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September 27, 2012

Wheatley report finds LIBOR reform needs external audits

Reinforced audit procedures and strengthened reporting practices are one of the cornerstones for the London inter-bank offered rate (LIBOR) reform, according to a report from Financial Services Authority (FSA) managing director Martin Wheatley.

The Wheatley Review of LIBOR is the result of a study commissioned by the Chancellor of the Exchequer to assess the need for wider policies in the aftermath of the LIBOR scandal that came to light in June.

The report recommends the British Bankers Association (BBA) should endow the role of LIBOR administrator and sponsor to a new rate administrator.

It recommended that as a ‘priority’ the new administrator should draft an industry-led code of conduct that, among other requirements, has to implement regular external audits of LIBOR submitting firms.

The code of conduct would also define enhanced reporting practices that allows for personal accountability within submitting firms and puts in place internal procedures for sign-off rate submissions.

Wheatley also recommends that the requirements for external audit should be implemented 6 months after the introduction of the code and subsequently every 2 to 3 years.

Under the provision of the code, institutions will be required to obtain regular external assurance to confirm whether they abide to the new rules of conduct. According to Wheatley, assurance from external auditors can play a major role in restoring public confidence in the LIBOR.

“External assurance provides an independent review that published benchmarks are fairly presented as well as firm systems and internal controls used to support LIBOR submissions and internal governance arrangements,” Whealtley writes.

ICAEW project welcomed

On the back of this the Wheatley Review has welcomed the project recently launched by the Institute of Chartered Accountants of England and Wales (ICAEW) aimed at providing auditors with guidance on external assurance standards for interest rate benchmark submissions.

The report recommended the ICAEW should work with the new LIBOR administrator to ensure that their guidance informs and is consistent with the code of conduct.

“Wheatley’s recommendations […] are sensible proposals for strengthening the system. We firmly support the demand that institutions obtain external assurance on their LIBOR processes,” ICAEW financial service faculty head Iain Coke said.

Coked commented that whether the solution is a ‘Newbor’ or a ‘Tweakbor’ the future success of the benchmark rate requires “better oversight and governance”.

“One way to restore the public’s and the markets’ confidence in such benchmarks is to have the submissions and processes checked by an independent third party,” Coke explained.

However, he notes that although the Wheatley report is a specific response to deal with a specific problem what the system needs is a cultural revamp.

“In order to regain trust in Banking, what is needed is a real change in culture, embedding integrity and eradicating the “what can I get away with” attitude,” Coke said.

The HM Treasury also confirmed that the UK government is now considering Wheatley’s recommendations.

“It is the government’s intention to respond to the review when Parliament returns, and introduce any necessary legislation in the Financial Services Bill that is currently being considered by the House of Lords,” HM Treasury said.

Scandal comes to light

Earlier this year, Barclays admitted the rigging of inter-bank lending rates and the 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 and another sixteen banks are being investigated by US and European regulators for allegedly being involved in the same wrongdoing.


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