier: I think this guy, in his first year, made $40 million. That is quite good. You must have been delighted about that. As things progressed and the business was obviously having a bit of trouble, Dr Rohner-as you were lying in bed at night at 3 o’clock in the morning, thinking "My God, where is all this going? We are losing so much money. Where is this one rock of hope?"-there is this fellow making, over three years, about a quarter of a billion dollars. It must have been a real relief to you that there was somebody there.

Dr Rohner: As I said, what kept me up at night, if anything, was a loss of multiple billions.

Q2151 Mark Garnier: I am sure it did, but any chief executive of any organisation would be looking for something to grasp on to-a lifeline. We have seen the presentation that talked about this LIBOR side of the business, with the structured LIBOR being the most important part of the business going forward. You must have been delighted that there was somebody within that who was doing very well. Mr Johansson, he was there a lot on your watch.

Jerker Johansson: When I came into the investment bank and looked at the revenues in the various parts, I already had a fair amount of scepticism about revenues of this kind, because of the risk and capital associated with generating them. I would have been more cheered up in the middle of the night by businesses doing well that were flow based, like the foreign exchange business-client-facing, flow-based businesses. At this time, it was already clear that those other businesses were very volatile, very subject to market fluctuations and very dependent on capital and risk, which were very much constrained in that department.

Q2152 Mark Garnier: Do you all remember the Barings crisis in 1996? You will remember there was one rogue trader. Glancing back on that, you may well remember that one of the key things was that no single director of Barings ever asked whey this guy was doing so well; they just sat there opening bottles of champagne while another few hundred million dollars were supposedly being banked by this bloke. As it turned out, he was a rogue trader. I am not for one moment suggesting that the individual in this case was a rogue trader, but given the lessons you would have learned, particularly as you were all in customer-facing businesses as part of the management of the bank, you would have been absolutely mindful of the fact that anyone who stands up-a tall poppy-is someone you need to look at, even if it is just because they are drawing attention to themselves. Is that not the case? Mr Johansson, it was happening on your watch.

Jerker Johansson: I agree with you that that is a good way of looking at it. When we started to look at the businesses across the board, we were looking at business areas and very much analysing them along the lines of revenues and resource requirements in terms of people, capital and risk. We then prioritised businesses that were client facing and less capital intensive. In that respect, I remember looking at this particular business and not thinking it would be an area we should invest more in and focus on.

Q2153 Mark Garnier: How much capital were you committing to that?

Jerker Johansson: I cannot remember the actual figure.

Q2154 Mark Garnier: Ballpark figure.

Jerker Johansson: I do not know.

Q2155 Mark Garnier: A billion? Ten billion?

Jerker Johansson: I simply do not know, but it was a substantial amount.

Q2156 Mark Garnier: What is a substantial amount?

Jerker Johansson: The equity allocation of the investment bank was about $25 billion. The total risk-weighted assets, which are one measurement of risk, were about $200 billion. The balance sheet of the investment bank was about $1,600 billion, so these were very substantial amounts.

Q2157 Mark Garnier: Okay. How often did you meet the chief risk officer, and what was his name?

Jerker Johansson: I recruited a new risk officer for the investment bank.

Q2158 Mark Garnier: When was that?

Jerker Johansson: That was in April or May-it was right after I started.

Q2159 Mark Garnier: April or May of which year?

Jerker Johansson: In ’08. I interacted with the chief risk officer very frequently, because of the capital issues we talked about.

Q2160 Mark Garnier: But on the investment bank, how often did you meet with him?

Jerker Johansson: I would say several times a day.

Q2161 Mark Garnier: Mr Jenkins, how about you? You would obviously have met his predecessor.

Huw Jenkins: I would say several times a week.

Q2162 Mark Garnier: How about the compliance officer?

Huw Jenkins: Compliance officer-weekly meeting.

Q2163 Mark Garnier: Mr Johansson?

Jerker Johansson: Something like that. The compliance interaction was more me reacting to them coming and bringing out issues that had come up in the investment bank or that involved the investment bank. I would say probably about once a week.

Q2164 Mark Garnier: You are familiar with the three lines of defence model for a financial institution.

Jerker Johansson: No, I am not familiar with that.

Huw Jenkins: The front line being the client interaction, the second line being the control functions and the third line being the management.

Q2165 Mark Garnier: You recognise it now?

Jerker Johansson: Yes, that rings a bell. I have not been working in banking for four years, I’m sorry.

Q2166 Mark Garnier: None the less, it is a pretty crucial part.

Jerker Johansson: I understand the principle very well, and it makes a lot of sense.

Q2167 Mark Garnier: From both of your experiences, you are both incredibly familiar with the first line of defence, because you have a lot of experience in the customer-facing, generating world. Correct?

Jerker Johansson: Yes.

Q2168 Mark Garnier: Therefore you should be 100% aware of the risks that are inherent in a financial institution, because you have done it and because you are now running it. You have actually been there on the front line and you should understand the first line of defence. Why, therefore, was it allowed to go wrong? How could the two of you, of all people, who really understand the situation, allow this to go wrong? Mr Jenkins, do you know what a wash trade is?

Huw Jenkins: Yes.

Jerker Johansson: Yes.

Q2169 Mark Garnier: So how was this one trader able to get away with nine wash trades and giving away £170,000?

Huw Jenkins: I cannot answer that question. It is such an obvious thing that it is surprising that it was able to get through the system. I agree with you. If they were really back-to-back trades in the same security just to deliver value to this broker, there have been a whole series of incidents such as that over the history of the bank, and systems have been put in place to capture that.

Q2170 Mark Garnier: The culture of this bank is yours, is it not?

Huw Jenkins: Yes. We were the guys who set the tone and the culture.

Mark Garnier: Particularly you, so you should have known this.

Q2171 Chair: Before we move off that, you were responsible for putting in the structures that you have just described in order to capture those wash trades, were you not?

Huw Jenkins: In the equities business, I definitely was.

Q2172 Chair: Throughout the business?

Huw Jenkins: Not throughout the business. When I was working in the equities business, we put in steps to ensure that such activities could not take place.

Q2173 Mark Garnier: When you were recruiting and building up the business, what type of people were you taking on?

Huw Jenkins: We were trying to take on people who could really develop the business. We were trying to find A players. A classic example would be someone such as Ken Moelis, who we recruited while I was in the States and who was the head of investment banking for us over many years. He was able to bring others and had a long-term track record and a strong client franchise. We wanted somebody who could manage a business as well.

Q2174 Mark Garnier: So you were going out and buying market share. You were going out to find the best teams available and bidding for them. Is that right?

Huw Jenkins: That was part of what we did to enter new businesses.

Q2175 Mark Garnier: What controls did you put in place to monitor their culture when they arrived?

Huw Jenkins: It is a very interesting question. The key thing is clearly to be close to those people and to really understand their objectives and business practices and what we expect from business areas. Ideally, there will be a mix of people, so that you get some of your own people embedded with any new team, because the last thing you want to do is to have a whole series of silos of different cultures.

Q2176 Mark Garnier: What would you define as "your own people"?

Huw Jenkins: People who have been with the bank four or five years and have been through an experience of promotion and development.

Q2177 Mark Garnier: But they could be people who have come from other institutions.

Huw Jenkins: Yes.

Q2178 Mark Garnier: The key point being that if you are going out and buying in market share, which is what you were doing, especially with this rock-star trader you keep talking about, you are buying in other banks’ cultures, and you do not necessarily know what those are. The only way that you can be sure-I seek your agreement or disagreement on this-of someone’s culture is if you have trained them up from scratch.

Huw Jenkins: Yes. I think that is a fair point. I think you can learn a lot about people from going through transactions and other things with them, so I would not say that you cannot understand people’s cultures and values without them having been a graduate trainee.

Q2179 Mark Garnier: Absolutely. Mr Wilmot-Sitwell, when this trader left, were you asked for a reference for him?

Alex Wilmot-Sitwell: I do not recall being asked for a reference. I think that there would have inevitably been some form of HR-driven reference that would have gone to the other bank, because that was part and parcel of the normal course. To be candid, I do not recall him-I never met him-leaving.

Q2180 Mark Garnier: Sorry. Let me stop you there. A generator of a quarter of a billion dollars leaves to go to a competitor and you miss it.

Alex Wilmot-Sitwell: I do not know exactly when he left.

Q2181 Mark Garnier: In 2009.

Alex Wilmot-Sitwell: Yes, but I do not know when in 2009. I took on my responsibility halfway through 2009 and I do not recall him leaving. It may well have pre-dated my engagement.

Q2182 Mark Garnier: How many people within the organisation by that stage were generating over $100 million a year?

Alex Wilmot-Sitwell: Very few.

Q2183 Mark Garnier: Very few being what? A handful? One? Ten? One hundred?

Alex Wilmot-Sitwell: I do not believe that he was necessarily-the way the business is structured, certain businesses would have been generating that and unfortunately, very often, many people would lay claim to revenues. But the answer is that individual people generating that sort of revenue would be a handful.

Q2184 Mark Garnier: You obviously don’t remember him leaving, so the answer to this is presumably going to be no, but did you have any procedures when individuals left-particularly tall poppies like this-to go through their trading books, to go through the dealers’ blotters and to go through the execution to see if there was anything outstanding?

Alex Wilmot-Sitwell: Yes. There were procedures.

Q2185 Mark Garnier: But nothing was picked up.

Alex Wilmot-Sitwell: No.

Q2186 Mark Garnier: So this guy did 17 wash trades and you did not pick up any at all?

Alex Wilmot-Sitwell: Apparently not.

Q2187 Mark Garnier: How often did you meet with the risk officer?

Alex Wilmot-Sitwell: Every day.

Q2188 Mark Garnier: Did he tell you anything of any use?

Alex Wilmot-Sitwell: He told me lots of things of use.

Q2189 Mark Garnier: But not this?

Alex Wilmot-Sitwell: But not this.

Q2190 Mark Garnier: Nor that you were manipulating LIBOR?

Alex Wilmot-Sitwell: No.

Q2191 Mark Garnier: So he was not very good, was he?

Alex Wilmot-Sitwell: I think the risk officer at the investment bank was very good, actually, and I think did an extraordinary job through an incredibly difficult period. Why this was missed-why this did not get picked up through a whole series of internal audits and compliance reviews-I cannot answer, I cannot fathom and I cannot understand.

Q2192 Mark Garnier: Do you think there is anything else that has been missed?

Alex Wilmot-Sitwell: I would be very surprised, given the extent of scrutiny that has taken place since the financial crisis.

Q2193 Mark Garnier: How can you describe the risk officer as being very good when this is one of the biggest scandals to hit the banking world? Actually, there are so many scandals I am not sure whether it is the biggest, but surely you must see that the control functions-your three lines of defence-utterly failed. Your risk manager is not doing anything at all. I did not ask you what your background was, but certainly two of the three of you have got a background on the first line of defence. Was yours a customer-facing background?

Alex Wilmot-Sitwell: My background has been on the advisory business-on the private side advisory-and M and A since I started in the industry.

Q2194 Mark Garnier: Okay, so you were in an income-generating role and you were front-facing. So you also have first line of defence experience.

Alex Wilmot-Sitwell: Yes.

Q2195 Mark Garnier: And yet this colossal scandal has got through under your collective watch. All three of you have huge experience of the first line of defence and you have not picked it up.

Q2196 The Lord Bishop of Durham: You may be relieved that I would quite like to look forward rather than back for a bit. Mr Wilmot-Sitwell, you are the only one of the four who is still actively involved at the very top of a major banking institution. Do you have a whistleblowing system at BOA?

Alex Wilmot-Sitwell: Yes, we do.

Q2197 The Lord Bishop of Durham: Is it different from the one at UBS?

Alex Wilmot-Sitwell: Not fundamentally different. There is a website; there is a hotline, which is managed externally; and in addition there is an ethics hotline, which is also managed externally. That external body would report any inquiries, comments or queries through to the group internal audit function.

Q2198 The Lord Bishop of Durham: And at UBS that was more or less how it worked?

Alex Wilmot-Sitwell: More or less.

Q2199 The Lord Bishop of Durham: How often did you get reports on the ethics hotline?

Alex Wilmot-Sitwell: There wasn’t an ethics hotline.

Q2200 The Lord Bishop of Durham: Right. How often did you get whistleblowing reports?

Alex Wilmot-Sitwell: Seldom. I cannot give you an exact number, but I would certainly say it ran into the tens rather than more than that.

Q2201 The Lord Bishop of Durham: So it would be an event that you would notice. It would be very unusual.

Alex Wilmot-Sitwell: Absolutely, and it would be elevated.

Q2202 The Lord Bishop of Durham: It would be elevated. Would that be true for all of you? You remember this whistleblowing approach and it being a relatively rare event to hear a whistleblowing report?

Unattributed: Yes.5

Q2203 The Lord Bishop of Durham: And yet that really makes the sense of what was going on in particular areas of the bank even more worrying: there wasn’t a single person who was sufficiently concerned, even when they knew they could report it anonymously, confidentially and safely, to feel it worth picking up a telephone. Is that correct?

Alex Wilmot-Sitwell indicated assent.6

Q2204 The Lord Bishop of Durham: So if we look at the fact that you had a code of business conduct and ethics, and that we can see from what we have heard this morning that, in significant parts of the bank, to put it at its mildest, that really was not working very well, what are you doing now-if Mr Wilmot-Sitwell answers first, then I will ask the other gentlemen what they would do-that you did not do then that means that you know that BOA is an ethical operation?

Alex Wilmot-Sitwell: I think a number of things have changed, thankfully. First, there is without doubt a significant lesson to be learnt with regard to the strategic development of an organisation: its growth needs to be managed in a way that can be operationally controlled and the growth needs to go into areas where there is critical and core competency to be able to understand how to run those growth businesses. The strategy of being all things to all people in all markets is a fundamentally flawed one. What has taken place since the financial crisis-partly as a result of that crisis, partly as a result of some these appalling scandals-is that there has been major simplification of businesses.

Q2205 The Lord Bishop of Durham: If you will excuse me interrupting you, I think you are talking here about operational risk management. It is very good to hear all that, and thank you for it, but I am asking about the ethical framework and ethical instruction. The knee-jerk reaction of someone when they see something going wrong, such as LIBOR being manipulated, should be to say to themselves, "I am not going to argue with this particularly ferocious trader, but I am going to pick up the whistleblowing hotline." How have you changed to that?

Alex Wilmot-Sitwell: We have changed that, I believe, as an industry by dramatically encouraging people to feel able and motivated to step forward. I think that there has been a massive reinforcement of ethics, culture and behavioural tendencies within organisations.

Q2206 The Lord Bishop of Durham: How?

Alex Wilmot-Sitwell: I think hearings such as this, and the litany of problems that have become exposed, are a strong reinforcement of the importance of managing the reputation of a firm. We are only as good as the reputation of our firm. We are only as good as the professionalism and integrity with which we carry out our business. There is a recognition that there is a massive hill to climb in terms of recovering that reputation and rebuilding the integrity. That is a message that needs to be driven from the top, relentlessly, every day, in every forum, at every time when there are people representing the organisation. It is a message that I believe will get pushed through the organisation. There then has to be zero tolerance of failure to comply with those high standards.

Q2207 The Lord Bishop of Durham: On the basis that, in any organisation, there will be some bad apples-that is the way that human beings are-how often do your management reports include a reputational risk audit?

Alex Wilmot-Sitwell: We do reputational risk audits all the time.

Q2208 The Lord Bishop of Durham: How often do you personally get them and discuss them at board level?

Alex Wilmot-Sitwell: At my executive committee level, which is the level at which I would discuss this, any reputational matter that was raised would be discussed. There is also a weekly reputational risk meeting that I attend.

Q2209 The Lord Bishop of Durham: Dr Rohner, in listening this morning, I have the impression from what has been said that you have personally felt the disastrous events of the past few years most keenly. As you look back, what would you have done differently that would have embedded ethics and culture and would have avoided these catastrophes and appalling practices? You must have thought about that.

Dr Rohner: I have thought deeply about it ever since. It is a combination of measures that create a different environment-these are business elements, so they are indirectly related to ethics, but I believe that it is very important-a simple business, a business that is very well understood, and therefore easier to control by way of peer pressure, because people just know what the right thing is.

I also feel that the urge to grow rapidly was in many ways reinforced by very short-term thinking on all parts: quarterly reporting cycles and rat races of two banks against each other quarter by quarter. I would do much more long-term thinking and investment.

There is also the speed of innovation. One initiative might be very good and you can control it manually. If you have 100 of them, and 100 times the manual control, somewhere the system again gets fragile and too complex, the span is bigger.

I also think that the remuneration question has to be part of it. I mentioned previously that I personally believe that whenever you identify a business as a business, it has to have a fully costed profit and loss statement. The only thing that should drive any bonus, which I think should be called profit participation, should be driven by profit exclusively and no other consideration. That means that it is a collective exercise. There are only very few people in a bank who could claim that they could set up their own business and be as successful. You have certain client-facing people who might have such good relationships that they could do that, on the private client side or the corporate client side. I believe that we tried hard and without hesitation to send the right message from the top, but it was clearly not successful in an environment that was not receptive to that.

What was also important in these pockets where we had these problems was not the bad culture, but a lack of culture. When you grow a business too quickly, and we hired people from many different places, some of them, I would say-I realised this when I was running the firm and looked back and saw what happened-we would clearly have to qualify as mercenaries. That is not how we can build culture.

A key issue is that the bank is a financial services business-basically, people providing advice to others. It is not a tangible product that you can feel and touch. That is why the standards in any services business, particularly the financial services business, have to be higher. Ultimately, the reputation and effect depend on all the individuals there, much more than in a car manufacturer or a consumer goods manufacturer, where much of it is around a tangible product. All these measures together will create another world.

Last but not least, this is also something which I consider very important: the entire financial system was over-leveraged. Funds were extremely cheap, and when funds are so cheap, balance sheets grow rapidly. With that is correlated, "We also have to be in that business, because otherwise, we are lagging behind the other banks, which are very big in this business." So there is a dilemma, because to wind that back is a very tough process because it means that the balance sheet would shrink. Businesses are getting more expensive, but I am personally convinced that for the financial system to ever gain the full confidence of all participants again, that is the only way that will work long term.

The Lord Bishop of Durham: Thank you-very interesting answer.

Q2210 Chair: It was a very interesting answer. Earlier in your evidence you gave the impression that you may also think that banks of this type may be too complex to run. You referred to the huge complexity that had made it so difficult to find out what was going on. That was your view, wasn’t it?

Dr Rohner: Yes.

Q2211 Chair: Do you think that there is therefore a case, given the systemic risk in these institutions, for breaking them up?

Dr Rohner: I don’t think the split will solve the problem.

Lord Lawson of Blaby: That doesn’t answer the question.

Chair: Give him a moment.

Dr Rohner: It’s a complex question that requires careful reflection. We obviously thought about all these things as well.

Chair: I am thinking about the continental European banking model in particular.

Dr Rohner: The complexity I was referring to was the one I experienced, and I sense that there are others that are similar. I do not think that this complexity could not be reduced and managed in a non-split banking system.

We also thought about models of holding companies, which would remedy some parts of it. I made the statement that one of the driving forces behind the problems that occurred at UBS was the cheap funding available to the investment bank from the other businesses, but we changed that. There doesn’t necessary need to be a legal structure; it can also be a management structure that prevents these things happening. If you reduce the activities in an investment bank to securities trading, corporate finance advice, FX flow businesses-these are very clean, very simple businesses that can be very well controlled and well managed, and would fit into a financial institution very well.

It becomes a problem when there is a huge balance sheet position, with this difficult delineation between proprietary trading risk and customer client risk. When they build up, they might, as we have seen at UBS, ultimately jeopardise the viability of the rest of the bank. So there, clearly, the capital rules are the key. I would rather go for very strong capital rules than for a split system.

Q2212 Lord McFall of Alcluith: Culture and ethics-could you all give me a definition of what you think culture is and ethics are, very quickly? What is culture?

Huw Jenkins: I think that culture is a set of values by which you conduct your business, in the context of a business culture-whether you prioritise client over profit, or whether you prioritise short-term over long-term.

Q2213 Lord McFall of Alcluith: But the mafia could have that type of culture.

Huw Jenkins: I used two examples. It could also be about diversity, it could be about-

Q2214 Lord McFall of Alcluith: Is it not about behaviour, at the core-good behaviour?

Huw Jenkins: I think that the behaviours are driven by the values that you set.

Dr Rohner: I concur. I think I mentioned before that I think culture is how people behave in a specific environment.

Q2215 Lord McFall of Alcluith: What are ethics?

Dr Rohner: They for me are the core values that drive the behaviour of each individual.

Q2216 Lord McFall of Alcluith: Are ethics not about resolving conflicts of interest in the organisation, from a business point of view?

Dr Rohner: That is then an outgrow of behaving correctly.

Q2217 Lord McFall of Alcluith: If culture was defined as good behaviour and ethics was defined as resolving conflicts of interest, do you think that UBS would have been a different entity under your stewardship?

Jerker Johansson: Over time.

Q2218 Lord McFall of Alcluith: You, Sir?

Alex Wilmot-Sitwell: My definition, or the answer to the question?

Lord McFall of Alcluith: Your definition and what you think.

Alex Wilmot-Sitwell: My definition of culture. Well, I think it is always interesting when people talk about culture, as I am not sure that there is a culture of a firm-it is not a homogenous thing. I think it is behavioural; it is the behavioural environment of the firm that defines the culture, and I believe that ethics is a code of conduct.

Q2219 Lord McFall of Alcluith: If culture was about good behaviour and ethics was about resolving conflicts of interest, would UBS have been a different entity under your stewardship?

Alex Wilmot-Sitwell: I think that UBS is a different entity today, and I think a lot of the reason for that is the changes that have been made.

Q2220 Lord McFall of Alcluith: Whose role is it to question whether the high profitability of a strategy is due to sheer brilliance or a desk taking significant, uncaptured, qualitative risk? In other words, how do you select individuals, given the courage needed to be purposefully cynical when it appears that the good times keep coming?

Huw Jenkins: It is a very good question. It needs to be people who have experienced the rough and the smooth, and experience is critical to that.

Dr Rohner: I concur.

Q2221 Lord McFall of Alcluith: Given the speed at which risks can emerge and the breadth and detail of knowledge needed to understand them, is it realistic to expect a board to have a tight handle on all the risks relating to a large international bank? How does it overcome this challenge? The question in my mind as a result of listening to the discussion this morning is: what is the point in being a board member under a dysfunctional organisation such as this?

Jerker Johansson: We have covered part of this, but the main thing is the difference between organic growth and acquired growth. I think that in a business like investment banking, where you are so reliant on the culture and ethics of the individuals, growing the organisation brick by brick is far preferable. And I think that that applies especially when we are talking about global expansion.

When I have been involved successfully in growing in a certain regional area, we have started with people from that area in the centre and then we have gone out, opened up the business and expanded that way. That takes longer, but makes for a much stronger organisation in which the culture is consistent.

Q2222 Lord McFall of Alcluith: Did UBS have a board-level committee to oversee the values, culture and reputational risk and, in your opinion, how seriously did it take that duty?

Dr Rohner: Are you talking about supervisory board level?

Q2223 Lord McFall of Alcluith: The European structure’s advisory board-the board level and the supervisory board. Did you have that?

Dr Rohner: Yes. We had the risk committee at the executive board level and then there was a risk committee at the supervisory board level-

Q2224 Lord McFall of Alcluith: Did they ask any questions that challenged you if you thought that you were not doing things right-to the extent that you would not be sitting here today if you had got it right?

Dr Rohner: Yes, there were regular, tough challenges.

Q2225 Lord McFall of Alcluith: Give me an example of the things that they challenged you about regarding culture of the bank.

Dr Rohner: Regarding culture of the bank, well, we went through the entire recognition of the problems that we had. The whole point of the culture of challenges that came from too rapid growth was a key focus that was discussed widely. We also mentioned them in the report we published to our shareholders in April 2008.

Q2226 Lord McFall of Alcluith: At the board level, did you discuss, on occasions, the good or bad behaviour of employees?

Dr Rohner: I cannot recall a specific discussion.

Q2227 Lord McFall of Alcluith: I think it is incredible. I think the rest of the Committee members are-I use that word-incredulous that you knew nothing about what Mark Garnier said was a huge scandal, but you knew nothing about it. In fact, as the Chairman says, in ordinary people’s language, it reminds me of the film "Casablanca" when Captain Renault went into the bar and said, "I’m shocked, shocked to find that gambling is going on here," and then the croupier said, "You are winning, Sir," to which Captain Renault said, "Thank you very much" and went away. I suggest that you knew that gambling was going on. And you went out the door with far more winnings than Captain Renault. That is why you are in this particular situation. Are you Captain Renault, each of you?

Huw Jenkins: No.

Q2228 Lord McFall of Alcluith: What did you do differently from Captain Renault?

Huw Jenkins: With respect to this LIBOR issue, I did not know it was going on. Indeed, these reports of the various regulators show that we did not know what was going on.

Q2229 Lord McFall of Alcluith: Dr Rohner?

Dr Rohner: I felt that during my tenure I contributed to the best of my knowledge, and substantially, at the bank-

Q2230 Lord McFall of Alcluith: Yet there was a giant screw-up-you did your best, but there was a huge scandal.

Dr Rohner: I accepted accountability, but we did our best to resolve it.

Jerker Johansson: I would agree with that.

Alex Wilmot-Sitwell: As I said, I did not know what was going on. Certainly if I had, I would have immediately taken action to stop it.

Q2231 Lord Lawson of Blaby: May I follow up the line of questioning that the Bishop of Durham was pursuing? I was interested in your answers to him, Dr Rohner. You seemed at one point to suggest that the competition in merchant banking led to a sort of Gresham’s law, in which bad practice drove out good-this was part of the explanation. I would like to address one particular aspect of that, to which you yourself alluded briefly in one of your answers to the bishop, and that is the question of remuneration. You will recall that UBS was investigated, and very serious defects were found, by the FSA in this country, by the Department of Justice and CFTC in the United States and also, although we have not mentioned it today, by your own Swiss supervisory authority, FINMA. Among the things that FINMA said was this: "On average, the variable part of the remuneration of submitters and traders accounted for 200 to 500% of their base salary. Inherent personal incentives therefore existed to benefit proprietary trading positions of the bank during the period under inquiry. The financial incentive system in place for both submitters and traders may have fostered their improper behaviour." Do you agree with that?

Dr Rohner: I can only agree with it if I can put it in a broader perspective, because there is one concern that I have with it. It is a reality that the compensation might incentivise some behaviour, but I also feel that it does not excuse the behaviour that people have shown. What I always resent is when people say, "Because there was a monetary incentive, I broke the rules." I think self-responsibility would always, under whatever compensation system, require people to abide by the rules and to behave ethically. In reverse, though, in terms of creating an environment in this area, culture is ultimately how people behave in a specific environment. Then I agree and recognise that if I could re-create the environment I would do it differently, along the lines I said before, and I would create a compensation system that, more than anything else, drives the level of compensation away from the individual and gives it to the entire group. I am saying that because I strongly believe that if in the end the pay of everybody depends on the collective result, the peer pressure and control on any behaviour is automatically much, much stronger than in the individualised view of the world. That is-

Q2232 Lord Lawson of Blaby: I am pressing on because time is short, I do not mean to be discourteous.

The top management are responsible for the remuneration system, and the remuneration system creates incentives. While a remuneration system could incentivise proper behaviour, you put in place a remuneration system that-as FINMA pointed out-incentivised improper behaviour. That is a rather serious thing. Do you feel that, because banks can’t be trusted to put in a remuneration system that incentivises ethical behaviour-FINMA found you had a bizarre remuneration system-the regulatory authority should make clear which remuneration systems are permissible and which are not? I am talking about not the levy, not the content, but the system. Reflecting on the history of UBS, do you think that would be a reasonable conclusion?

Dr Rohner: If I would involve a regulatory authority to do that, I would have to reflect further. One would also have to think about what the burden would end up being on regulatory authorities, which might make it very difficult to monitor the pay or even define the pay system. Certain elements of the remuneration system, to my knowledge, already are under regulatory control. They have to be actually approved.

I do believe that ethical behaviour was always part of the discretionary bonus system. It has not been lived up to in the cases we have discussed today, but it was part of the system that UBS had in place. That system was and is very much the same as the market and industry has. That explains some pressures and why it is not changed so easily. We made the first attempt in 2008 to change the compensation system. That was one major issue the chairman drove forward.

I think, as I said, there are certain elements that are important. It should be profit-driven and collective. It is difficult for me to say how realistic it is to push it through in the competitive environment we are in. I could imagine that certain principles are defined that could be reviewed, either by regulatory authorities or auditors, in terms of adherence to the system. I am convinced that the situation we ended up in was a function of many factors, and this is only one. Even if that one was changed, if the others are not, I do not think the outcome would be massively different. That is the complexity of the financial system as a whole.

Q2233 Mark Garnier: This question is particularly to Mr Jenkins, Dr Rohner and Mr Johansson. You mentioned right at the beginning that the first you heard about this LIBOR scandal was when you read of it in the press recently. Is that right?

Dr Rohner: Yes.

Q2234 Mark Garnier: Are you not staggered that at no point had any of the regulators investigating this come to interview you to find out if you knew anything about it?

Huw Jenkins: The thought had not crossed my mind, but it is a fair point.

Dr Rohner: I was not surprised because I had no involvement.

Q2235 Mark Garnier: Yes, but they were guessing you had no involvement. They never asked if you had no involvement, did they?

Dr Rohner: I guess it was extremely thoroughly investigated and, had they had any reason to speak to me, they would have.

Q2236 Mark Garnier: Mr Johansson.

Jerker Johansson: The FSA report and all of these reports-

Q2237 Mark Garnier: We know what they say; that you have got no involvement. None the less, this all happened on your watch. You would have thought that at some point during this investigation somebody from one of the regulators would have picked up a telephone and asked if you knew anything about it. Don’t you think so, when it involved a $1 billion fine?

Jerker Johansson: If they were satisfied that we did not know, that is not surprising.

Q2238 Mark Garnier: But were you not surprised that they did not ask you? I am asking this more from a regulation point of view than necessarily your culpability for this.

Jerker Johansson: I am not surprised, given the thoroughness of the process that seems to have happened.

Q2239 Mark Garnier: So, it was thorough up to the point where they don’t bother talking to the people in charge. You are not surprised.

Jerker Johansson: No, I am not surprised, given the thoroughness of the investigations that have taken place.

Q2240 Mark Garnier: So is that a message being sent by the regulator that the people in charge do not matter-that they do not bother asking? Mr Jenkins, I think I saw your head nod a little bit there.

Huw Jenkins: No, I don’t have any opinion on that, sir.

Q2241 Chair: What we have heard today or seen today is a good deal of contrition. We have also heard about some appalling mistakes, which can only be described as gross negligence and incompetence. The best construction that many of us will place on that is that you were not only ignorant of what was going on but out of your depth. Do any of you want to challenge any of that?7 In sorting this out as we go forward, then, is it also agreed among all of us that we have to do far more than change the structure of banks; we have fundamentally to reform corporate governance, the incentive structure and the overall supervisory approach as well, not only in the UK but right across the global financial industry? Is that also agreed?

All the witnesses indicated assent.8

Chair: Order. The meeting is closed. Thank you very much for giving evidence.

Examination of Witnesses

Witnesses: Dr Thomas Huertas, former Director, Banking Sector, FSA, Tracey McDermott, Director, Enforcement and Financial Crime Division, FSA and Sir Hector Sants, former Chief Executive, FSA, examined.

Q2242 Chair: Sir Hector, Dr Huertas and Tracey McDermott, welcome. Have you been following what we have just been listening to?

Sir Hector Sants: No, I’m afraid we were parked in another room and couldn’t hear it there.

Q2243 Chair: Well, I am sure you have read the final notice for UBS with great care-not only the FSA’s, but the Americans’ equivalent. Do you think realistically we are ever going to be able to create a regulator or supervisor that has a realistic chance of preventing these scandals?

Sir Hector Sants: I think we have to, as I think the FSA submission had begun to do, distinguish very clearly between prudential issues and conduct issues. I think some of the debate that has ensued since the crisis has somewhat conflated them. So on prudential issues-

Q2244 Chair: To be fair, just on that-if I may interrupt right at the start-you used to be an opponent of splitting them. Didn’t you make a speech opposing it at one point?

Sir Hector Sants: I have taken the view that, intellectually, either system could work. I was indeed sceptical about the wisdom of splitting them in the middle of the financial crisis, given the disruption and costs that ensued. I have to say that one of the factors that has made the FSA’s work very difficult over the past five years is the effort required to be put into the split. Certainly, a large percentage of senior management’s time was devoted to dividing up the FSA and designing the new regulatory structure. That was one of my principal focuses in the past five years. I think that we did the task very well, but we should not forget the backdrop against which all these discussions were going on: the FSA was being asked to divide itself up and design an entirely new structure.

Q2245 Chair: I just wanted to be clear that this is an issue on which, in the early stages of this crisis, you held one view, and that you have changed your mind.

Sir Hector Sants: When you think in more detail about some of these issues, as I have done over the past few years during the design process, the arguments in favour of twin peaks-I will come on to that in a second-have definitely increased. Now we are here, it is the best place to be.

I will elaborate a bit more, to go back to your core question. I know that we are not discussing prudential, but briefly, with prudential you are looking to make a judgment on the stability, sustainability and quality of the balance sheet of the institution. I entirely take the view that a small number of quality supervisors, assuming that they have the right information-one of the problems with the FSA historically was not having the right information, as a number of you will know-can make the right sort of judgment. You can make the forward-looking judgment as a supervisor on the risk of the failure of that institution, and you can proactively intervene. That is the basis of the new PRA philosophy, which I thoroughly subscribe to.

Conduct issues are much more complicated. We have to be realistic. When we are talking about misbehaviour by individuals in very large institutions, it is difficult to envisage that you could ever construct a regulator that would be able to discover that misconduct if it was not visible to the firm. As you know, in the case of UBS, there were probably four or so supervisors-that was the average staff-on it, and they were not in the building all the time. It would take a regulator of massive resource to find these sorts of issues. The number of instances of them is very small. There are millions of e-mails and documents involved, so the idea that a conduct regulator will proactively spot these issues on its own is a false hope. If we set the FCA up to do that, we will be disappointed.

The conduct regulator can absolutely set up an effective enough enforcement, deterrent and incentive environment so that the management of those firms can take core responsibility for ensuring that it does not happen again. That is the core difference between conduct and prudential. The first line of defence for conduct issues has to be the firms themselves and, in particular, it has to be the compliance function, which in general failed woefully in these firms in this period. It has to be a real independent second line of defence in the three-line concept. Compliance has tended to be the adviser-that is the term they often use-whose job was to ensure that the staff complied with the rules. The job of compliance was not to ensure that the behaviours were aligned with a set of core principles in the institutions themselves. A good compliance officer ensures that people in the firms do the right thing; it is not about them complying with the detail of the rules. We do not want to presume that this whole thought process will construct a conduct regulator that will proactively stop this stuff happening.

We need a different approach by the firms. I still do not think that they have changed enough; we can elaborate on that, and Tracey can no doubt talk to that. We need a tougher and more effective enforcement process, particularly with regard to holding individuals accountable for what they are doing, so as to toughen up that side of the conduct process. There are a series of other issues around this, which I am sure you have already noticed.

Q2246 Chair: This is becoming a statement, but it is very interesting, Sir Hector, so we will let you carry on for a minute.

Sir Hector Sants: I have just two more quick points to make, in terms of an overview.

This particular case of UBS and LIBOR is complicated by two other structural problems, one of which is being addressed. It is less clear how we address the other. The first is that the LIBOR market was not regulated. That is a really important point, because when you look at what the FSA did over the past five years, when it set out to deal with an issue of market abuse, it did it well. Look at insider dealing, for example. The way that insider dealing works is that, because it is a regulated market, there is an obligation on the operator of the regulated market to draw the regulator’s attention to misdemeanours. It is an obligation on the operator. It is not actually the regulator spotting it; it is the operator. The operator also has to work with a very effective set of data and technology. Because it was not a regulated market, the FSA was not focused on it-we should not be under any confusion on that point-but it also was not in receipt of the type of information it would normally have. That needs to be changed. It was obviously a gap in the structure.

A second, very quick, point is that there is a continued difficulty with the problem of overseas branches operating in the UK. Latterly, when I was at the FSA, I felt that was a significant problem. On the Chairman’s earlier point, particularly when you are an integrated supervisor, you are not the lead prudential regulator. It is natural that your focus on the institution is somewhat less. There is a difficulty when there is a lack of clarity as to who exactly is doing what.

In this case, the supervisory responsibilities of the FSA only extended to people working in the UK, in London. Of the 40 or so front-line individuals whom everybody has focused on of late, only nine were in the supervisory net of the UK. The vast majority of the wrongdoing was actually going on outside the supervisory net of the UK, and we were not the lead supervisor. Generally speaking, we ought to be working with subsidiaries, not branches, in the UK. These big branches in the UK pose a significant threat to effective regulation.

Q2247 Chair: You put UBS on a watch list at the end of December 2007, and the wealth management business shortly thereafter. You have just told us that the FSA would have been unlikely to catch something that the firm itself has not spotted. What changed? What behavioural response from the FSA resulted from being put on the watch list?

Sir Hector Sants: I think I will turn to Thomas, as front-line supervisor, to answer that question.

Dr. Thomas Huertas: I think one has to bear in mind the overall context of UBS at the time. In June 2005, UBS formed a company called Dillon Read Capital Management, an internal hedge fund, and went on a programme of growth. We identified problems with the potential strain that that expansion would place upon the firm. During the course of 2007, our concerns about the control environment became more acute, and we had concerns about the underlying financial strength of the organisation. On the basis of those findings, we put the firm on a watch list that further intensified the supervisory interaction with the firm. There are two aspects of the supervision to bear in mind. The first relates to the prudential findings.

Q2248 Chair: This was a prudential watch list?

Dr. Thomas Huertas: Both prudential and wealth management for conduct; the subsidiary for prudential.

Q2249 Chair: What I am trying to do is drill down straight away to what consequence of being put on a watch list might have improved your chances of picking up misconduct.

Dr. Thomas Huertas: More intensive supervision and more frequent reviews.

Q2250 Chair: How many people were working on UBS at that time?

Dr. Thomas Huertas: The supervisory model was a very small number of front-line supervisors, supplemented by specialists in the risk area.

Sir Hector Sants: Four supervisors.

Dr. Thomas Huertas: Four supervisors, but supplemented by specialists in risk, markets and, in cases where there were enforcement proceedings, enforcement teams.

Q2251 Chair: I am sorry to keep interrupting. Full marks to the FSA for keeping an eye on this firm, but I am trying to work out what changed as a consequence that might have led to a swifter exposure of this appalling conduct scam that we have been examining today, bearing in mind, as you have said, that for this huge firm you put four people on the job, with some support from your technical staff.

Dr. Thomas Huertas: In terms of the market conduct, initially it was across all of the firms. LIBOR is an example of a problem that went across a whole number of firms, not just UBS.

To give an example of what we did identify and took significant action to cure, early in 2005 we identified a problem in the credit derivatives market. There was a backlog of unconfirmed transactions, and there was a pattern of unauthorised assignments that led us to say that that market was becoming unstable. We initiated an across-the-industry movement to clean that up, and co-operated with regulators in other countries, notably the Federal Reserve Bank of New York, and did clean up that problem.

Q2252 Chair: I am sorry, but I am not asking you to supply the success stories. What I am asking you to do is tell us what happened at that time that might have improved realistically your chances of picking up this huge scandal. Or is the answer "Not much, and let’s hope they do it better next time"?

Sir Hector Sants: My perception of the answer would be to take it back to my opening comment, which is that, on conduct, without a trigger of information it is relatively unlikely that, even if a supervisor had 40 people rather than four, it would make a huge difference. You need a trigger.

Q2253 Chair: So they were being put on a watch list-

Sir Hector Sants: It was put on a watch list for a series of other reasons, which Thomas has elaborated on. Clearly significant action was taken against them, in regard to, for example, credit derivative problems, which are visible through operational and market data. The problem with this particular issue, when we have wrongdoing by the nine or so people I referred to, is that it is embedded in-perhaps Tracey can elaborate-millions of bits of data, such as e-mails, documents and so on. That sort of material is not visible to a supervisor. So, no, in respect of the watch list, I don’t think it would have made any difference. What triggered the subsequent action-

Q2254 Chair: So it would not have made much difference, if any, with respect to this case?

Sir Hector Sants: Going on the watch list would not have changed the probability of detecting this, because you need a trigger to trigger a supervisory intervention, and normally in a market that comes from the market operator, and at no point did the BBA ever engage with us, suggesting that there was wrongdoing in this market.

Dr. Thomas Huertas: We were certainly aware that the market was dysfunctional. We were certainly aware that there were potential problems. We certainly supported the BBA, in terms of looking at revising the system, and we welcomed the BBA’s acceleration of the review of the LIBOR fixing.

Q2255 Chair: If this occurred today, what would be done differently? In other words, if this firm was put on a watch list, and this was going on in the undergrowth, and you had other reasons for putting them on the watch list, as you put it, what would you do differently in order to increase the probability of finding this from extremely low, or near zero, to some higher figure? Or do you think that that is impossible?

Sir Hector Sants: We might ask Tracey, as the current FSA executive, to come in, in fairness to Martin Wheatley and his colleagues. I imagine you are calling Martin Wheatley again. It is really for him to answer the question. As I understood the design at the point at which I left, which is over six months ago, first, there would be a small focus team on conduct-the twin peaks point. I think it is only two or three people, but again, Tracey can elaborate. The staffing model has not changed radically, but at least those two or three people would be focused on conduct.

Secondly, I assume that as a result of the combination of the Wheatley review and recommendations from this Commission, you will be dealing with a regulated market in the future, which will therefore make it a supervisory focus. Thirdly, there should be a greater emphasis, through the new ARROW replacement, on ensuring that there were correct conduct systems and controls. There should be better deterrence, but ultimately I think I am back where we started: unless the companies and firms put in place a radically different approach to compliance, a radically different culture and a radically different set of incentives and behaviours, and different values, there is a very high risk that this will come back round again.

Q2256 Chair: You are peculiarly well placed to do that just at the moment, Sir Hector.

Sir Hector Sants: I hope so.

Q2257 Mark Garnier: Tracey McDermott, you are now the acting director of the enforcement that led to the FSA action against UBS. To what extent were you involved in the ongoing investigation into the whole UBS saga?

Tracey McDermott: We formally commenced investigating UBS in April 2011, which was about the time when I became acting director of enforcement, so I have been responsible for this throughout.

Q2258 Mark Garnier: So you have been actively managing it?

Tracey McDermott: I am actually now the permanent director of enforcement.

Q2259 Mark Garnier: Congratulations. Dr Huertas was here for the last session, but there are a couple of key points relating to that session that I want to ask you about. The three senior members of UBS who we had before, particularly Marcel Rohner, Huw Jenkins and Jerker Johansson, said that the very first time they ever heard about this investigation and the enforcement against UBS was when they read it in the newspaper. Does that sound right to you?

Tracey McDermott: Sorry, when they read it in the newspaper-

Q2260 Mark Garnier: When they picked up a newspaper and said, "Good Lord, look what has happened to the business that we were running five or six years ago."

Tracey McDermott: I am surprised that they were not aware that there was an investigation.

Q2261 Mark Garnier: Did you or your team have a conversation with any of them, at any time?

Tracey McDermott: They would not have been interviewed as part of our investigation. The focus of our investigation would obviously have been on the misconduct, which is set out in the notice. The people that we and the US authorities interviewed would have been the people who were directly involved, as established through the e-mail and voice records and so on that we have identified. It would not surprise me that we had not spoken to those people directly, as part of the investigation. I am slightly surprised that they would not have been aware that it was happening.

Q2262 Mark Garnier: But do you not find it slightly odd that people at the helm of the ship when it sank, as it were, were not asked about the problem? Maybe it did not sink-that was a bad example-but you know what I mean.

Tracey McDermott: The focus when doing an enforcement investigation is to try to identify misconduct that we can take disciplinary action in relation to, and we focus on the specific misconduct that is being identified. Hector mentioned the material that one sifts through; there was a massive amount of sifting through statistical data in relation to the actual submissions themselves, but also a key focus in this investigation was obviously the data in relation to e-mails, Bloomberg chats and broker phone records, which are set out here. We focus on the people whom that takes us to and the people the interviews take us to; there is little point in talking to somebody who then says, "I don’t know anything about it".

Q2263 Mark Garnier: I absolutely take that, and that sounds a reasonable way of approaching it, but none the less, how are you sure that those people at the top are not complicit in what has been going on?

Tracey McDermott: What you do in an investigation is follow where the lines of inquiry take you. You do different investigations in different ways, but typically you will start working up from the bottom to get through the process, and see which direction you are pointed in, in terms of who are the people with responsibility and who are the people who are aware. You expect people who you are interviewing-if they think that it is not their fault, but that somebody more senior was actually responsible-to point you in that direction. The questions you ask are around where the trail takes you, and where this stops.

Q2264 Mark Garnier: Sir Hector, a bit earlier we were talking about the responsibility of the leadership of these organisations, yet you must be staggered that, in an investigation of this magnitude into a scandal of this magnitude, that people in charge of the business at the time it was going on knew nothing about the investigation and the responsibility until they read it in the newspaper.

Sir Hector Sants: I echo Tracey’s comments. I am extremely surprised that they made that comment, yes. That is a personal opinion, but I agree with Tracey.

Q2265 Mark Garnier: Ultimately, we are looking at banking standards and culture. Repeatedly, we keep coming to the same point: the culture and standards are driven from the top, yet when something goes wrong, the regulator does not even talk to the people at the top. They do not even know anything about it until they read it in the newspaper.

Sir Hector Sants: You are developing a very important point. It is reflective of some of the discussion in your earlier sessions, which I have looked at. To a large degree at the moment, the way in which the regulatory system works is that, as Tracey has explained, it focuses on discharging its enforcement mandate as it has been given.

For a variety of reasons, which no doubt we could elaborate on but I think you are already broadly aware of them, the powers and mandate given to the FSA make it very difficult to take action against individuals in relation to the offences that the FSA has a mandate to address. Therefore, the natural focus to deliver efficient enforcement-otherwise, these cases would go on and on, and obviously there is a need to get them to fruition-is to do them in the way that Tracey has described.

One of the reforms that needs to be made to the system is to enable oversight agencies-the regulators-to take swifter and more efficient action against individuals. That would then change the behaviour pattern and the way we go about our work.

Tracey McDermott: Can I add one point by way of clarification, just in case I misunderstood the question? We obviously were talking to senior people in the context of running the investigation, but those are primarily the legal, global head of investigations and so on. It is not the case that we only talk to the people we interview.

Sir Hector Sants: The supervisors would have been talking to the current senior executives about trying to ensure that the bank was currently well run. So it is not as if there is no contact with senior people in the organisation, just specifically with regard to the enforcement.

Q2266 Mark Garnier: Yes, but there is a very important message that has been given by the regulator here. You talk about the fact that there are only four oversight officers who can look at these firms, and therefore, clearly, you have to rely on the firms to be able to do it themselves. Yet if you can have three or four individuals who are running this business at the time, who then leave the business and are not even questioned about it, that sends a strong message that the regulator does not see the management of the firm at the time as being relevant to the compliance of that firm.

Sir Hector Sants: I am certainly of the view that once an enforcement investigation has concluded, and the material is in the public domain-that is an important point in relation to an effective closure of investigation-you would expect the regulator to look at that material in the public domain and, where appropriate, take it up with the individuals concerned.

Q2267 Mark Garnier: The important point about this is that the very first time that these individuals have been held into account was when they came here this morning. This happened many years ago.

Sir Hector Sants: My point is that this investigation closed in November 2012. Our practice is to ensure that we do not put at risk the legal process. It is not for me, as a departed member of the FSA, to comment on what they did following the closure of this particular investigation.

Q2268 Mark Garnier: One of them has gone on to be president of Europe and emerging markets at another bank. I have absolutely no doubt that his character is faultless-I suppose it is faultless; he has been found faultless by you-none the less, he has gone on to run another investment bank, without any sense of responsibility for what has happened. He may feel guilty about it, but there is no message from the regulator that he has been responsible for what has gone on, apart from the fact that he let something pass on his watch. That is the wrong message.

Sir Hector Sants: These are questions for the current FSA management. I was not present when these matters were closed.

Q2269 Mark Garnier: But you were running the FSA.

Sir Hector Sants: No, I was not running the FSA at the time when these enforcement investigations closed.

Mark Garnier: Sir Hector, you were running the FSA. You were responsible for running the principal financial services regulator.

Sir Hector Sants: Not when that individual took his job.

Q2270 Mark Garnier: You were not holding the management of these organisations responsible for what was going on within these organisations. I take your point that you were not there when the enforcement decisions were made, but this evidence that has come from the FSA-that managers were not being held responsible-is a culture that was under your watch.

Sir Hector Sants: I entirely agree with you that once you know the facts of an investigation, you should engage with the senior management to ensure that they have learned the lessons from that process. If there are reasons that would affect their suitability for future jobs, that should be taken into account. We are talking about the specifics of UBS, which I cannot fairly comment on. In other organisations, where we have had large enforcement investigations on the culture of the organisation, we have engaged and talked to senior people. I regularly spoke to all the senior management of the major British banks, which was where my focus was, and I entirely agree with your point. You are asking me to comment about a particular case-

Q2271 Mark Garnier: No. I was using it as an example.

Let me turn to another thing. You said that you read through the evidence session. I presume that you have read through closely the evidence session when the senior executives of Barclays came before the sub-panel on the board of the governors. Let me read a comment from Mike Walters, who is now I presume the former head of compliance. "I am in charge of the compliance function, but the first line of defence is responsibility to run its business in a controlled way. It is compliance’s responsibility to help that happen. Clearly, here it did not, and that is regrettable, but it is not the compliance function’s responsibility to make Barclays compliant." Your comments, please.

Sir Hector Sants: I completely and utterly disagree with that statement.

Q2272 Mark Garnier: How did that happen? How is it possible that the compliance officer of an organisation such as Barclays, particularly coming out of the LIBOR investigations and all the other shenanigans that have been going on, can sit here in front of a House of Commons Committee and say it is not his responsibility to make Barclays compliant?

Sir Hector Sants: That is a question to address to him. As far as I am concerned, going forward it will change, and that is one of the reasons that I have taken on the role.

Q2273 Mark Garnier: No, it is a question to address to you, because you were head of the FSA. It is slightly relevant that you have now gone on to become a compliance officer at Barclays. How is it possible that when you were running the FSA a compliance officer in charge of an organisation such as Barclays could say that it is not his job to make it compliant?

Sir Hector Sants: We need to be realistic. If, as I understand it, you are suggesting that the role of the regulator is to take responsibility for the views and behaviours of every single individual of any seniority in the City, that is not realistic.

Q2274 Mark Garnier: No, but it is there to set an example.

Sir Hector Sants: It is clear that the way he described the compliance function operating does not in any way accord with the views of the FSA or myself. We would not agree with that. It is unfair on the individual for me to say more than that, particularly as he is a current employee of Barclays and given that I will be working for them in due course. I am not currently employed at Barclays, I should say for the record.

I entirely agree with you; I do not think that comment accords with the philosophy of the FSA. It is possible, to be fair to the individual, that sitting in front of these discussion groups can be intimidating and maybe he did not quite mean to say that. I have to say that, taking it at face value, I agree with your sentiment. That is not the way a compliance function should work; that is not the way the FSA thinks the compliance function should work and it was not the way the FSA thought the compliance function would have worked under my watch.

Q2275 Mark Garnier: How on earth did it come to pass that the FSA missed an organisation such as Barclays having a compliance officer who does not feel responsible for the compliance of the firm? There is a wider point that is very important because you clearly have limited resources when compared with the half a million people working in the banking industry and 2 million or thereabouts in the financial services industry. You simply cannot sit next to every single one of them.

Ultimately, you have to deliver a very clear message about what the responsibility is of those people in a senior position in those organisations. Barclays compliance officer does not think it is his job to make the shop compliant and the directors in charge of UBS, who were running the shop during the course of a huge scandal, had to wait until it was published in the local rag before they discovered that they were in charge of something that had gone horribly wrong. That is not a very efficient regulator delivering a very efficient message, is it?

Sir Hector Sants: The message we have been delivering in relation to the compliance function is and has been clear. Does that mean that everybody always hears?

Q2276 Mark Garnier: But the evidence is that it is not the case, isn’t it?

Sir Hector Sants: That may well reflect the fact that we still do not have the right set of incentive and deterrence structures within the regulatory environment. For example, I think you have had some hearings on PPI. All of us would agree that any philosophical high-level perception of what went on with PPI would be that it was totally wrong. We made that abundantly clear to the banks for years. They chose to employ lawyers to trawl through the rules of the FSA to try to prevaricate and delay returning to consumers what was due, not because the message was not clear but because they chose to fight us.

The attitude of the banks is one of confrontation. That is about the balance of power; it is not about the clarity of the message that the regulator is delivering. I can assure you that we were very clear that PPI was an unacceptable product. From my period onwards-2008 onwards-they should have been giving restitution to the consumers. They knew that was our view. I think privately they might even have agreed with it, but because they thought they could fight it, they did. We need to understand that clarity of message does not always get the result you want unless Parliament has backed it up with the right level of power, deterrents and enforcement.

Q2277 Mark Garnier: Clarity and responsibility does, though. One of the reasons why the people who run these banks can throw huge amounts of money at legal action is because they have nothing to lose. Apart from anything, they have far deeper pockets than the FSA-that is just the way life works-but if, ultimately, it finds against the banks, the people in charge of the banks are not even interviewed when something goes horribly wrong. They do not even get told that they have been responsible for something until they read it in the newspaper. If the FSA is not holding those individuals to account, even by just beating them up a little verbally, in a private room, like something out of some ’70s cop movie-even something as trivial as that-they are just going to continue to do it because they cannot possibly take the regulator seriously, because, as far as they are concerned as very senior people at the top of these banks, there is no regulatory responsibility for them at all.

Sir Hector Sants: Two points, if I may say so. First, when they said that they did not know anything about it-I still find it extraordinary, by the way-I assume that they were referring specifically to the LIBOR case. We certainly did have meetings with senior UBS executives, including those who were at the earlier session, where we made it clear that we had reservations about their governance, elements of their culture and a whole series of issues to do with their bank. If they had acted on that, it might have improved the chances of them picking up the LIBOR issue.

For example, one of the things that I, personally, communicated to UBS a number of times over the years was the fact that they did not have an effective regional management structure that gave local oversight, and that they were operating as basically an entirely globally run bank, which in my view tends to lead to control problems. So they did have frank conversations with the regulator where they were asked to change some of their structures. Of course, with UBS it was a particular difficulty because we are not the lead regulator and we do not have the natural authority that we would have over a UK bank. So I would reject the idea that we had not communicated to them that we felt that their bank had a series of significant flaws, but the substantial responsibility for changing culture in UBS rests with the lead regulator in Switzerland, not with the UK.

Q2278 Mark Garnier: The structure is your responsibility though, isn’t it?

Sir Hector Sants: Split responsibility in regulation tends to lead to problems-stuff drops between the cracks, and that is a problem. Clearly, it is absolutely right to say that you should be looking to the FSA to deliver effective regulation going forward to the PRA and FCA over British banks, but I think you have to recognise the complexities of regulating the foreign banks-I think that is right.

On your second point, it is a very fair observation that changing some of the powers that govern the oversight of individual responsibilities would make it easier to do things such as put conditions on authorisations; suspend individuals while investigations are going on; maybe make judgments that good or poor behaviours can be taken into account in the authorisation process; set up some form of central register that the industry polices, which I know the bankers’ institute has talked about-all these would be welcome conclusions to be drawn out of this process. However, I am absolutely clear that where we knew there was a clear message to be delivered, I never shirked at giving it. Actually, one of the things I did was try to introduce clear, direct, one-on-one communication between the senior executives of the FSA and the chief executives of the major British banks. I am clear that I did that.

Q2279 Chair: Just to be clear, I find your answers to Mark somewhat unusual, in that throughout this crisis we have seen a good number of people who appear to have been-to put it mildly-incompetent over a sustained period, even if they were ignorant and therefore not guilty of the crime itself. Yet, they are still practising. They are still out there, heavily engaged at a senior level, often as regulated people. Don’t you think this is something that badly needs to be addressed? You hinted at it in a previous reply.

Sir Hector Sants: Yes. I am not wishing to disagree with everything that Mark said; I think we have brought out a number of very important points. I am trying to encourage this line of thought that a clearer mandate to the regulators to take responsibility to address the problems you have described-

Chair: These people need to be struck off, don’t they?

Sir Hector Sants: -a clearer set of powers that they can use unequivocally, and greater clarity, particularly in relation to foreign entities working in the UK, would be extremely helpful. I recognise that we have been very focused on protecting the integrity of the enforcement process. I think that is perfectly appropriate, but it nevertheless creates some difficulties and we do not maybe act as early as we might otherwise because of that.

Q2280 Chair: But it is getting people struck off if they are demonstrably incompetent, well short of what might be considered an enforceable action.

Sir Hector Sants: Correct. That is the problem.

Q2281 Chair: Do you agree with that view?

Sir Hector Sants: Yes.

Q2282 Lord Lawson of Blaby: Just to be clear, as we have not got much time, I would like to make a comment first, which you do not need to answer. I am not at all impressed by your excuses for why the FSA was so slow on the ball. You make excuses along the lines that LIBOR was not a regulated product, and anyhow this was an overseas bank and you were not the lead regulator. I would point out that that applies also to the CFTC in the United States, but they got there much sooner than you did: they were on the ball a lot sooner than you were. Indeed, you probably would not have been on the ball when you were if you had not known about the CFTC investigation.

Sir Hector Sants: I would not agree with that last comment. I could expand if you would like me to, but, for the record, I do not agree with the last comment.

Q2283 Lord Lawson of Blaby: Well, they were on the ball before you were, weren’t they?

Sir Hector Sants: No. The reality-and Thomas can elaborate because he was at the sharp end of this process-was that, as I know you have spent some time discussing, there were a set of press and newspaper articles that occurred in April-May 2008. Within 24 or 48 hours of one of them, roughly at the end of April, there was contact from the CFTC to us. It is perfectly true that they did call us, but that was within 48 hours of the newspaper article. We have a surveillance and discussion oversight process, which was looking at that material. It is not possible to say what would have happened next if they had not contacted us, but it is not a question of us not reacting. They contacted us and we started working with them straight away. A key point, which I am sure Tracey will elaborate on, is that even if the FSA had started its formal enforcement investigations earlier, it would not have changed the finish date of the process. I don’t think that you can describe this as something that we did not look at until the CFTC pushed us along. The process was a joint one from the beginning.

Q2284 Lord Lawson of Blaby: Anyhow, I would like to look to the future, because that is more important, rather than raking over the past. I want to follow up something that the Chairman was saying. It is something that, I must say, causes me great concern. Looking ahead, what is going to be the effect of your judgment on UBS? You fined the bank an unprecedented amount of money. You did not fine any of the individuals. You did not even name any of the individuals: we read about trader A and trader B, and manager A and manager B. There was no sanction of any kind against individuals, and no suggestion that they should not be fit and proper persons or should not be allowed to work in the business.

There are rotten apples everywhere. What do you do as a result of this? They tend to be in bad odour with their employer, so they leave, and go on the books of a head-hunter. The head-hunter may not know about what they have been up to; even if he does know, he keeps quiet about it because he is interested in placing them elsewhere. The net effect is that these rotten apples are distributed among the system as a whole, so in fact you are doing positive harm: you are risking infecting the culture of, in this case, investment banking on a much wider scale. This is a serious problem that needs to be addressed, isn’t it?

Tracey McDermott: I may be the right person to answer that. People are not named in the notice for legal reasons. There are ongoing investigations into a number of other institutions and into a large number of individuals, including a number of the individuals identified in the notice, both by us and by other authorities, including criminal authorities. This is not the end of the LIBOR story-it will go on for some time-but clearly those investigations have to run their course.

Q2285 Lord Lawson of Blaby: Well, I am not sure. You have the power to name them, don’t you?

Tracey McDermott: If we were to name individuals within the context of this notice, they would get what are called "third party rights" under the legislation. It means that they have the ability then to challenge the notice through the disciplinary processes that are private for the first part through the RDC process, which you may have discussed previously, and then on through to the tribunal. If people are given third party rights, that would extend the period for probably two to three years before publicity actually comes out. It would not speed the process up. What we do have the right to do obviously, if we take disciplinary action against individual people, we can-and we do-publish that material.

Q2286 Lord Lawson: That is what I am talking about. You have the power to discipline individuals, don’t you?

Tracey McDermott: We do, but cases against individuals typically take longer because they are typically contested, and people typically and quite properly take advantage of the rights that are available to them to put forward their side of the story, both in terms of our investigation and in terms of going through the formal decision-making processes through our own committees and through the tribunal.

There are ongoing investigations into a number of individuals. Clearly, you cannot pre-empt those investigations, whether criminal investigations or regulatory investigations, by saying before they have concluded the names of the individuals concerned.

Sir Hector Sants: What would be helpful would be at least to give the FSA power of suspension. To be fair-I am sure that Tracey can elaborate in more detail-you have to be careful about whether you use that because, in itself, it is alerting the firm and the individual to the investigation going on. Sometimes, it is not a good idea to alert them to the fact that there is an investigation, for obvious reasons. Nevertheless, I agree with you, as I do on the earlier point, that it is unsatisfactory that there is not the option to suspend while the investigations are pending.

But I am sure you appreciate Tracey’s basic point that it serves regulation and the system well to get a case out early or as soon as one can against the firm, and then follow up with individuals rather than spend years and years-and you will be aware of some examples where individuals take a very long time. I encourage the Committee to look at the issue of suspension powers.

Q2287 Lord Lawson: Yes, Ms McDermott is explaining the system as it now is. What I am really asking you is whether that is satisfactory. Given the problem of the rotten apples continuing to be in the banking business, and indeed to be infecting a large number of other banks, does not something need to be changed in the regulatory supervisory system? That is my question.

Tracey McDermott: If someone moves firm or is fired by their current employer and if they are to hold an approved position, again they do have to apply to us. Clearly, all of the intelligence that we have on individuals-all those involved in this case and others-is on our system. In order for us to approve somebody again, we would have to be satisfied that they are fit and proper, and we have the evidence to take into account.

The difficulty arises when someone does not change jobs or does not need to apply for approval, which is only when you get to the end of the process. That is the only point when you can actually stop them at it. The question of whether you should have an ability to suspend, which would obviously also have to have checks, balances and protections around it for the individual, pending the outcome of an investigation, is important.

Q2288 Lord Lawson: Any of the individuals who you indentified in your investigation into UBS-

Tracey McDermott: Sorry?

Q2289 Lord Lawson: In your final notice, you referred to a whole lot of individuals: trader A, trader B, trader C, manager A, manager B, manager C. Have you taken action of the kind that we have just been discussing against any of them?

Tracey McDermott: We have ongoing investigations into a number of them, as do a number of other agencies. I do not think that I can comment further than that, pending those investigations.

Q2290 Lord Lawson: There is also this other thing if they apply for another job.

Tracey McDermott: Yes.

Q2291 Lord Lawson: Does that apply to any of them?

Tracey McDermott: Yes.

Q2292 Lord Lawson: And you have said something, have you?

Tracey McDermott: Yes.

Q2293 Chair: But a good number of these people are still satisfying the terms of the approved persons regime, are they not?

Tracey McDermott: Yes.

Q2294 Chair: Therefore it strikes one that, since they have just acknowledged in front of us-this is the best construction they were able to place on their actions-that they were ignorant and grossly incompetent, they should not be on an approved persons list. Do you agree?

Tracey McDermott: It is very difficult to comment, not having seen or heard the evidence. In relation to the specifics of the misconduct set out in this final notice, we did not find evidence that those people were implicated in this. On the question of their responsibility and the competence of their responsibility, it would be very interesting to look at what they said.

Q2295 Chair: It takes us back to Nigel Lawson’s earlier question: have we got the right structure for the approved persons regime? Does it need tightening up? Do we need to shorten the two to three-year period while maintaining, clearly, the rights that an individual deserves in these cases?

Tracey McDermott: Our original submissions to the Commission raised a number of questions around how we make the approved persons regime work more effectively, and it is certainly something that has been considered very carefully in the context of the future FCA. There was a question earlier about what the FCA will do differently to try to prevent things from happening.

The focus on senior management is something that we have talked about a lot in the FSA but we have found it very difficult to bring home the responsibility, particularly in larger firms, to those who are further up because of confused lines of accountability and because of confused responsibility. One of the things we are doing in the FCA, and I am sure also within the PRA, is to say, "How do we make that work better?" One of the things we have done recently, for instance, is when we ask somebody to undertake remedial work-often after a supervisory visit you will identify problems and you will say, "You need to go away and fix that"-we have said, "We need to know the name of the person who is responsible for fixing that." They give us the name of that person so that if it is not fixed we already start from the position that we know who is responsible.

So there are small steps we can take within the existing framework, which we have started to do. There are also bigger policy questions about the degree to which you are looking at having to have direct culpability or whether you have, to the point that has been made, more taking of responsibility even when you are not directly involved. Those are definitely things that are being looked at in the framework. From a conduct-specific perspective, there will also be-I think there probably has not been as much of this over the past few years-direct engagement with senior management on conduct-related issues. That means direct engagement at CEO and board level on things that are related to conduct, whether retail or wholesale.

Sir Hector Sants: To pick up a point that was made in earlier sessions of the Treasury Committee, which I think is important, in the last few years I am absolutely confident that the FSA has been seeking to hold senior individuals accountable. That is entirely reasonable, like all the general sentiment being expressed around the table, which I do not disagree with; I am entirely in agreement with you. The FSA has found it very, very difficult. In addition to the small points being mentioned, I think the biggest issue is on the authorisation point. If you have been a senior executive associated with a major failure, to use that phrase rather incompetently-it could be a prudential failure, and the issue came up in RBS, but it could also be a major conduct failure-the presumption has to be going forward that you have to prove why you are still fit and proper rather than the other way round.

Chair: I am going to have to cut you short, Sir Hector, not because it is not very interesting to the whole committee but because we are very short of time. Given that you are now no longer in the FSA, you can give us a view without having to carry any institutional baggage, and we would be very grateful if you would put that to us in detail in writing as soon as possible.

Q2296 Lord McFall of Alcluith: Sir Hector, you rightly said that the attitude of banks regarding PPI has been one of confrontation, and we found that out yesterday. I am very much aware, because I was involved with you, in your interest in culture and ethics at the FSA, and bringing that on to the agenda. Indeed, your last speech at the FSA was on culture and ethics. It is against that background that a number of people, in the press and otherwise, have found it surprising that you have taken on the job of compliance officer with Barclays. Damian Reece in the Telegraph said "it’s just more of the same people complicit in London’s failings as a banking centre shuffling seats" and others have said it is a cynical move by Barclays.

But Barclays was at the centre of so many issues when you were in charge of the FSA-for example, you called into question their competence to act as a bank, leading to the resignation of Bob Diamond. You fined them £24.5 million in 2006 for misreporting 57.5 million transactions to the FSA, despite the fact that an internal review which they undertook the previous year only discovered 17 million. You also were aware of their breaches of the client asset rulebook in their fiduciary duties and their PPI mis-selling-by the way, the FSA found Barclays in 2011 to be the most complained-about bank in that regard. There was also fund mis-selling and issues relating to Abu Dhabi, Nigeria or wherever. This is a catalogue, Sir Hector. What I want to know is, given your genuine interest in culture and ethics-as you know, I have supported you as chief executive of the FSA and I would like to have still seen you there today-how have you satisfied yourself that your move is ethically appropriate?

Sir Hector Sants: Really, it is for the reasons you have just articulated. Barclays is a great British financial institution. It is at the heart of the financial system. It touches a large number of consumers, a large number of the population and the economy. It is vital that institutions of that size, impact and reach are well run institutions who have a set of values, who recognise that what matters is that they contribute to the community and are not there just for their employees, or indeed, even just for their shareholders. It is vital that they are run in a different way in the future. As you rightly point out, I have spent the last five years thinking deeply about these issues. I have always sought to learn from the many searing experiences I have had, and I think I can bring to that institution great insights in how to help them.

I believe the new management team, the new chairman, the new chief executive, Antony Jenkins, is absolutely committed to change. I would not have gone there if I did not believe that they are absolutely committed to change. I believe that I can help them to take forward that change agenda. Unless institutions like Barclays reform themselves dramatically, we are going to have these problems again. You have read out the litany of their failings in the past. They’ve got to change. The point I was trying to make in my opening comment was that it is not enough just to change the regulators. We can change the regulators, I entirely accept that, and the regulators can learn a lot from what is happening in the last five years. I also entirely accept that. But these banks have got to change. One of the key issues that has to change is the culture, the behaviour and a credible compliance oversight process, and I think I am going with the intention of doing that. If I can do that then I think I will make a very significant contribution to the system.

Q2297 Lord McFall of Alcluith: Sir Hector, that would have more force if you were going as chief executive or, indeed, if you were going as a board member. You have emphasised in many speeches that it is the tone at the top that matters, and it has to go down. Now, you are not on the board. So how can you, or how have you, satisfied yourself that the board will listen to what you have said, particularly in light of what Mark Garnier said about the previous compliance officer in Barclays? There is a big degree of cynicism as to how that will be effected if you are not on the board.

Sir Hector Sants: There are a couple of points there. First, when people look at the FSA’s track record and discuss what has happened over the last five years, for entirely understandable reasons they focus on the financial crisis and events surrounding that. But in doing so they also overlook the fact that as the chief executive of the FSA, one of my principal roles, as I mentioned earlier, on which I spent a large percentage of my time, was driving operational change. Nobody can deny that I successfully restructured the FSA on target, on time, on budget, which in the public sector is very unusual, in the middle of one of the world’s worst financial crises. That is a major achievement. I think I have an absolutely proven track record as a very successfully operational manager. I created a number of businesses before I went into the FSA in that respect. I like operational management. I am really looking forward to working with Antony and his executive colleagues to drive forward operational change in Barclays, which I think is absolutely needed.

I agree, operational change in itself will not solve the problem. Too often, people sit in front of you and talk about the risk committee is doing this, the numbers say that; and that in itself is not sufficient. Clearly for Barclays to change and deliver it will need a board that is also driving and taking ownership. I have spent time with the chairman, who I know. I have spent time with other board members in that process and I believe that they are absolutely committed to that change. I am going to do what I think I do best, which is drive operational change, but it will only work if the board supports me. Not everybody in this world wants to be on a board. I like doing operational change; that is what I am good at. I am an operational manager.

Q2298 Lord McFall of Alcluith: I asked UBS yesterday if they would implement an ethics and culture hotline to their board, which they have not had before, which, first, is independent; secondly, goes to the board so that it becomes a matter of board discussion; and thirdly, preserves the anonymity of people. Would you, as a gesture today, indicate that you will recommend something like that to Barclays so that it is indeed at the top? In doing so, could you describe what your definition of culture and ethics will be to this new organisation?

Sir Hector Sants: On your first point, yes. That is a very good idea. I think that, generally-I am not on the board but I am certainly intending to give input on how the board can drive the required culture and ethical changes. I know of one of the ideas that is under consideration, which is something that, again, I like to think my successors in the FCA will give consideration to. It would supplement what you are describing. Historically, boards have operated, for understandable reasons, with far too much focus on prudential risk. They have an audit committee and a risk committee, but if you go to a classic risk committee it is mainly about prudential risk, balance sheet risk. I think that there is now a strong argument for setting up some form of conduct and operational risk committee of the board, which the compliance officers, as members of the executive committee-I think that is important, by the way-account to. The risk committee then focuses on balance sheet risk and we get a process that ensures that boards spend far more time on the culture and ethics question.

How do you drive good culture and ethics? Very briefly, I think that, first, you need the right values. I do not subscribe to this shift to saying that it is all fine if we only think about customers. Actually, a lot of things have been done wrong in banking when it was said that it was to the customer’s advantage.

What you want is a bank that is committed to serving society and the community as a whole, which has a set of values outside that just of its customers and employees. You need the right set of values. You need leadership from the top, I agree, that lives those values; you need the right set of incentives, and the incentives to drive those values are still not right in terms of compensation and so forth; you need the right deterrent structure inside the bank as well as outside the bank; and you need a far greater engagement of the board with these issues, and a far greater engagement from the regulator than we have seen historically, actually. As you rightly point out, I sometimes feel that we, the regulator, have not spent enough time on culture and ethics in the regulatory environment, and I worry a bit that twin peaks might be a casualty of that. I would encourage the regulators to continue with their agenda.

Chair: One last quick question and a quick reply, please.

Q2299 Lord McFall of Alcluith: Given that you have intimate information regarding all Barclays’ competitors, how would you respond to the accusation that you might be compromised?

Sir Hector Sants: I am definitely not compromised. There is a statutory period where you are not allowed to work for a competitor, which has been set up by others as the correct period to enable the information that you had before to become irrelevant. I have passed that period; indeed, I will be a month past that period before I start at Barclays. That is obviously a judgment that the system makes, but I can tell you absolutely that I do not have any such information.

Secondly, however, I think that both the FSA and I, and Barclays, were aware of the fact that there are some "ongoing cases"-I use that phrase loosely-between Barclays and regulator which I was involved in the initiation of. I have obviously had no involvement with them for last seven months or so, but I have made clear when at Barclays I will not involve myself in those cases despite the fact that, actually, I have no information that is not already in the public domain in relation to those cases. But we are all collectively aware of the perception that that might cause.

I understand why people raise the questions, but I think that the safeguards are in place and we have been very thoughtful about ensuring that we put some additional safeguards in place.

Q2300 Chair: Sir Hector, this issue has been raised with me privately by a number of people and there is one aspect of it that you have not covered in your reply. You have said that you have put in place safeguards to deal with specific cases on the conduct side, and I think that it would be helpful if some clarificatory letter could be provided to set that out for us in a little more detail.

Sir Hector Sants: We can do that. Maybe the FSA could send that letter.

Chair: I think it would probably come from Barclays, actually.

Sir Hector Sants: That’s fine.

Q2301 Chair: There is also the prudential side. You have had access to information about the strengths and weaknesses of the balance sheets of Barclays’ competitors. Has careful thought been given to that issue? After all, that doesn’t suddenly expire after six months.

Sir Hector Sants: First, I accept that I will be joining Barclays in the senior management team, but the particular focus of my work will not be on prudential balance sheet issues. I entirely take the point that I will be joining the executive team of Barclays, but the statutory period set in place by others, which has been judged sufficient to allow the value of that information to decay to nothing, has elapsed.

Chair: You are repeating yourself.

Sir Hector Sants: I genuinely do not believe that I am party to any confidential prudential information relating to Barclays’s competitors.

Q2302 Chair: We only have your word for that. I am sure your word is worth something, but I am just pointing out that that is all we have for that important issue.

Sir Hector Sants: To seek to give you greater reassurance, I would have to ask what sort of information people had in mind that I have and that would not have decayed away. I cannot see what that would be, but I am happy to have that discussion.

Q2303 Chair: I think one can construct hypothetical cases quite quickly. I think you could do so in your mind, particularly with respect to transactions. However, I am not going to develop the argument now.

Sir Hector Sants: I can absolutely assure you that I am not aware of any information that I possess about Barclays’ competitors that would be of value to Barclays and is not in the public domain.

Chair: It has been raised with me, and I felt I should raise it with you, as did John McFall.

Q2304 Baroness Kramer: I have to go back to the core of what today’s hearing is, which is the LIBOR issue and the FSA’s response to it. This was a crisis that, frankly, did not just bring London’s financial services into disrepute, but threatened London’s role as a major financial centre. We have had enforcement against two banks, but most of us expect that further banks will be brought into the frame. Who knows whether it will be a worse story when those issues come out? There are going to be civil actions in the United States and possibly elsewhere that will have huge implications. All of this will have great ramifications for ordinary people and ordinary companies in this country. It is a hugely serious issue. The action taken by the FSA seems very small in comparison to the consequences that will eventually have to be borne by the British public and British companies, which will have global impacts. I want to pursue that.

Earlier, Sir Hector, you explained why it is extremely difficult to find the kind of traders, such as Mr Hayes and others, who exploit their position to benefit themselves and their friends. The threat to LIBOR’s reputation has been far more than the institutional use of LIBOR to adjust their companies’ reputation in the market by altering their submissions on a daily basis. You were aware of that. Barclays first reported instances back in September 2007, if I am correct, and raised the initial sets of issues. The newspapers were certainly on to the issues by the time we got to April 2008. And yet the pace of investigation and the level of response seems to have been quite modest. All of us think that, there but for the CFTC, God knows where this might have gone before there was really serious regulatory response.

Could you explain why the CFTC took the lead when it was so clearly an issue whose implications were far greater for London than for any other financial centre? What happened in the next two years before the FSA finally got serious about this in 2010?

Sir Hector Sants: As you rightly point out, there are two different strands to the discussion of the events of the past. The first we have covered exhaustively, which is how supervision, and therefore the ability to detect wrongdoing, works. The second is what I think you are asking me to elaborate on, and I will briefly touch on your ’07 comment. Once you have identified the potential for what I would call wrongdoing, how quickly do you to move to effective enforcement and remedial action? They are two separate things.

Baroness Kramer: Let me interrupt you just-

Sir Hector Sants: I was going to answer your question.

Q2305 Baroness Kramer: I want to interrupt you very slightly, because there is this notion that it then takes a long investigation. Perhaps it takes a long time to get the precise details, but there are so many quick mechanisms that will tell you whether LIBOR submissions are reasonable or not. You can do it by simply looking at what the traders are offering. Within the organisations, you have traders who are raising the issue and are saying, "Our three-month LIBOR rate is in fact 2.281%. Why are we not submitting that when they are submitting it to LIBOR?", and it is not a long process to know that there is a fundamental problem. Pinning it down to individual people at organisations may take much longer, but knowing that there is a serious problem does not take very long.

Sir Hector Sants: I am afraid I think it does. We may disagree there. On your first point-I am just telling you the facts; you can make your own judgments on them-the facts are that the FSA was not aware of the potential of low-balling or any form of wrongdoing, including the actions of individual traders, in the period of late ’07, early ’08. The material that was around at that point was seen as reflective of the marketplace being dysfunctional, because very little activity was taking place. The action that was taken on that was the BBA doing a review of how the setting mechanism was constructed. As we all discussed before-I will continue to answer the question-there is no question that one of the weaknesses here was that the setting mechanism was not regulated.

Q2306 Baroness Kramer: Let me interrupt you again, because we are pressed for time. I am sorry to do it; I would normally let you finish. When we had UBS in front of us, we were just astounded, frankly. Here we had senior people, who were worried about the creditworthiness of their company on a daily basis, attempting to convince the market of their creditworthiness. We said to them, "Surely you can see that it would be very unlikely under those circumstances that you made one of the lowest possible submissions of LIBOR rates. The differential between what you were facing in most markets and what you were proposing as your LIBOR submission was a very wide gulf." If that was beyond those particular individuals to grasp, it certainly was not beyond the FSA or others who were watching the markets to grasp.

Sir Hector Sants: The people who were watching the markets in terms of the individual submissions were the BBA. It was the BBA’s job to alert us or the Bank of England. The Bank of England was also part of this process. It was interesting, as you know, that the Bank of England never told us about the Fed’s discussion with it in March ’08. The BBA did not alert us to potential wrongdoing.

I will answer your main question; otherwise you might feel that I am avoiding it. I am explaining why the FSA was not taking action in late ’07, early ’08. I entirely accept that we then had a set of press commentary, which did not specifically-Thomas can elaborate on this-imply wrongdoing. It hinted, possibly, at low-balling and a dysfunctional market. Those articles come out, as you rightly point out, in April or May ’08, which was when the BBA was doing its review of the setting mechanism, into which the FSA made a number of specific recommendations to tighten issues up. The BBA did not take all of them up, which reflects the problem of the market being regulated.

I am afraid, as I said before to Lord Lawson, I do not accept that you can assert that if it was not for the CFTC, the FSA would not have taken this issue forward. Those conversations occurred within a day or two. It is impossible to conjecture what would have happened if they had not contacted us, because they were basically happening at the same time. Thereafter, we started to look into the matter.

Where I need to clarify, and where Tracey can elaborate, is that it is not easily possible as the FSA to spot either low-balling or wrongdoing without a substantial amount of data. It is not like a traded equities market, where we can reach into the market and extract data with regular ease. It takes months to collect data. Initially, the understanding was that this potential problem was focused on US dollar LIBOR, so it is true that initially we focused on banks in that respect and then widened the investigation out during ’09. It is reasonable to say that perhaps we could have looked at all the currencies straight away, but the idea that we could have quickly worked out that there was something wrong, is just not right, I’m afraid.

Tracey, perhaps you would like to explain what was going on in enforcement over this period. They were working with the CFTC in collecting the data for the CFTC. It was not the CFTC doing something over there and us doing nothing over here; we were at the sharp end of that process. It would have been an unnecessary duplication for us to send out duplicate requests.

Tracey McDermott: There are two slightly separate things here as well. There were discussions with the CFTC in about April, which were focused on the articles, which were also focused on the BBA review. The CFTC at that time had very little sight of how LIBOR worked. There was then contact in June of that year with enforcement directly, and one of the things we did was have a three-way conversation with the BBA and the CFTC, so that they could get a greater understanding of that process.

The first formal requests that came through, which came through the FSA to the banks, were coming through in November and December of 2008. They were asking for huge amounts of data, and as Hector said, there were huge amounts of data about what banks’ submissions were. You will be well aware that there are 15 different tenors-15 different lengths-so each bank is producing thousands of lines of data in relation to the submissions and also the transactions they were doing. The initial focus was to see whether you could see from that data whether there are obviously anomalous submissions along the lines that you would think. In fact, ultimately, that was not really what revealed the wrongdoing.

What revealed the wrongdoing was separate work that firms were also required to do, starting with Barclays. The focus was initially on US dollar in 2007-08 and looking at the communications and the internal correspondence at the time. Talking about UBS in particular, they started that process a little later. They produced, at the beginning of this, something like 1.2 million documents for us-about 6.6 million pages of e-mails, chats and so on. They had culled that from their review of about 10 million pages. We have also had a review of about 40,000 to 50,000 audio calls from brokers.

These are huge exercises. It is a bit like looking for a needle in a haystack, when you start the process and try to refine it down. During 2009, there was a lot of data being gathered, which was coming to us at the same time as the CFTC. As I said, towards the end of ’09, Barclays started identifying some of the suspect communications. That is why Barclays was the first one formally moved into what we would call a formal enforcement investigation. That is when the first interviews started taking place. No one-the CFTC, the DOJ, the SEC-had done any interviews until that point, when we all did them together. There would have been no quicker process to get to that stage, because that internal analysis of the data had to happen.

In April 2010, there was then a requirement for all firms to do a more detailed review of their communication-initially focused on US dollar, because that was where the problems were perceived to be. It was through that review that UBS identified issues in relation to yen LIBOR in late 2010 that led on to this investigation. It was not the case that we were sitting back and waiting. It was not the case that we were not engaged in the process.

Sir Hector Sants: It was us who primarily widened it out from US dollar LIBOR. As I think Tracey is explaining, we cannot emphasise enough that the data in themselves are not easily retrievable with a quick judgment. When we widened it out, we had Ernst & Young do a substantial data-gathering exercise, and I think they discovered four instances of possible sterling LIBOR problems-a handful of them. It is not something that we could quickly have reached a conclusion on. We put pressure on the BBA to improve its setting mechanism. We have to ask the question-if we had been casting doubt in the middle of the financial crisis on the quality of LIBOR without credible information, that in itself would have been a very serious action to take.

The idea that somehow or other the CFTC were doing stuff and we were doing nothing is not true. The idea that you could quickly spot it is not the case. The idea that we did not commit significant resources from the FSA is not the case. By the end, we were using something like 15% of the enforcement resources. It was the biggest enforcement investigation that the FSA had ever mounted. We were doing it against the backdrop of a major financial crisis, in which the majority of our supervisory resource was deployed on prudential matters, and we were trying to reorganise the FSA and split it up. We took LIBOR very, very seriously.

Q2307 Baroness Kramer: Well, let me ask one question and then I shall let others come in. I just want to understand this, because we heard the same argument coming from UBS: "There was such a financial crisis that we weren’t going to say anything and disrupt the boat. The most important thing was to keep up our reputation in the market and prevent financial collapse." I am hearing, in a sense, almost the same from you: "There is a financial crisis, so we had better not raise an issue"-

Sir Hector Sants: No, I’m saying we used 15% of our resources9, which was a huge amount. At the time, we were very stretched. Thus I am demonstrating to you how importantly we took it. Also, it was almost, I think, the only enforcement action that I have ever notified Government and Treasury about when we started taking it. I wrote to them and said, "We’re taking this action." It was in March or April 2010 that I wrote and told them. It was pretty much the only enforcement action that I have alerted them to, because of the seriousness with which we took the matter, so I think the suggestion that we did not take it very seriously is not in any way grounded in the facts.

Chair: We are very pressed for time. Andy Love has three quick questions, and then I am going to bring in Justin Welby.

Q2308 Mr Love: Let me start by following on from what has just been said. I take the point about how seriously you took it, but at the time of the Barclays LIBOR issue, there was a lot of comment about the fact that the whole thing had been driven by the CFTC and the comparison of the level of fines between the US and the UK authorities. That same discussion is emerging once more. How do you defend the position of the FSA in relation to those issues?

Sir Hector Sants: I will ask Tracey to elaborate, but just on fines, very briefly, it has been a consistent approach of mine, during my time at the FSA, to seek to change the FSA’s regime so that its fines would increase in size. Those changes were brought in, I think, in 2010, so any offences that occur after 2010 are likely to lead to much higher fines. So I entirely agree with you: I think the deterrence element of the historical approach of the FSA was not sufficient for this type of wilful wrongdoing. I think we do need to be very clear about the distinctions between different types of regulatory action, but I’m talking about the fact that people ought to believe that if they are wilfully engaged in conduct wrongdoing, they have a reasonable chance of being caught, and that if they are caught, the sanction is significant, both to the firm and to the individual. Tracey.

Tracey McDermott: I think in relation-

Chair: Briefly, if you would.

Q2309 Mr Love: Perhaps I can cut the discussion short. Can you write to us with a response? I think that you are using an old regime, as Hector has said, and the new regime is significantly greater. Could you lay that out for us?

Tracey McDermott: In relation to the penalties-

Q2310 Mr Love: It would be good to have an explanation of why the CFTC seems to have been pushing very much harder than the FSA. That would appear to be the case.

Tracey McDermott: I am happy to do that.

Q2311 Mr Love: Can I move on? Sir Hector mentioned earlier that of the 40 people who were responsible for what happened at UBS, nine of them are in the UK, but we are told that only three individuals have been arrested by the Serious Fraud Office. Can you tell us what is happening in relation to those nine individuals?

Tracey McDermott: As I said in response to an earlier question, we have a number of ongoing investigations in relation to individuals, as does the SFO. We do not, as a matter of policy, announce who we are investigating before we-

Q2312 Mr Love: Can you tell us how many you have referred to the SFO?

Tracey McDermott: We have not referred specific individuals to the SFO. The SFO is investigating the LIBOR matter and therefore will be looking at all individuals who are involved in this, as are the DOJ and as are we. Ultimately, who takes forward action against different individuals will depend on what the evidence shows in relation to them-whether the right outcome is a potential criminal outcome, a regulatory action or, indeed, no action at all. That is a process of investigation which is being gone through.

Q2313 Mr Love: Can you elaborate on how many you think will be subject to serious fraud charges and how many will face penalties and possible exclusion from the industry?

Tracey McDermott: It is incredibly difficult for me to do this. I do not want to be unhelpful, but there is an ongoing criminal investigation and I do not want to say anything here, speculating about what the conclusion of the investigation might be, that might subsequently prejudice any prosecution. I can assure you that the Serious Fraud Office are taking it very seriously. We are in liaison with them on a daily basis, at a working level and also regularly at a more senior level. We are also taking it seriously. I am very wary of saying anything now suggesting that the outcome of those investigations is pre-judged.

Q2314 Mr Love: There have been reports that the Department of Justice in the United States wants to extradite someone from the UK. Can you confirm that that is trader A, and that you would prefer for them to be prosecuted in the United Kingdom?

Tracey McDermott: I can confirm that the Department of Justice has indicted two individuals. Their names are in the public domain, because they are in the charges from the DOJ: Tom Hayes and Roger Darin. I can confirm that Tom Hayes is a UK national. Whether or not an extradition request is made is a matter that will be discussed between the prosecutors-the DOJ, the SFO and the Attorney-General-and I do not think that I can comment further.

Q2315 Mr Love: Are those two individuals being investigated in this country?

Tracey McDermott: I am afraid I cannot comment further than I have already done.

Q2316 Mr Love: One final question to Sir Hector. You have now left the FSA. We could almost see you blooming as you came before us. I wondered about your experience of what will turn into the FCA, primarily. There are a whole series of changes being brought in that will assist to address some of the FSA’s shortcomings. You have laid out here today that you would like to see suspension powers as an additional role for the FCA, presumably. In terms of the culture and the robustness of the actions that the FCA take, do you have any experience that you would like to share with this Committee about where it should be looking to ensure that the FCA is adequate to the task that is being set for it?

Chair: A very brief response, please, and follow up in writing if you would: if necessary and if you can obtain permission, as an individual rather than from Barclays.

Sir Hector Sants: If I can write within the next few weeks, I am not employed by Barclays, so I am sure it is fine.

First of all, I think it is very important that both the FCA and the PRA have culture at the forefront of their supervisory process and seek to reach a view, when they are thinking about whether the firms they are overseeing meet their statutory objectives, whether the culture is aligned with delivering those goals. One of the historical problems is that that sort of question was not asked. I think there has been a reluctance to ask that question, because people have been nervous about a regulator specifying what a good culture is.

As I have said, it is difficult to say necessarily that it is the regulator’s job to specify a good culture, but it certainly ought to at least work out whether there is a culture, and whether the culture adopted will deliver the right outcomes. It needs to be much more embedded in the supervisory approach, and a lot more work needs to be put into ensuring that firms have total commitment to deliver on those values, as we discussed earlier, from the board right down to the bottom-level employee, so that they are not just another set of statements.

I think there is a lot of work, and I do worry. The focus in the last five years, for all the understandable reasons, has primarily been on prudential: on rules, which were inadequate, as we know, and on prudential supervisory practices, which were inadequate. They have changed, but I think there is a severe risk that we do not also change the conduct approach and the conduct powers. It is a different set of issues that we have been talking about, and they need to be addressed. I will be delighted to write and expand on that if you would like me to.

Chair: Thank you.

Q2317The Lord Bishop of Durham: Ms McDermott, when UBS were giving evidence earlier and reflecting back on what they had learned from the disasters of the period leading up to 2008, 2009, 2010 and the scandals, they identified a number of things that should have raised their suspicions that things were not going well. Very briefly, what would be your list of things that would raise your suspicions and make you focus more closely on a particular institution? I am referring to culture and standards rather than balance sheet or leverage.

Tracey McDermott: I think one of the key things that we have said we need to look at in the FCA world is that we need to have a much clearer focus on where people are making their money. Ultimately, one of the things that drives bad behaviour is that people think it is a way of making profit. If you look at PPI or if you look at LIBOR, it is driven by that. As a conduct regulator, we need to be much clearer about where the firm’s money is actually being made, and then we need to be looking very clearly at whether there is adequate control around that.

The other thing that I would say is a series of red flags-it was demonstrated by UBS, but also by some other firms-is a series of serious failures in different bits of the business. Some of them may not individually be massively significant, but what does that say about the culture if people in quite disparate parts of the organisation can basically get around the rules? Something that Hector said earlier is actually very important, which is that the focus should not be on what is compliant with the rules; it should be on what is the right thing to do. The red flags are partly around looking at money and partly around looking at senior management, not just in the sense of formal governance, but in the sense of substantively what they do on the ground. It is looking at whether problems are arising around the business that, when you put them together, give a picture of something that is not being run in the right way.

Q2318 The Lord Bishop of Durham: The comment you have just made about not looking at what is legal but at what is right was first made, to my knowledge, in a DTI investigation in 1982. It does not seem that the regulators have learned a lot.

Tracey McDermott: I am afraid I do not know about the specific DTI investigation. Obviously, here I have two different hats. When I look at this with an enforcement hat, I am looking at what is legal-compliance with the rules and compliance with the principles-because that is about disciplinary action.

Q2319 The Lord Bishop of Durham: But I am asking you what would raise your suspicions.

Tracey McDermott: In terms of the wider question, it is about looking at what is right. That is something that is driven from within the firms. One of the examples, when the Treasury Committee looked at the Barclays case, was that when people were constantly pushing something to the limits, it is an indication that people were not looking for what was right; they were looking for what they could get away with, for want of a better word. Perhaps if that was mentioned in 1982, we have not learned as much as we should, but it is certainly something that we are very focused on.

Q2320 The Lord Bishop of Durham: Finally, there is one word you have not used, which has come out in several of our more recent sessions and, in particular, constantly with UBS, as they reflected back. Is it essentially that the bank was simply too "complex" to manage? Would you not consider a complex organisation something that you should approach with an immense amount of suspicion?

Tracey McDermott: One of the things that I mentioned earlier was the need to have clarity of responsibility in terms of who is responsible for what. A complex organisation is not of itself problematic, provided that there are clear lines of responsibility and accountability in how those fit together. I think that that is an area of focus.

Chair: We are all extremely grateful to the three of you for coming in. I apologise that the session was not only delayed, but somewhat curtailed-particularly to Dr Huertas, who has had less of an innings than he might have expected. We look forward to receiving a number of further pieces of evidence in writing.

[1] Please see the published letter from Jerker Johansson dated 17 January 2013. Ev 1565

[2] Witness correction: I would clarify ‘The people at the bank are neither worse nor better, but there was obviously an environment’ to read ‘The people at the bank are neither worse nor better, but there was obviously an environment due to the financial crisis’.

[3] Note by witness: I would like it to be noted that I did not finish my response as I was interrupted by the Chairman.

[4] Note by Witness: I would like to clarify that I did not mean to suggest, when acknowledging Baroness Kramer that I agreed that a “systemic daily low balling of the LIBOR rate” was the “standard operating procedure” in March 2008.

[5] Ev 1613

[6] Ev 1613

[7] Note by Dr Rohner: I would like to point out that Chairman paused, but I did not give any reaction.

[8] Please see the published letters from Huw Jenkins, Jerker Johansson, Marcel Rohner and Alex Wilmot-Sitwell dated 15 January 2013, 1 February 2013, 18 January 2013, and 18 January 2013 respectively. Ev 1564, 1565, 1609, 1613

[9] Note by witness: I would like to clarify that I was referring to the FSA’s enforcement resources.

Prepared 18th June 2013