Older readers may remember the Maxwell scandal. This was a case of theft from a pension fund. Not surprisingly, theft of hundreds of millions of pounds is illegal. But, the UK government thought that, rather than making some simple changes to primary legislation to make theft less likely (for example, by having more independent trustees within pension funds), they would regulate defined-benefit pension schemes. Older readers might also remember private-sector, defined-benefit pension schemes. Younger readers cannot join them anymore because the regulation hammer (and some other factors) led to the vast majority closing down.
We must be careful with regard to the LIBOR scandal. The British Bankers Association (BBA) is, in a sense, a private regulator for LIBOR and the government seems to be using this as an excuse for castigating the private sector and bringing in government regulation. However, private regulation has an excellent history, and government regulation certainly has not proven itself superior in the financial sector.
We should resist arguments for more government regulation of LIBOR: neither government nor private regulation can bring about perfection. But we also need to point out any disingenuous statements from the proponents of government regulators given that the BBA states: "As all contributor banks are regulated, they are responsible to their [government] regulators, rather than BBA LIBOR Ltd or the FX&MM Committee, for maintaining appropriate procedures for contributing, including the maintenance of internal chinese walls."
But, surely, the main problem is not regulation in any case. Given Britain’s strict libel laws, I need to tread carefully. However, if what has happened is not fraud (and it is not being prosecuted as such at the moment) it ought to be. We do not need a specific government financial regulator to prosecute fraud and theft.
Secondly, as the minister has said, there is a moral and cultural issue here. Regulation is the wrong tool to deal with moral and cultural issues.
We have a confused regulatory system here. Instead of blaming private regulation we should perhaps go the whole hog and remove government regulation from the picture. LIBOR is a private arrangement and the banks that set it have the strongest incentives to keep it honest. The government should stick to prosecuting fraud. The private sector institutions that have an interest in LIBOR should club together and make sure that they impose the strongest possible penalties on those that disobey the letter or the spirit of the LIBOR regulations set by the BBA.
Something like ‘my word is my bond’ would be a good start and, if someone’s word proves not to be their bond then the sanctions – administered by the club itself – should be severe. Indeed, the market sanctions have been severe already. Barclays’ share price is down 15 per cent. We cannot expect perfection and to avoid all incidents within financial markets, but this seems like a good feedback mechanism to me.