The Libor Scandal – Why we don’t need a parliamentary inquiry. By Jake Cordell
The recent Libor fiasco is the latest in a colourful history of highly-publicised scandals to have hit the UK banking sector since the 2007 collapse of Northern Rock. The basic details matter little to some sections of the public to whom the simple fact that a few highly-paid board members have lost their jobs is self-evidently justifiable on any number of charges. In this case, the high-profile scapegoats have been Marcus Agius, chairman of Barclays, Bob Diamond, the bank’s chief executive and Jerry del Missier, chief operating officer. More resignations are likely to follow in the next few days.
To those who are interested in exactly what quasi-fraudulent activities Barclays and other UK banks have been involved in, details are easy to find, with every national newspaper updating us daily in print, and hourly online. To sum, Barclays derivatives traders coerced with other equity traders to fix the London interbank offered rate (Libor) – the rate at which UK banks lend to each other. Evidence of the scandal dates back to 2005, from when memos and emails have surfaced showing Barclays staff making sketchy references to fixing the Libor. Last week, UK and US regulators announced they were imposing record fines of around £290m on Barclays for their involvement in the scandal.
And so, the economic wrongdoing spilled into the political environment, bringing with it a whole new round of tub-thumbing, scare mongering and well-versed anti-bankers propaganda.
Despite my attempts to defend the banking sector in the face of similar witch-hunts over the payment of bonuses (on the grounds of international competiveness), or over the necessity of the part-nationalisation of RBS and Lloyds Banking groups (Too Big To Fail) I find myself struggling to find any justification for defending the UK banking sector in this instance.
More worryingly and relevantly I, like many others, cannot comprehend how Barclays has managed to find itself in this position. Surely the basic premise of regulatory bodies such as the Financial Services Authority (FSA) is to take away the opportunity of insiders to affect such influential market data? Questions like this have forced David Cameron and George Osbourne’s hand into announcing a swift and far reaching inquiry into the culture of banking.
The inquiry will be conducted by parliamentarians and will not have a judicial element. The government’s reasoning for this is that they hope the committee will report in time to attach any findings to the impending Financial Services Bill, which will legislate for the separation of UK investment and retail banking and other recommendations of the Vickers Report. However, the terms of this second inquiry could prove to be a sticking point within the coalition, with Vince Cable, the Liberal Democrat Business Secretary pressing for the inquiry to be taken out of the hands of politicians and conducted alongside criminal investigations by the Serious Fraud Office.
There is also debate as to whether there are any more adjustments that can be made to the banking sector and whether consumers’ trust can ever be regained. The government obviously cannot stand by idly as the Libor scandal unfolds, but as of now, major changes have been announced and not yet implemented. Continuous inquiries and investigations may only serve to muddle the picture, for both banks and the general public.
Arguably the most important reform was the government’s first announcement back in the summer of 2010 that the FSA would be broken up, with power being divulged into the Bank of England and a new regulatory body, the Financial Conduct Authority (FCA). At the time, many thought this was simply a rebranding process for the FSA, but the past two years have seen the doomed institution, spurred on by public and political opinion, beginning to show its teeth. The FCA is likely to continue in this new-found zero tolerance approach in a bid to set precedents for the future conduct of banking in this country. However, further inquiries and legislature threaten to stifle the organisation before its doors have even opened.
There are also questions over the incentives of banks to follow the law. Individual banks are often protected from a loss of retail business given the complexities of changing current accounts, and loan providers – something the upcoming Financial Services Bill is set to address. Furthermore, hazy reporting of financial misconduct and generic banker-bashing damages every bank. The Libor scandal will result in a loss of confidence amongst all major UK banks as little room is left in the outraged public climate for detailed analysis of the major players and wrongdoers. In an industry that is already heavily saturated and with remarkable barriers to entry there is little concern amongst boardrooms that customers will be lost, or turnover fall.
Of course, Barclays has suffered as a result of this scandal, being fined nearly £300m and losing fifteen percent of the group’s share price in just one day. However, these are short-term setbacks for one of the world’s largest financial companies, and will do very little to affect the day-to-day trading within both investment and retail arms.
In many aspects the government would fare better following Vince Cable’s recommendations for a criminal investigation than conduct a parliamentary inquiry which is bound to result in well-trailed and predictable reforms. The former route would give the public and tabloid media exactly what they want, in the form of bankers’ blood, while ensuring that the investigation will be conducted thoroughly, properly, and according to UK and international law. It would also send a message to the banking industry that the years of light-touch regulation and financial penalties for misconduct are over. In turn this would give the FCA the example they need to threaten banks with the strong deterrent of judicial punishment. Lastly, and most crucially, a criminal investigation would not complicate upcoming legislation that holds a good chance of reforming both the culture and conduct of banking in the UK.