Wheatley given two weeks to make his initial recommendations on LIBOR, Government confirms

A discussion paper on the London Inter-Bank Offered Rate (LIBOR) to be produced by Martin Wheatley, chief executive-designate of the future Financial Conduct Authority (FCA), will be published for a four-week industry consultation on 10 August. It will also consider the scope of the UK regulators' civil and criminal sanctioning powers in relation to financial misconduct.

Current regulator the Financial Services Authority (FSA), the conduct and compliance functions of which are due to be superseded by the FCA, is unable to pursue criminal sanctions in relation to LIBOR due to the nature of its powers.

Meanwhile David Green, director of the Serious Fraud Office (SFO), has said that he is "satisfied" that the existing fraud and false accounting offences are "capable of covering conduct in relation to" alleged manipulation of LIBOR by a number of financial institutions. The SFO, the Government department responsible for investigating and prosecuting serious and complex fraud, announced earlier this month that it had "formally accepted the LIBOR matter for investigation".

Wheatley, whose review will not consider any issues relating to the current investigations into LIBOR and its euro equivalent, EURIBOR, said that recent misconduct findings in respect of the rates by the FSA and US Department of Justice were "extremely serious in nature". Last month Barclays became the first bank to announce that it had entered into settlement agreements with the regulators for "misconduct" in relation to its contributions to the rates, for a total of £290 million.

"This benchmark rate is used globally for trillions of dollars worth of financial contracts," Wheatley said. "Therefore, it is clear that urgent reform of the LIBOR compilation process is required. Such reform may include amendments to the technical definitions used for LIBOR, the associated governance framework and the role of official regulation. The review will also consider whether similar measures are required for other existing benchmarks."

LIBOR is a daily reference rate based on the interest rates at which banks can borrow unsecured funds from other banks. It is widely used as the pricing basis for some $550 trillion worth of global financial instruments including interest rate and currency hedging instruments, and to set the interest rate for syndicated loans. Contributing banks submit estimated rates daily to business data provider Thomson Reuters, which carries out the calculation and publishes LIBOR rates in 10 currencies at midday every London business day.

Participation in the setting of the LIBOR rate is not currently a 'regulated activity' under the Financial Service and Markets Act. Wheatley will consider whether regulation or changes to the rate's governance arrangements are necessary and, if so, what if any financial stability consequences would emerge as a consequence of a move to a new regime. It will also consider the feasibility of replacing banks' estimates of the rate at which they are borrowing at any given time with actual trade data, as well as other alternative rate-setting processes.

He has also been asked to provide "provisional policy recommendations" in respect of other price-setting mechanisms in financial markets.

Wheatley has been asked to report quickly to enable any necessary amendments to the law to be included in the draft Financial Services Bill. The Bill, which is currently going through Parliament, will overhaul the current system of financial services regulation in the UK and establish the FCA, as well as a Prudential Regulation Authority (PRA) within the Bank of England to regulate banks, building societies and insurers.

The European Commission has also proposed the introduction of the specific criminal offence of actual or attempted manipulation of benchmarks, including LIBOR and EURIBOR, as part of its proposals for new laws on insider dealing and market manipulation.