The influence that Bank of England governor Sir Mervyn King had in forcing out Bob Diamond as chief executive of Barclays illustrates the need for tougher oversight of the central bank, a powerful committee of MPs concludes in a report on the Libor-rigging scandal.
The 122 page report by the Treasury select committeedescribes the culture of Barclays as having “gone badly awry” but said the governor’s involvement was “difficult to justify” given that he does not yet have responsibility for regulating banks.
King, who appeared before MPs last month, made clear that he did not demand Diamond’s resignation following the £290m fine on Barclays for attempting to manipulate interest rates. However, he summoned the bank’s chairman, Marcus Agius, and his deputy Sir Michael Rake to tell them that regulators had lost confidence in Diamond in the wake of Libor-fixing fine.
King spoke to the two Barclays boardroom directors on the day that Agius had announced his resignation. Agius had resigned after a conversation with Lord Turner, chairman of the Financial Services Authority, who had left their talks believing that it was Diamond who would quit, not Agius. Turner’s inability to get his message across is also criticised.
“Whatever the merits of the action taken by the governor of the Bank of England and chairman of the FSA – and this committee has sympathy with the conclusion that they had drawn about the leadership of Barclays – the action they took has exposed implicit, and potentially arbitrary power, to force out senior figures in the financial services industry,” the report said.
“The return of the ‘governor’s eyebrows’ – which many will welcome on this occasion – comes with the need for corporate governance safeguards,” the report said.
Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, said the report “has called for action in a number of areas, including higher fines for firms that fail to co-operate with regulators, the need to examine gaps in the criminal law, and a much stronger governance framework at the Bank of England”. The Bank of England pointed out that the Financial Services bill was setting out new governance structures for the central bank.
The report criticised the Barclays board for presiding over “a deeply flawed culture” that allowed attempts to manipulate Libor to begin in 2005. The bank stressed that it had now announced a review of business practices. “While we don’t expect to agree with every finding in [the report], we recognise that change is required, not least to restore stakeholder trust,” a Barclays spokesman said.
The report is also critical of the FSA’s slow approach to investigating Libor, which was two years behind the US. Andrew Bailey, the top regulator at the FSA, attended the Barclays board meeting in February to outline concerns and Turner had followed this up with a letter in April to the bank’s chairman.
“It will be a great step forward if the regulators get away from box-ticking and endless data collection and instead devote more careful thought to where risk really lies. This could reduce the regulatory burden and, at the same time, provide more effective oversight. It will involve a change in culture on the part of the regulators and is a major challenge for the future,” Tyrie said.
This was welcomed by the FSA, which is being disbanded next year when banking regulation will be handed to the Bank of England. “We welcome the committee’s report and their view that the new judgement led approach to regulation being delivered by the FSA is the right one,” an FSA spokesman said.
The report indicated that a new area for consideration by the new cross-party parliamentary commission on banking standards, which is being chaired by Tyrie, is the leadership style of chief executives.
“The parliamentary commission on banking standards’ examination of the corporate governance of systemically important financial institutions should consider how to mitigate the risk that the leadership style of a chief executive may permit a lack of effective challenge or to the firm committing strategic mistakes,” the report said.
For the first time, the report produced evidence by John Varley, the chief executive of Barclays during the Libor rigging scandal. Varley left in January 2011 when Diamond, who had been head of investment banking, replaced him. One focus of the inquiry was a file note that Diamond wrote to Varley, copied to Jerry del Missier, a close colleague. The note outlined a conversation with Paul Tucker of the Bank of England during the October 2008 crisis, which Del Missier interpreted as an instruction to cut the bank’s Libor submissions. Del Missier quit the bank on the same day as Diamond.
Varley told the MPs in written evidence that he rang Lord Myners, the former City minister, Sir John Gieve, then a deputy governor of the Bank of England, and Hector Sants, then chief executive of the FSA, after reading Diamond’s note. He had emailed Diamond to say “we should discuss” this, but did not recall any further correspondence.
The MPs concluded that Barclays “did not need a nod, a wink or any signal from the Bank of England to lower artificially their Libor submissions” as it was already doing so, even before the October 2008 crisis.