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September 5, 2012

ICAEW proposes assurance guidance for interest rate benchmarks

The Institute of Chartered Accountants in England and Wales (ICAEW) plans to provide auditors with guidance on external assurance standards to prevent the rigging of inter-bank lending rates.

ICAEW’s initiative comes in the aftermath of the London inter-bank offered rate (LIBOR) scandal, which saw more than sixteen banks allegedly misreporting this interest rate benchmark. Only Barclays has admitted the wrongdoing and the UK Financial Services Authority (FSA) and the US Commodities and Futures Trading Commission (CFTC) imposed fines that amounted to £290m ($460m).

Barclays’ chief executive Bob Diamond and the bank’s chairman Marcus Agius were forced to resign as a consequence of the misconduct.

The LIBOR scandal has prompted investigations by US and European regulators into a number of financial institutions such as HSBC, Lloyds, Citi or Deutsche Bank for manipulating inter-bank lending rates.

ICAEW Financial Services Faculty head Iain Coke said it is important to restore trust in these benchmarks as they play a role in establishing rates for many loans and market transactions.

“External assurance can help provide that trust by testing that there are robust processes in banks for submitting rates to form the benchmark and that those processes are being followed,” Coke commented.

According to ICAEW, Barclays’ interest rate benchmark submissions are subject to external assurance after its settlement with the US CFTC.

The institute indicated many banks under investigation may also be subject to similar requirements with regulators but many others may voluntarily seek external assurance to restore public confidence.

“We expect regulators to increasingly demand independent assurance on important market benchmarks, such as LIBOR; we hope to help auditors take a consistent approach whichever rate and whichever markets they operate in,” Coke concluded.

ICAEW has set up a working party to issue an exposure draft of the guidance, which it aims to publish by the end of 2012.

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