Britain's Financial Services Authority finalized new rules this month that bring regulatory oversight of the London Interbank Offered Rate (LIBOR)—a benchmark used to set interest rates for trillions of dollars in securities—under the scope of the government.

The new rules follow recommendations made by the “Wheatley Review of LIBOR.” In July 2012, Chancellor of the Exchequer George Osborne commissioned Martin Wheatley, chief executive officer-designate of the FCA, to conduct a review of LIBOR's structure and governance and the corresponding criminal sanctions regime.

Administrators and banks must appoint an individual, approved by the FCA, to oversee compliance. Banks also will be required to have in place a clear conflicts of interest policy and appropriate systems and controls, the FSA stated. These requirements will result in “clear, robust rules which will give firms and their employees comfort that the regulatory regime clarifies what is expected of them." 

The Wheatley Review outlined numerous deficiencies in firms' systems and control procedures, weaknesses and conflicts of interest in governance frameworks, as well as a lack of credible external oversight by the administrator of LIBOR. It further recommended to the government that LIBOR activities be brought within the scope of statutory regulation. The final report was published in September 2012.

In response to those recommendations, the FSA inserted provisions into the Financial Services Act 2012, giving it authority to regulate financial benchmark activities. Initially, the only specified benchmark will be LIBOR.

Under the Act, effective April 1, the U.K. will have a whole new financial regulation framework. The FSA will be replaced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority, with the Bank of England having overall responsibility for financial stability. A new Financial Policy Committee of the Bank of England is also being created. With this new framework, LIBOR benchmarks fall under the scope of the FCA.

Historically, financial benchmarks have been set by the financial markets themselves, outside the scope of any regulatory regime. In the case of LIBOR, however, “this industry-led approach has failed,” the FSA stated.

“Confidence and trust are critical to financial markets,” Wheatley said in a prepared statement. “That trust has been eroded by the Libor scandal and the recent enforcement action against several banks.” Wheatley added that the new rules “should help restore that faith and bring integrity back to Libor.” 

Following a consultation, the FSA has finalized proposals for the regulation and supervision of specified benchmarks, including LIBOR, implementing recommendation of the Wheatley Review. Under these proposals, benchmark administrators must corroborate submissions and monitor for any suspicious activity.  

Criminal prosecutors in the U.S. and other countries are investigating several major banks worldwide over allegations that they rigged the LIBOR. Currently, three banks—Royal Bank of Scotland, UBS, and Barclays—have already paid significant fines.

In February, the FSA fined RBS £390m ($612 million). The RBS fine marked the third issued by the FSA in respect to LIBOR. In December 2012, Swiss Bank UBS paid £160 million ($260.2 million). The first fine of £59.5 million was issued against Barclays Bank in June 2012.