UK Orders Review of Libor Rates

By Peter Evans

LONDON--The U.K. government has ordered an independent review of how one of the world's most important interest rates is set just days after it emerged that Barclays PLC (BCS) paid GBP290 million ($450 million) to settle claims that some staff manipulated the rate for profit. The review comes as pressure in the U.K. grows for a criminal investigation in to the market-fixing scandal.

"It's very important [the review] takes all of the actions necessary, holding bankers accountable... making sure there's proper transparency, making sure the criminal law can go wherever it needs to uncover wrongdoing," Prime Minister David Cameron told BBC television Saturday.

Business Secretary Vince Cable said there should also be a criminal investigation into the Libor-fixing scandal.

"[The public] just can't understand why people are thrown into jail for petty theft and these guys just walk away having perpetrated what looks like conspiracy," Mr. Cable said told Sky television Sunday.

"I've been told the [Serious Fraud Office] is having a fresh look at the evidence," Mr. Cable said.

The government's review--to begin next week--will examine the future operation of the London interbank offered rate, or Libor, and report by the end of summer.

Bank of England Governor Mervyn King last week called for the current system for calculating Libor to be scrapped.

Adair Turner, Chairman of the Financial Services Authority, said Sunday the public was justifiably angry over the Libor scandal, which has resulted in calls for Barclays Chief Executive Bob Diamond and Marcus Agius, the bank's chairman, to resign. Officials at Barclays were available for comment Sunday.

A survey by U.K. consumer-rights magazine Which?, results of which were released Saturday, found that 78% of Britons think where banks have broken the law, those individuals responsible should be personally prosecuted, giving an indication of the level of mistrust of the banking system among consumers. The survey also found that only one in five consumers believed the FSA was an effective body for regulating the banking industry.

Set every day under the auspices of the British Bankers' Association, Libor is one of the most widely used interest rates, affecting the cost of everything from business-account overdrafts to credit cards to mortgages. Libor rates are calculated for different currencies each day using quotes submitted by banks on a panel, based on the banks' estimated borrowing costs.

Barclays was only the first to pay its fine, and other banks expected to be found guilty of manipulating the rate.

Mr. King said Friday that the process of using quotes to calculate Libor should be replaced with a system in which actual transaction prices are used instead. "The idea that my word is my Libor is dead," Mr. King said.

Mr. Turner said it was a dark period for the reputation of U.K. bankers, with the past 10 days a particularly torrid time for the industry. In addition to the Libor scandal, Royal Bank of Scotland Group PLC (RBS.LN) has been grappling with software problems that left millions of customers without access to their accounts, while the FSA Friday confirmed it has reached settlements with the U.K.'s four major banks after it found "serious failings" in the sale of interest-rate hedging products to businesses.

"The governance at the top of our leading banks has been lamentably weak," Mr. Cable wrote in an article in the Observer newspaper Sunday.

"No one at the top of Barclays will take responsibility for systemic abuse," he said. "Shareholders have to get a stronger grip on weak boards and out-of-control executives."

The government would this week launch a consultation on whether there should be a presumption that directors of failed banks should not be allowed to work in the industry again, the FSA's Mr. Turner said.

Mr. Cable said the consultation would also examine whether criminal sanctions should be able to be brought against directors of failed banks.

Write to Peter Evans at [e-mail]

Ainsley Thomson contributed to this article.