UK financial watchdog seeks to mend ‘broken’ Libor, not scrap it

Britain’s top financial watchdog delivered a 10-point plan to fix Libor but stopped short of scrapping the benchmark interest rate in a much-awaited reform of a system plagued by scandal.

“The system is broken and needs a complete overhaul,” said Martin Wheatley, head of the Financial Services Authority.

Wheatley acknowledged problems with London interbank offered rates, but said Libor is so deeply entrenched in the financial system that it cannot be easily replaced.

There are no better alternatives now and any transition to a new benchmark would be difficult, he said yesterday, adding that it made sense for market participants to examine whether there are other possible benchmark rates in the longer term.

The Government sees the reform of Libor as critical to restoring global confidence in London as a financial centre.

“The longer the situation prevails that trust has been eroded, the more difficult it is to restore,” UK financial services minister Greg Clark said.

The FSA plan, which includes oversight by a new panel from 2013, marks regulators’ first effort to fix the tarnished benchmark, but rule-makers have to thread the needle carefully.

On the one hand, they must restore confidence in the financial system; on the other, they cannot take steps that are too radical without creating big trouble with existing transactions that use the benchmark, with some home loans using Libor stretching out 65 years.

More than $300 trillion of contracts and loans refer to Libor. “Bringing Libor under an independent regulator will take away the notion that this was a system run by banks for the benefit of banks,” said Matthew Fell, director for competitive markets at the Confederation of British Industry lobby group.

Stephen Gilchrist, head of regulatory law at Saunders Law, said regulation of individuals as proposed had not stopped abuses.

“The FSA only authorise persons in the financial services sector who pass a ‘fit and proper’ test which goes to probity and integrity. Where has that got us in the recent past?” Gilchrist said. (Reuters)