Libor could be scrapped under new proposalsTough reforms to lending rate to come

11 August 2012

Rules on libor

Libor in its current form could be scrapped under new proposals from the managing director of the Financial Services Authority (FSA). 

In a review into the London Interbank Offered Rate (Libor) following the Barclays rate-rigging scandal, Martin Wheatley, managing director of the FSA, said that 'the existing structure and governance of Libor is no longer fit for purpose and reform is needed.'

'It's completely untenable that we can go forward without some level of regulatory change,' he added.

Problems with Libor

Libor is the price used by banks to set credit card and mortgage rates, as well as complex financial agreements between banks. It is calculated by aggregating estimates of the rate at which banks lend to each other.

The rates are administered by the British Bankers Association (BBA) - the trade body that represents the banking industry - and Libor is calculated by Thomson Reuters. 

Action point: 60 second guide to Libor - find out more about Libor in our handy guide

Wheatley's review has concluded that this process is flawed, stating that there 'appears to be insufficient independence' built into the governance structures and a lack of transparency around its calculation, and that basing the rate on estimates was a 'significant weakness' in Libor. 

Wheatley also raised doubts about the BBA's involvement in setting Libor. 'It still remains an open question as to whether, from an industry perspective, it's still the best body to continue with that function,' he said.

The proposals to change Libor

The FSA's managing director proposed widespread changes to the way that Libor is calculated and governed, and could even be scrapped altogether. The review sets out a number of proposals, including:

  • The calculation of Libor using real rates of lending, rather than using estimates
  • Strengthening the governance around setting Libor and giving the responsibility of administration to an unconnected third party
  • Finding different rates other than Libor to base transactions on

Wheatley said that 'the short- and medium- term focus has to fix Libor and then there is a broader question about whether there are better rates going forward. Our responsibility is to make sure that widely used benchmarks have integrity.'

Which? welcomes Libor proposals

Peter Vicary-Smith, Which? chief executive said: 'We welcome today's proposals that Libor rate setting should be overseen by a properly independent and accountable body and that there should be criminal sanctions for rate manipulation.  

'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.

'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. 

'That's why the parliamentary banking inquiry must produce recommendations for fundamental change to the culture and practices of the banks, and put the best interest of consumers at the centre of reforms.'

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