Financial Services Authority Chairman Adair Turner said banking scandals, including Libor rate fixing, and “huge” bonuses, have destroyed the public’s trust in the U.K. financial industry.
Turner, who has been chairman of the FSA since 2008, said that bankers, politicians and regulators must commit to fundamental changes to rebuild the bond with the country after the London interbank offered rate scandal that led to the resignation of Barclays Plc’s Robert Diamond.
The outrage over the U.K. banking system is “a fury about values, provoked by the quotes revealed in the Libor scandal: ‘come over ... and I’m opening a bottle of Bollinger,’ so we can celebrate fixing the Libor rate,” Turner said in the text of a speech at the Bloomberg offices in London. “Those quotes reveal a dealing room culture of cynical greed.”
Diamond stepped down as chief executive officer of Barclays on July 3 following the bank’s admission that it submitted false Libor information to benefit derivatives trades and bolster its own positions. Barclays, Britain’s second-biggest lender by assets, was fined a record 290 million pounds ($449.5 million) in U.K. and U.S. probes last month.
Turner said that the country should adopt the Independent Commission on Banking’s recommendations to erect fire breaks around consumer banking operations, and commit to more intense supervision of the financial industry.
Still, there are limits to the regulators’ oversight. It would have been difficult for supervisors to spot some of the manipulation of interest rates at the heart of the Libor scandal, Turner said.
In relation “to the manipulation of rates by a minute amount for a short period in either direction, I do not believe these problems could have been spotted from outside except via supervision so intensive as to be prohibitively expensive,” Turner said.
Martin Wheatley, designated to become CEO of the Financial Conduct Authority when the FSA is split in two, will report on whether Libor setting should be regulated and whether actual trade data can be used to set the benchmark by the end of August.
In addition to government and regulatory actions, banks must change the culture that has led to Libor, and other scandals, including the improper sales of payment-protection insurance. Bank boards need to question basic product decisions and their revenues, he said.
“If the top management and board of a retail bank observes that it is making huge profit margins on an ancillary product sold by a commission-incentivized sales force: what does it do?” Turner said. “Congratulate the sales teams and increase the targets, or ask searching questions about whether the product is truly in consumers’ interest.”
“If it is serious about values and culture, it has to do the latter: but that’s not what happened in most U.K. retail banks in the case of payment protection insurance,” he said.
Turner said he was “very concerned” about the Euro area’s sovereign debt crisis, and that the link between banks and state funding problems would have to be cut for the currency bloc to survive.
Lawmakers should speed up efforts to create a banking union for Euro region banks, giving them direct access to state funds, Turner said.
Spain’s bailout of its regions risks pushing the nation closer to needing a full international rescue as it struggles to maintain market access with 10-year bond yields hovering at 7.5 percent.
Economy Minister Luis de Guindos will visit Berlin today for crisis talks with German counterpart Wolfgang Schaeuble. After taking on as much as 100 billion euros ($121 billion) of bailout loans to aid banks, the risk for Prime Minister Mariano Rajoy’s government is that the additional burden of helping regions pushes bond yields to unaffordable levels.
Turner’s chances of succeeding Bank of England Governor Mervyn King have increased since last month, according to bookmaker Paddy Power Plc. His odds to replace King have lengthened from 9/2 to 7/2, while those of deputy governor Paul Tucker have worsened to 5/2 from 6/4.
Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. Lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.