Following the release of the FSA’s Final Notice in respect of Barclays’ LIBOR fine (27 June 2012), the FSA Chairman ordered an internal audit to assess the extent of the FSA’s knowledge of the “lowballing” (i.e. deliberate submission of low LIBOR rates by LIBOR panel banks), an issue which had been highlighted in the Barclays’ Final Notice. On 5 March, the FSA published its report (the “Report”) which covers events in the period January 2007 to May 2009. Significantly, in light of the issues identified in subsequent LIBOR Final Notices, the Report does not focus on the FSA’s awareness of so-called “trader manipulation” of LIBOR in that period.

The Report identifies a number of mitigating features in the FSA’s conduct during the relevant period, principally (1) its (understandable) pre-occupation with the unfolding financial crisis in the relevant period and (2) the natural “dislocation” that this created between the LIBOR rate submissions that would be expected from panel firms and those actually submitted which may have masked inappropriate lowballing. Of more interest are the conclusions which bear similarities with some of the systems and controls criticisms levelled against banks in the LIBOR Final Notices to date. The Report concludes that the FSA should have made sure that communications (26 of which made express reference to lowballing) were better analysed, circulated and escalated in an appropriately targeted manner. The FSA (in its Management Response) accepted that it had been “too narrowly focused in its handling of LIBOR related information”.

Looking ahead, the Report makes several recommendations regarding the Financial Conduct Authority and Prudential Regulation Authority, including that they establish effective working arrangements for the circulation, sharing and escalation of information and that they “maintain the necessary breadth of perspective” to identify issues at an early stage.