The Bank of England plans to beef up its watchdog role after it failed to spot one of the biggest scandals in the City’s recent history.
The central bank said a “root-and-branch” review of its market intelligence operations had found that some staff were unfamiliar with the way City firms operated.
But Threadneedle Street was immediately warned by a prominent MP that a draconian approach to regulation of London’s financial markets could chase business to New York or Frankfurt.
In a speech at Warwick University, Minouche Shafik, a deputy governor of the bank, said reforms would put staff in a better position to confront errant financial firms and rogue traders breaching market rules.
The review comes after BoE staff failed to spot the rigging of foreign exchange markets by some of Britain’s major banks. A review by Lord Grabiner, which cleared the regulator of any fault, criticised the Bank’s lack of expertise in key departments.
Shafik said moves to be more transparent meant ending an era of “constructive ambiguity” in favour of greater openness.
“The Bank’s dialogue with markets dates back to 1786 but the days of men in top hats and fireside chats are now a distant memory,” she said.
“Today, the Bank has a broader role than ever before. A clear understanding of the root causes of developments in financial markets must underpin the decisions we make about monetary policy and regulation of financial markets. Aligning our market intelligence function closely to the Bank’s mission, so that its purpose is clear and its approach is transparent, will ensure we continue to seize that opportunity.”
She added that tougher rules governing the regulator’s structure and training methods would allow a network of staff covering 23 markets and sectors to gain firsthand insights “on short-term moves and long-term trends relevant to all the Bank’s policy functions”.
Andrew Tyrie, chairman of the Treasury select committee, said the move to tighten controls could have the opposite effect and prevent staff from gathering important information.
He said: “The Bank has done the right thing to tighten its internal controls but it will have to make sure that these don’t choke off high-quality market intelligence. It needs that intelligence to do its job properly when it operates in, or supervises, financial markets and also to help challenge its own internal assumptions about how markets are operating.
“The Bank will now also need to ensure that it is developing enough internal expertise to assess the intelligence that it gathers.”
Grabiner, a barrister, said the $5.3tn-a-day (£3.4tn) forex market needed to be regulated but an excessive clampdown could cost the City if it lost business to Frankfurt or New York.
Appointed by the Bank of England last March to review allegations that its staff knew about foreign exchange rate manipulation, Grabiner told the Treasury committee: “One of the curiosities of this marketplace is that it was not regulated.”
The Financial Conduct Authority fined five leading banks including the taxpayer-controlled Royal Bank of Scotland a total of £1.1bn in November for rigging the foreign currency markets.
Penalties from the US authorities brought the total tally to a record £2.6bn. The investigations centred on traders’ use of chat rooms to coordinate currency rates in the minutes leading up to a daily 4pm “fix”.
Grabiner told the committee: “My own view is that you can’t leave a market of this size in an unregulated form. You really do need to have a careful look at it, but you must not undermine the valuable marketplace you have created because if you make it too expensive or too complicated it’ll end up in Frankfurt or New York or somewhere else and then UK Plc loses out.”
Shafik is conducting a sweeping review into the global markets for fixed income, foreign exchange and commodities, which together generated $117bn of revenues for the big investment banks in 2013. She is due to report in June.
This article was written by Phillip Inman, economics correspondent, for theguardian.com on Thursday 26th February 2015 19.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010