Bankers who manipulate the interbank lending rate Libor should face criminal sanctions, an independent review has concluded, as part of efforts to reform "what has become a broken system".
Martin Wheatley, the chief executive-designate of the Financial Conduct Authority, has been investigating the options for improving Libor's transparency after Barclays was fined over £290 million by both UK and US regulators earlier this year. More than a dozen other global banks are being investigated over similar claims.
His review, published today, has called for a fundamental overhaul of the way Libor is run. It calls for the establishment of a system requiring banks to back up their operating cost submissions with evidence of relevant transactions and detailed technical changes to refine the way Libor is compiled.
In a speech at Mansion House later, Wheatley is expected to say: "The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust – it has torn the very fabric that our financial system is built on."
Part of the solution will be ensuring there are appropriate punishments for bankers who manipulate Libor for their own benefit.
"Such behaviour would normally be for direct or indirect advantage – for example, by benefiting trading positions," the review explains.
"The perpetrators of such behaviour are likely to be conscious of the dishonesty of their conduct, and civil sanctions under either the regulatory code of conduct or the civil market abuse regime may not therefore be sufficient to prevent such behaviour in all cases."
Wheatley has had to deal with reluctance from the government, however, which is keen to avoid the "proliferation" of new criminal offences.
So today's review proposes expanding the remit of existing legislation to cover those who should be prosecuted.
Questions remain about the extent of the new offence, however. The review states: "Consideration should be given as to whether it should be necessary to show that the person acted in order to obtain a profit or benefit, or avoid a loss, and to whether the offence should also cover undertaking an equivalent course of action (for example, undertaking transactions at an artificial level in order to manipulate a submission based on these transactions)."
The British Bankers' Association, which has come under fire for its management of the Libor operation and is condemned by Wheatley for having "completely failed", said in a statement: "The absolute priority now for everyone is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators, and we will work closely with the government and regulatory bodies to ensure this."
Existing bankers who submit data for the Libor process will now have to be approved by the regulator and traders will be warned that they face "criminal sanctions" including jail if they are found guilty of attempting to manipulate the Libor rate in the future.
Treasury minister Greg Clark said the report was clear that "the self-regulation of Libor has failed".
"It's yet another example of the broken regulatory system that this government is committed to fixing," he said.
"Libor is a hugely important international benchmark and this report makes a series of comprehensive and practical recommendations designed to restore its credibility. The government will respond, in full, once parliament returns."
Winning back public confidence in the way Britain's financial system works is likely to prove difficult, however. Polling company ComRes found just ten per cent of members of the public said they would trust a banker to tell them the truth. Seventy-eight per cent said they would not trust them.
Stewart Hosie, an SNP MP and member of the Commons' Treasury committee, accepted there is a "huge amount of work" to do to win back the public. He welcomed Wheatley's proposals as being "sensible" but warned the task facing the City was much greater than reforming how Libor operates.
"It's also things which the public see which are more accessible," he told politics.co.uk.
"Do they see lending to their business, do they see their kids being able to get a mortgage? Do they see the annual bonus pot falling rather than kicking along at nine, ten or £11 billion?
"It's a huge amount of work but I think there's an education exercise as well. The public need to understand what the body politics is also asking the banks to do in terms of increased capital ratios and making the banks safer."