The FSA has come under severe attack from the Treasury select committee over its role in the Libor rate-rigging scandal.
In its report, Fixing Libor: some preliminary findings, published today, the TSC slams the regulator for failing to carry out adequate supervision and governance and its inability to act on information from various sources.
In June, Barclays was fined £290m by the FSA and US authorities for rigging the Libor and Euribor rates. It is thought a number of other banks including Royal Bank of Scotland, UBS and Citibank are also being investigated.
The TSC’s report criticises the FSA for not spotting the “extreme weakness” of Barclays’ internal compliance for Libor setting procedures, despite numerous visits to the firm.
The TSC is demanding the FSA reports back to it with improvements to its supervisory procedures.
It also expresses concerns that the FSA was two years behind US regulators in investigating Libor, which it says contributed to the perceived weakness of London in regulating financial markets.
FSA chairman Lord Turner says the Internal Audit Department of the FSA is now undertaking a review of how the FSA dealt with information about Libor from US regulators, the media and market rumours.
The TSC criticises the FSA’s approach to corporate governance, saying the regulator appeared content to allow former Barclays chief executive Bob Diamond to continue in the role.
Diamond resigned in July amid growing public pressure surrounding the scandal.
TSC chair Andrew Tyrie says: “Such an informal approach, as was taken in this case, is open to abuse in the future. The Prudential Regulation Authority and the Bank of England need better corporate governance. The absence of a requirement for effective governance in the new regulatory framework is a serious defect of the Financial Services Bill.”
The report contains damning criticism of Diamond, branding his evidence to the TSC as “lacking in candour and frankness” and falling well short of the standard parliament expects.
Former Barclays chief operating officer Jerry del Missier is also criticised for not querying an apparent order from Diamond to lower Libor rates after a conversation with Bank of England deputy governor Paul Tucker.
Tyrie says: “The evidence that Tucker, Diamond and del Missier separately gave about this manipulation describes a combination of circumstances which would excuse all the participants from the charge of deliberate wrongdoing. If they are all to be believed, an extraordinary, but conceivably plausible, series of miscommunications occurred.”
The TSC says Barclays’ culture was “deeply wrong” and went well beyond Libor, claiming management turned a blind eye to this culture on the trading floor.
In its report, the TSC accuses the Bank of England of naivety for not anticipating wrongdoing with regards to Libor rate-setting, or checking with the FSA whether any wrongdoing occured.
The TSC says the rate-rigging scandal displays the “dysfunctional” relationship between the Bank and the FSA at the time, to the detriment of the public.
It believes the entire culture of the banking sector is in a poor state and needs urgent reform.
The Parliamentary Commission on Banking Standards is currently reviewing the professional standards and culture of the UK banking sector.
The TSC is calling on the commission to consider how to mitigate the risk that banks’ senior management may not be challenged enough internally, which could lead to institutions committing strategic mistakes.
The committee is also urging Financial Conduct Authority chief executive designate Martin Wheatley to recommend the present criminal law of market abuse is ammended to include Libor manipulation as part of his review into Libor.
The TSC’s report highlights that seven international banks are under investigation and Barclays’ shortcomings should not be seen in isolation.