FSA’s banking review is warned that trust may be beyond repair

By GARETH MACKIE
Published on 10/08/2012 21:48

PLANS to overhaul the interbank lending system, described as “no longer fit for purpose” by the City regulator, will not do enough to rebuild trust, it was claimed on Friday.

An initial discussion paper by Martin Wheatley, who heads conduct regulation for the

Financial Services Authority, outlined a number of proposals to change the way Libor is set.

Until now, membership of the Libor setting panel has been the preserve of a small group of banks, which volunteer daily estimates for the rates at which they would borrow different currencies for different periods, but the Wheatley review will examine whether actual trading data can be used to set the reference rate.

Jason Karaian, finance analyst at the Economist Intelligence Unit, said: “This is much easier said than done, particularly when trading activity dries up during times of stress.”

Libor is used to set the rates for credit cards, mortgages and savings products and is currently overseen by the British Bankers’ Association, which said it was “proactively co-operating” with the review.

A spokeswoman added: “The absolute priority of everyone involved in this process is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators.”

The Wheatley review, ordered by Chancellor George Osborne after Barclays was hit with a £290 million fine for Libor manipulation, said any move to using new rates would need to be carefully planned to limit

disruption.

The industry will have until 7 September to respond to Wheatley’s review, with final recommendations to be made by the end of next month.

Peter Vicary-Smith, chief

executive of consumer association Which, said: “Mr Wheatley has said it’s vital to rebuild trust in the Libor setting process, but the bigger job is to rebuild trust in banking that has been shattered by one scandal after another.

“The government and regulator must now thoroughly investigate the impact of Libor rate-rigging on ordinary borrowers and savers, and introduce a collective redress system to properly compensate consumers if they have lost out.”