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BoE’s Carney braced for grilling in forex probe

Bank of England Governor Mark Carney is due to get a grilling from U.K. lawmakers on Tuesday, as the investigation into alleged manipulation of the currency markets reaches Britain's central bank.

Parliament's Treasury Select Committee will quiz Carney and the bank's Executive Director of Markets Paul Fisher about allegations that bank officials "condoned or were informed of manipulation in the foreign exchange market or the sharing of confidential client information."

The Bank of England – which has already launched an internal review into the allegations - suspended a member of staff last week. It said there was no evidence so far that any of its staff had colluded in manipulation of the foreign exchange markets, but said the suspension was pending investigation into compliance with the bank's "rigorous internal control processes."

(Read more: Bankof England employee suspended over forex probe)

The allegations hinge on a regular meeting between Bank of England officials and foreign exchange traders, with one of the traders present at a meeting in April 2012 alleging that a bank official effectively condoned the behavior when asked about it.

Mark Carney, governor of the Bank of England, at the bank's quarterly inflation report news conference
Simon Dawson| Getty Images
Mark Carney, governor of the Bank of England, at the bank's quarterly inflation report news conference

Official minutes released by the Bank confirmed that "extra levels of compliance that many bank trading desks were subject to when managing client risks around the main set piece benchmark fixings" were discussed at one meeting. The minutes did not say that any violations of compliance were endorsed.

Carney's questioning by politicians about the issue is a further blow for the bank after public criticism of its role in the scandal surrounding the rigging of the key bank rate LIBOR.

The global banking sector's reputation is now undergoing another battering amid global investigations into foreign exchange markets following reports that traders were colluding to manipulate the daily foreign exchange rates.

(Read more: Banks brace for billion-dollar forex probe)

The Treasury Select Committee's Chair Andrew Tyrie has expressed concern about the speed with which the Bank of England's Court of Directors – which is responsible for managing its affairs – responded to concerns.

The court asked its Oversight Committee to investigate the allegations just last week – despite concerns dating back to last October "or possibly earlier," according to Tyrie.

"The Bank of England's foreign exchange dealers seem to have had knowledge that there was manipulation going on, but this wasn't passed on to the regulator – despite the bank being a member of the regulation community," committee member Mark Garnier MP told CNBC. "We need to get to the bottom of how this break down occurred."

Garnier stressed that London's reputation as "the center of the world for financial services" was at risk – which is especially important given the ongoing overhaul in regulation across the world.

"There is a huge amount of change to financial regulation going on at the moment, and we want to be leaders in this change," he said. "If we now discover a problem with a prime regulator's (the Bank of England) conduct, this will this damage our input in the world's regulatory change."

(Read more: World's biggest banks face forex probe questions)

Carney took over at the Bank of England in the summer of 2013, years before the alleged currency market manipulation took place. Allegations that bank officials knew first surfaced months ago, however, so there are likely to be questions asked about why he did not immediately order an inquiry.

"This situation tests the mettle of an individual. He has to demonstrate that he is taking control of this situation and convince everyone – including the international forex market - that he's doing the right thing," Garnier added.

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