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Libor Arrests, FSA Conflicts, Molycorp Probe: Compliance

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U.K. prosecutors are poised to arrest former traders and rate setters at UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc within a month for questioning over their role in the Libor scandal, a person with knowledge of the probe said.

The arrests will be made by police under the direction of prosecutors at the Serious Fraud Office within the next month, said the person, who declined to be identified because the matter isn’t public. Arrests in the U.K. are made at an early stage of the investigation, allowing police and prosecutors to question people under caution and may not lead to charges.

The SFO has 40 people working on the probe into manipulation of the London interbank bank offered rate, a benchmark for financial products valued at $360 trillion worldwide, and has involved the City of London Police, said David Green, the agency’s director.

The SFO opened the investigation in July at the request of British politicians after Barclays was fined a record 290 million pounds ($462 million) for rate manipulation. Regulators across the globe are investigating claims banks altered submissions that were used to set Libor in an effort to benefit traders, or to appear financially healthier than they were.

Regulators in the U.S. and U.K. are probing how derivatives traders and bankers who submitted interest-rate data colluded to rig benchmarks to benefit their own trades, and whether banks low-balled submissions in 2008 to hide their true cost of borrowing. Criminal probes by the SFO and U.S. Department of Justice are running in parallel with civil investigations by U.S. and U.K. agencies.

Barclays spokesman John McGuinness, UBS spokesman Richard Morton and RBS spokesman Michael Strachan all declined to comment.

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Compliance Policy

Japan FSA Considers Expanding Financial Crisis Response System

A Financial Services Agency panel in Japan today will discuss an expansion of its financial crisis response system to include brokerages and insurers, according to documents distributed by the panel in Tokyo.

Proposals will include expansion of the country’s deposit insurance agency’s role in times of crisis to help stabilize market liquidity. They also will address allowing the deposit insurance agency to inject capital into failed financial institutions.

FSA Considers Fines for Asset Managers on Conflicts of Interest

The U.K.’s Financial Services Authority is considering fines for some asset managers for failing to limit conflicts of interest.

The regulator said it observed poor practices including the favoring of certain customers over others, failing to report trading errors and inconsistent policies regarding the personal trading accounts of fund managers. The policies at firms for accepting gifts “might have caused concern about the objectivity” of decisions made for clients, the FSA also said.

Employees of some firms, which the FSA didn’t name, “often lacked awareness of situations where short-term business goals conflicted with the long-term interests” of customers, the regulator said in a letter to chief executive officers of asset management firms published on its website Nov. 9.

The FSA carried out a review of conflicts of interest at asset management firms between June 2011 and February this year and will select some firms for follow up visits. Rules require the boards of asset management firms to set up and regularly review policies to prevent unfair practices.

Austrian Watchdog to Gain Company Accounts Oversight in Proposal

Austria’s financial watchdog will be empowered to regulate accounting practices and financial reports under a government proposal to bring the country into compliance with an eight-year-old European Union law.

The Finanzmarktaufsicht, known as the FMA, will gain the authority to check auditing practices and financial reports under a law proposed Nov. 9, the Finance Ministry said. It covers companies with shares or bonds traded on Austrian public markets.

Austria has bailed out three banks since 2008, and prosecutors are investigating whether false accounting played a role. Retail investors have also suffered losses in real estate companies whose financial problems may have been hidden from investors.

No authority in Austria currently has the power to review company accounts. The proposed law will go before parliament for consideration next.

Solvency II Report May Reduce Insurers’ Hedges

A review of the application of Solvency II rules by Europe’s insurance supervisor may reduce insurers’ need for hedging.

The European Insurance and Occupational Pensions Authority (EIOPA) will launch an impact study in December to consider reducing the amount of capital European insurers are required to hold against guaranteed policies, Carlos Montalvo, executive director of EIOPA said at a Nov. 5 Actuarial Profession conference in Brussels.

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Borg Threatens Banks With Higher Risk-Weights to Cap Dividends

Swedish Finance Minister Anders Borg threatened banks with higher risk-weights on mortgages that would raise their capital requirements for housing loans should they try to increase dividend payments to shareholders, citing a need to keep banks stable.

Sweden’s largest banks have signaled they’re likely to steer excess capital to investors after exceeding regulatory capital requirements that take effect in 2015. Dividends paid for 2012 will rise by an average 16 percent, according to Bloomberg forecasts. Svenska Handelsbanken AB, Swedbank AB, SEB AB and Nordea Bank AB are required to hold higher capital reserves than their European peers as Sweden seeks to protect taxpayers from banking crises.

Borg signaled Nov. 9 he wants Sweden’s biggest banks to raise their buffers even further, saying that “the capital requirements that we have today are based on far too low risk weights.”

Risk weights on Swedish housing loans are among the lowest in Europe, averaging about 6 percent, according to the central bank. That compares with an average of more than 15 percent in Germany. Sweden’s FSA wants to increase risk weights -- which determine how much capital a bank must set aside to guard against potential losses -- to as high as 20 percent.

Swedish banks already have capital ratios that exceed the 12 percent core Tier 1 capital ratio they need to hold by 2015.

Compliance Action

HSBC Jersey Account-Holder List Probed by U.K. Tax Authority

British tax authorities are investigating a list of more than 4,000 British residents who have bank accounts with HSBC Holdings Plc, the country’s largest lender, in the offshore tax haven of Jersey.

The list, leaked by a whistle-blower, includes a man who was jailed for two years after more than 300 guns were found in his house and the owner of a farm where police discovered cannabis valued at 500,000 pounds ($800,000), according to the Daily Telegraph, which first reported the document.

Chief Executive Officer Stuart Gulliver’s attempts to cut costs at the bank are being hobbled by probes into money laundering and compensation claims from British clients. The London-based lender said last week it’s likely to face criminal charges from U.S. anti-money-laundering probes and warned the cost of a settlement may “significantly” exceed the $1.5 billion the bank has so far set aside.

“We are investigating the reports of an alleged loss of certain client data in Jersey as a matter of urgency,” HSBC said in an e-mailed statement Nov. 9. “We haven’t been notified of any investigation in relation to this matter by HMRC or any other authority but, should we receive notification, we will cooperate fully with the authorities.”

HSBC’s Swiss private bank is one of 11 financial firms in the Alpine country being investigated by the U.S. Department of Justice for allegedly helping American clients evade taxes. HSBC said in May that fines and penalties to settle the tax-evasion probe could be “significant.”

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Molycorp Investigated by SEC for Accuracy of Company Disclosures

Molycorp Inc., the owner of the largest rare-earths deposit outside of China, said it’s being investigated by the U.S. Securities and Exchange Commission over the accuracy of the company’s public disclosures.

The SEC notified the company of its probe in August, Greenwood Village, Colorado-based Molycorp said Nov. 9 in a filing. Molycorp said in the filing it’s cooperating with SEC staff and can’t predict how long the investigation will take. Jim Sims, a company spokesman, didn’t immediately respond to an e-mail and voice message seeking further comment.

Molycorp is increasing output at its Mountain Pass mine in California. The company, which sold shares in a July 2010 initial public offering, acquired Canada’s Neo Material Technologies Inc. in June for C$1.3 billion ($1.3 billion) to add production capacity in China.

Basel III Start Delayed as Bank Regulators Review Comments

U.S. regulators won’t hold banking companies to a Jan. 1 deadline they wrote into proposed rules for boosting the reserves lenders must hold against potential losses, they said Nov. 9.

The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency “do not expect that any of the proposed rules would become effective” at the start of next year, as they continue weighing views expressed during the comment period, they said in a joint statement.

The agencies are working “as expeditiously as possible” on rules proposed in June to align U.S. banks with standards set by the Basel Committee on Banking Supervision. The international accords set a Jan. 1 deadline for boosting capital requirements to guard against a repeat of the 2008 credit crisis. Most Basel committee member nations have yet to complete work on the rules.

The Nov. 9 statement was a response to concerns expressed by industry participants that they would have insufficient time to understand the rules or make system changes by Jan. 1. The American Bankers Association, Financial Services Roundtable and the Securities Industry & Financial Markets Association have said the rules as proposed could hurt credit availability, damp economic growth and hurt U.S. competitiveness.

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SEC Begins Formal Inquiry Into Knight Related to Computer Error

Knight Capital Group Inc.’s $457.6 million trading error in August is the subject of a formal investigation by the U.S. Securities and Exchange Commission.

Federal examiners are assessing the firm’s compliance with a rule governing risk-control procedures in its trading operation and other regulations, the company said in a filing with the commission Nov. 8. Knight was also the subject of on-site examinations into its capital and liquidity conditions, it said. Those inquiries have concluded.

The trading mishap, which Knight blamed on faulty software, pushed the Jersey City, New Jersey-based firm to the brink of bankruptcy and accelerated an industrywide assessment of how to improve controls in electronic trading systems. SEC Chairman Mary Schapiro described the mishap as “unacceptable” and promised to issue regulations to help prevent similar events.

The SEC is examining Knight’s compliance with the so-called market-access rule, adopted in 2010 to reduce the risk of trading disruptions and improper and manipulative activity. The rule, which went into effect last year, requires brokers to employ risk checks on orders before they’re sent to markets to make sure they aren’t erroneous and don’t exceed preset capital and credit levels.

Knight bombarded U.S. equity exchanges with erroneous orders on Aug. 1 after improperly installing software that malfunctioned, according to Chief Executive Officer Thomas Joyce. The trading caused volume to surge and prices to swing in dozens of securities listed on the New York Stock Exchange and NYSE Arca.

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U.K. FSA Bans Reverend Who Lost $1 Million on Forbidden Loans

The U.K.’s Financial Services Authority banned Reverend Carmel Jones for approving unlawful loans while serving as chairman of The Pentecostal Credit Union, which resulted in losses of 670,000 pounds ($1 million).

Jones approved 14 loans to a separate church organization, breaching rules that forbid credit unions to lend to other corporations. The FSA told Jones on three occasions that the loans were unlawful, the agency said in a statement on its website today. As a result of the ban, Jones can no longer hold a post at a financial firm regulated by the U.K. regulator.

The credit union escaped a fine because of the detrimental impact a financial penalty would have on the firm’s members, the FSA said. The credit union, which has 1,600 members and a loan book worth about 5.5 million pounds, replaced its entire management at the watchdog’s request.

Leslie Laniyan, the new chairman at the credit union, said in an e-mailed statement that its “previous directors made a number of mistakes” and the group apologizes “unreservedly” to its members.


Ex-Provident Royalties CEO Admits Guilt in $485 Million Scam

Paul R. Melbye, co-founder and former chief executive officer of Provident Royalties LLC of Dallas, pleaded guilty to conspiring to defraud investors of $485 million in an oil and gas scheme.

Melbye, 47, is the second Provident Royalties principal to plead guilty to a scheme that duped 7,700 U.S. investors through fraudulent private placements and limited partnership interests from 2006 to 2009, according to a statement by U.S. Attorney John M. Bales of Sherman, Texas.

Provident co-founder Joseph Blimline, 35, pleaded guilty in connection with the scheme in 2010 and was sentenced to 20 years in prison in May of this year, according to court records. Melbye, who pleaded guilty Nov. 8 before a U.S. magistrate judge in Sherman, faces as long as five years in federal prison at sentencing, according to the statement. No sentencing date has been set yet for Melbye.

Matthew Orwig, Melbye’s attorney, didn’t immediately return a call seeking comment on the plea.

The case is U.S. v Melbye, 4:12-cr-0169, U.S. District Court, Eastern District of Texas (Sherman).

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Fed’s Duke Says New Rules May Harm Home Loans by Small Banks

Federal Reserve Governor Elizabeth Duke said pending bank regulations may “seriously” impair mortgage lending by community banks, which play a “significant” role in the market for home loans.

Duke, a former community bank executive, said she and other Fed governors, including Chairman Ben S. Bernanke, are concerned about the potential harm from several rules mandated in the Basel III agreement and Dodd-Frank Act. If rules cause small banks to believe they shouldn’t sell mortgages, “it should raise red flags,” and policy makers should weigh whether the benefits of regulation outweigh the costs of reduced lending, Duke said Nov. 9 in a speech in Chicago.

“The totality of new mortgage lending regulations might still seriously impair the ability of community banks to continue to offer their traditional mortgage products,” Duke told community bankers Nov. 9 at an event sponsored by the Chicago Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Housing industry groups, including the Mortgage Bankers Association and the National Association of Realtors, have been warning that the Basel capital standards and the Dodd-Frank regulations will have a chilling effect on mortgage credit as they go into effect at the same time next year.

Regulators are preparing to release the language of two rules taking effect in January to set standards for non-abusive lending and require banks to hold a slice of risky mortgages on their books.

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