By Bob Duncan
In a significant U-turn from their position of two days ago, the UK government has now announced that it will hold an independent review of the workings of the LIBOR and has summoned Barclays boss Bob Diamond before the UK Treasury select committee.
In a speech on Friday, Bank of England governor Mervyn King was at pains to rule out a Leveson style enquiry into the fiddling of LIBOR rates - which he described as the "deceitful manipulation of one of the most important interest rates".
He said the situation required "leadership of an unusually high order and changes to the structure of the industry", insisting that the job in hand should be to begin the process of reform rather than instigate costly and lengthy enquiries.
Labour leader Ed Miliband has also called for a public inquiry into the customs and practices of the banking industry. The TUC and some Tory backbenchers have also called for a probe similar to the Leveson Inquiry but the Treasury and the Bank of England have already rejected the idea.
During a speech to the Fabian Society, Mr Miliband said the government needed to do more. "The British people will not tolerate anything less than a full, open and independent inquiry, they will not tolerate the establishment closing ranks and saying we don't need an inquiry.
"They want a light shone into every part of the banking industry - including its dark corners. They want a banking system that works for them. They want people held to account, they do not want sticking plaster solutions and I'm afraid at the moment that is all the government is offering."
However, evidence is now emerging that suggests the practice of manipulating Libor rates may have already been known about as far back as 2008, a period when Labour were in power.
Barclays boss Bob Diamond has been summoned to appear before the Treasury Select Committee on Wednesday. Barclays' chairman, Marcus Agius, will also appear on Thursday.
Andrew Tyrie, the select committee chairman, said Mr Diamond's hearing would focus on the LIBOR scandal, which he described as "the most damaging I can recall”, adding “The public's trust in banks has been even further eroded. Restoring the reputational damage must begin immediately."
In a letter sent to Mr Tyrie on Friday, Mr Diamond claimed that traders were acting on their own without the knowledge of their bosses. He wrote, “Barclays traders attempted to influence the bank’s submissions in order to try to benefit their own desks’ trading position. They were operating purely for their own benefit.” He added, “the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders, at the time that they were made.”
However, he then appeared to contradict this by stating that the bank itself decided to lower its LIBOR rate during the credit crunch to protect its reputation. He wrote, “Even taking account of the abnormal market conditions at the height of the financial crisis, and that the motivation was to protect the bank, not to influence the ultimate rate, I accept that the decision to lower submissions was wrong.”
Prime Minister David Cameron said the government would not rush a decision on whether to hold an inquiry and would consider the issues "very carefully".
"It's very important... the government takes all the actions necessary - holding bankers accountable, making sure they pay their taxes, making sure there's proper transparency, making sure the criminal law can go wherever it needs to, to uncover wrongdoing. All of those things need to happen," he said.
The government's independent review, which will examine the future operation of LIBOR will be established next week and report by the end of summer. It will ensure amendments can be made to the Financial Services Bill which is currently going through Parliament. It will also examine whether to target institutions or individuals and whether to launch criminal prosecutions rather than simply impose fines.
Meanwhile, it is thought that mis-sold interest rate 'swaps', complex interest-rate hedging products, may have cost Scottish businesses up to £1 billion in extra interest payments, in addition to twice that figure in additional liabilities, placing up to 8,000 Scottish jobs at risk and putting some firms out of business.
The regulator, the Financial Standards Authority (FSA), which only began investigating two months ago after pressure from MPs, said that it had uncovered a range of poor sales practices.
These include hiding costs and risks, giving advice when claiming legally not to advise, over-hedging – pushing bigger or longer swaps which were more profitable – and selling in response to rewards and incentives. Those incentives saw bank staff responsible for selling swaps earning salaries and commissions of more than £300,000 per annum.
As part of the review, banks will appoint independent assessors to examine cases. But there are concerns from experts that the agreement with the FSA, intended to avert a PPI-style bonanza for claims companies, could allow the banks to minimise redress.
Cat McLean, partner at Edinburgh law firm MBM Commercial, said: "We must ensure the independent assessor doesn't suffer from the malaise which seems to affect the financial ombudsman, where claims can languish for years and who rarely upholds claims against banks, and that sufficiently relevant evidence is given to the assessor."
Abhishek Sachdev of Vedanta Hedging, said: "If I were the banks, I would be breathing a big sigh of relief. They will be accountants, not FSA-registered specialists who understand derivatives. They are presenting it as smaller than PPI, but the real claims involved are much bigger."
Ed Miliband said that new powers were required to prosecute people who "do the wrong thing in banking".
"Not one person has gone to jail for what happened during the financial crisis. Why is it that when you shoplift £50-worth of goods you go straight to jail but when you fiddle, lie and cheat your way through the system, gaining millions of pounds, you get away with a slap on the wrist - if that."
SNP Westminster Treasury spokesperson Stewart Hosie MP called for the Financial Services Bill, currently being considered by parliament, to be reviewed to ensure that the Financial Conduct Authority is equipped with ‘powers and sanctions’ to deal with the scandal.
Mr Hosie, a Member of the Treasury Select Committee, said, “The scale of the manipulation of LIBOR, described by the FSA as lasting for three and a half years, is truly scandalous. It is incredible that, at the present time, this manipulation is not a criminal offence.
“The public will quite rightly be asking what on earth the FSA was doing for the three and a half years that this was happening and, equally, this scandal raises questions for those who occupied Downing Street at the time that this abuse was going on – Labour’s Gordon Brown and Alastair Darling.