Banking StandardsWritten evidence from the Financial Services Authority

This memorandum is prepared in response to the requests directed to Tracey McDermott from the Parliamentary Commission on Banking Standards (“the Commission”) during the oral evidence taken on 10 January 2013 from Sir Hector Sants, Tracey McDermott and Dr Thomas Huertas.

The Commission’s requests were subsequently clarified by Mr John Sutherland on 21 January 2013 and are set out below with the FSA’s responses:

The Differences in the FSA’s Financial Penalty Regimes

1.1. Details of the penalty policies that applied in connection with misconduct that took place before 5 March 2010 (“the Old Policy”) and on or after 6 March 2010 (“the New Policy”) have been previously provided as Annexes A and B in our response of 18 January to the Commission’s questionnaire on sanctions and the approved persons regime (“the 18 January Response”).1

Why the fine levied by the CFTC was larger than the FSA’s fine?

2.1. The US and UK authorities operate different penalty regimes. Under the Financial Services and Markets Act 2000, the FSA is required to publish its policy on how it sets penalties (as set out in more detail in the 18 January Response and its accompanying annexes). The CFTC’s financial penalty regime is prescribed by the Commodity Exchange Act (“the CEA”). As a result, the basis for imposing penalties is different.

2.2. In considering the level of the financial penalty to be applied in the UBS case, the Old Policy applied because the majority of the relevant misconduct occurred before that date.

2.3. The Old Policy provides that the level of financial penalty (if any) that is appropriate for the misconduct is determined after consideration of all of the relevant circumstances of the case. The non-exhaustive list of factors (as detailed in Annex B to the 18 January Response) include deterrence, the seriousness of the breach, the extent to which the breach was deliberate or reckless, the amount of benefit gained or loss avoided, the size and financial resources and other circumstances of the firm, the conduct following the breach and other action taken by the FSA. There is no formal weighting of any of the factors; rather it is an assessment in the round.2

2.4. The Old Policy also requires penalties in other comparable cases to be considered. Plainly, the FSA’s action against Barclays in relation to breaches of a similar nature was a directly comparable case and one to which the Old Policy had also applied. In determining the penalties of UBS and Barclays, the FSA also assessed the apparent LIBOR misconduct of other firms that were at earlier stages of the FSA’s enforcement processes. The FSA also considered the LIBOR misconduct by reference to other previous disciplinary cases. Our conclusion was that the misconduct in connection with LIBOR was significantly more serious than any previous case and therefore penalties significantly exceeding any previous penalties were appropriate.

2.5. Comparing the UBS case to Barclays, a penalty of £200m was considered appropriate and proportionate. Because UBS did not settle until the second phase of the settlement discount scheme,3 UBS received a reduced discount of 20%, ie a financial penalty of £160 million.

2.6. As with UBS, in determining the Barclays’ penalty, the factors outlined under the Old Policy were considered. As to comparable cases, it should be noted that the Barclays penalty was approximately double the previous highest penalty that the FSA had imposed on a firm.4

2.7. Finally, although only a few penalties have been imposed under the New Policy (because it applies to misconduct which took place after 6 March 2010 and many ongoing cases still relate to misconduct that took place before that date), one of the FSA’s intentions in setting the New Policy was that financial penalties will significantly increase, particularly on larger firms (and higher earning individuals) doubling or trebling penalties that would otherwise have been imposed under the Old Policy.5 As we deal with more cases which apply the New Policy, the FSA and the FCA will keep under review how well the policy operates in practice and whether or not it needs further amendment.

2.8. In contrast, the CFTC calculates the maximum civil monetary available to it under its governing legislation the CEA, which prescribes a different approach from the FSA to the calculation of penalty:

2.8.1.The CEA applies a tariff to each “violation” (as defined under the CEA), which is either: (a) a set amount multiplied by the number of violations; or (b) triple the monetary gain.

2.9. The set amount depends on the nature of the violation and whether or not the violations occurred before or after certain dates. Briefly and in summary, the violations attract a tariff of $140,000 each or a maximum of $1m depending on when the violations occurred.

2.10. In determining the amount of the penalty, the CFTC then considers the appropriateness of the penalty by reference to the gravity of the violation according to the particular facts and circumstances of the case6.

Had the CFTC UBS investigation started before the FSA’s investigation?

3.1. As explained by Sir Hector Sants when giving evidence to the Commission on 11 January 2013, the FSA and the CFTC were in discussions about LIBOR submissions in April 2008. The initial contact was made by the CFTC to the FSA following the publication of a number of articles in the press at that time.

3.2. In her evidence, Ms McDermott provided further detail, explaining how that initial contact was followed in June 2008 with the FSA arranging a three way conference call with the BBA and how, thereafter, data was requested from a number of banks, including UBS.

3.3. As outlined in the FSA’s written response to the Commission of 18 January 2013:

3.3.1.During 2008 there were a number of communications between the FSA and the CFTC in relation to the review of banks’ LIBOR submissions;

3.3.2.In October 2008, the CFTC wrote to a number of banks (including UBS) seeking information about their submission process;

3.3.3.In December 2008, the FSA wrote to a number of banks (including UBS) to obtain information, as part of the ongoing enquiries into and review of banks’ (including UBS’) LIBOR submissions;

3.3.4.UBS responded to the FSA’s requests on 22 May 2009. The FSA passed this material on to the CFTC. At this time, the main focus was on concerns about “lowballing” of USD submissions. During 2009, extensive work was undertaken by Barclays (including email and telephone call reviews) and evidence of lowballing emerged in late 2009 and trader manipulation in the early part of 2010, which led to the formal referral of Barclays to Enforcement in May 2010. The first LIBOR related interviews were undertaken in November 2010, and were conducted jointly with other agencies;

3.3.5.In April 2010, the CFTC requested that UBS (along with a number of other banks) undertake internal investigations in connection with USD LIBOR submissions, the results of which were monitored by the FSA;

3.3.6.The FSA also initiated additional investigations, which were led by Supervision. In late 2010, the FSA decided to engage an external firm to undertake an analysis on behalf of the FSA of the submission data in 2007 and 2008 for all panel banks in USD, JPY and GBP. This analysis was to identify anomalous submissions. In January 2011 (following a tender process), Ernst & Young were engaged by the FSA to undertake this analysis. Follow up work was undertaken with a number of firms in July 2011, by which time UBS had been referred to Enforcement;

3.3.7.In late 2010, UBS also reported evidence of potential wider misconduct to the FSA, the CFTC and other authorities; and

3.3.8.Following a presentation by UBS in March 2011, investigators were formally appointed by the FSA in April 2011.

3.4. Therefore, the enquiries and review into the LIBOR submissions of UBS (and other banks) were conducted in parallel with the CFTC, and done so with a view to minimising unnecessary duplication of efforts. As acknowledged by Sir Hector in his oral evidence however, it is correct that it was the CFTC that initiated the first contact with the FSA.

It is hoped that this paper provides the information sought by the Commission, with the appropriate level of detail. If the Commission does have any further questions or requires any further information, then the FSA would welcome the opportunity to provide such assistance.

29 January 2013

1 Sent by email to Oonagh Harrison on 18 January 2013.

2 The FSA’s assessment of each of these factors in the UBS matter was set out in paragraphs 183 to 193 of the Final Notice of 19 December 2012.

3 Details of the FSA’s settlement discount scheme are set out in pages 21 and 22 of the 18 January Response and in the accompanying Annex A (DEPP 6.7).

4 In May 2010, JP Morgan fined £33.32m after the 30% Stage One settlement discount (were it not for this discount the penalty would have been £47.6m) http://www.fsa.gov.uk/library/communication/pr/2010/089.shtml

5 http://www.fsa.gov.uk/pubs/cp/cp09_19.pdf - paragraph 2.21.

6 The CFTC has not commented publicly about the basis of the penalty calculations for Barclays and UBS because such information was not included in the public orders issued by the CFTC.

Prepared 19th June 2013