FSA finalises proposals for the regulation and supervision of benchmarks

Benchmarks are used across financial markets in a broad range of activities.  They have historically been set by the financial markets themselves, and existed outside of any regulatory regime.  In the case of LIBOR, this industry-led approach has failed.  On 2 July 2012 the Chancellor of the Exchequer commissioned Martin Wheatley, CEO designate of the Financial Conduct Authority (FCA), to undertake a review of the structure and governance of LIBOR and the corresponding criminal sanctions regime.

On 28 September 2012 ‘The Wheatley Review of LIBOR’ was published, which included a 10-point plan for comprehensive reform of LIBOR including that LIBOR activities should be brought within the scope of statutory regulation. The Government has subsequently inserted provisions into the Financial Services Act 2012 to allow the regulation of activities in relation to benchmarks. The legislation will commence on 1 April 2013. Initially, the only specified benchmark will be LIBOR.

Following a consultation (CP 12/36) the FSA has now finalised proposals for the regulation and supervision of specified benchmarks, such as LIBOR, implementing a key recommendation of the Wheatley Review. The key proposals include:

• benchmark administrators will be required to corroborate submissions and monitor for any suspicious activity;
• those submitting data to benchmarks will be required to have in place a clear conflicts of interest policy and appropriate systems and controls. This will result in clear, robust rules which will give firms and their employees comfort that the regulatory regime clarifies what is expected of them; and
•  two new significant influence controlled functions created under the FSA’s Approved Persons Regime for the administrator and submitting firms.

Martin Wheatley, CEO designate of the FCA, said:

“Confidence and trust are critical to financial markets. That trust has been eroded by the LIBOR scandal and the recent enforcement action against several banks. These new rules today should help restore that faith and bring integrity back to LIBOR.”

Notes for editors

1. Read the Policy Statement[1].

2. The Wheatley Review[2] can be found on HMT’s website.

3. HMT’s primary legislation[3] and secondary legislation[4].

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.

5. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013 as required by the Financial Services Act 2012[5].