Barclays Ignored Warnings on Rate Rigging

Barclays’ compliance department failed to act on three separate internal warnings between 2007 and 2008 about conflicts of interest and “patently false” submissions by its staff to the panel that sets the benchmark interest rate used to price mortgages and credit card loans worldwide.

Bob Diamond
Bob Diamond

Those failings, revealed in the bank’s 290 million pounds ($453 million) settlement this week with US and UK regulators for attempting to manipulate the London interbank offered rate (Libor ), drew harsh criticism from competitors on Friday as the industry in general and Barclays’ leadership in particular were subjected to extraordinary official pressure for change.

One executive at a rival bank said he “could not get his head around the fact” that the issue had been reported to compliance three times without any consequences. “At our firm, we would immediately have sent in internal auditors. I don’t understand why this has not happened.”

Vince Cable, business secretary, said the government was “trying to clean up a massive cesspit in the banking system”.

Some 3.6 billion pounds has been wiped off Barclays market value since the fine was announced on Wednesday as part of a probe that involves 20 banks across three continents.

Adding political pressure to the bank and its peers, the Financial Services Authority said on Friday it had found evidence of mis-selling of interest rate swaps to small and medium-sized businesses by four banks including Barclays.

“Something went very wrong with the UK banking industry and we need to put it right,” said Sir Mervyn King, governor of the Bank of England, listing excessive pay, “shoddy treatment of customers” and the “deceitful manipulation” of Libor among the failings.

Neither King nor the UK’s top regulators, speaking at a news conference on financial stability, was willing to provide public assurance that Bob Diamond , chief executive of Barclays, or other banking leaders were “fit and proper” people to hold their positions, which the FSA states as a basic regulatory requirement.

Andrew Bailey, who will be head of prudential regulation at the FSA from next month, said he would not answer the question, preferring instead to warn bank boards – who have the power to hire and fire chief executives – to consider how best to respond to the latest crisis in British banking.

“If we see a fundamental breakdown of trust then the boards of these institutions have to recognise that trust has to be got back, and they have to think very hard about how this is to be done,” Bailey said.

King called on the government to legislate quickly to create a greater gap between retail banks and their investment banking arms. He also called for an end to the current system of setting Libor based on estimates provided by banks rather than actual trades.

Speaking after an European Union summit in Brussels, David Cameron added to the pressure on Mr Diamond. “I think he and – frankly – the whole management team have got some very serious questions to answer,” he said.

Mr Cameron said there had to be “a change of culture” in the banks and said Mr Diamond’s appearance before a parliamentary committee would be “an important moment” in establishing who knew what and when.

The Commons treasury committee hopes to call Mr Diamond to give evidence next week, a session which will be watched avidly in the City and which could help to determine whether the Barclays chief executive can ride out the storm.

The government is now under pressure to go further than the “ringfence” proposal suggested by Sir John Vickers’ banking commission and to legislate for a complete break-up of integrated banks like Barclays. But George Osborne, chancellor, Sir Mervyn and Mr Cable all indicated on Friday they wanted to press ahead with the plans as currently drafted.

According to the FSA description of Barclays’ failings, the investment bank’s compliance department failed to act on an email from an employee who wrote he was “increasingly uncomfortable” with the bank’s “patently false” submissions to the rate-setting process.

One person familiar with the situation said that the bank had overhauled its compliance unit in 2009. “They never told senior management about this. Compliance did not do things right at the time and after this was discovered changes to the controls were being made,” he said.

Lord Turner, FSA chairman, said the Libor investigation pointed up the need for complete industry change, saying it revealed “a degree of cynicism and greed which is really quite shocking...We would be fooling ourselves if we thought that some of the Libor fixing were not found in other areas of trading.”

Two UK investors called on Barclays to claw back bonuses over the Libor scandal. The Local Authority Pension Fund Forum, an association of 55 public sector pension funds with combined assets of £100bn, also urged Barclays to pursue criminal charges against staff and executives at the bank.

Ian Greenwood, LAPFF’s chairman, said: “The use of tactics to manipulate interest rates to create a favourable trading environment and pad the company’s profits is inexcusable.”

Reporting by Chris Giles, Brooke Masters, George Parker and Daniel Schäfer, Financial Times.