The main corporate regulator ASIC reckons banks can’t be trusted to set key benchmark interest rates and need closer supervision.
ASIC yesterday released a report or blueprint for banks to determine benchmark interest rates that set the interest charges for borrowers of all types – from mortgages to commercials.
Benchmark interest rates are set daily by market participants through various mechanisms and are used to determine interest rates on billions of dollars of bonds and other loan securities.
They can also determine how much banks and other borrowers pay the holders of some of their bonds and hybrid securities.
For example, Australia’s bank bill swap rate is also used by the banks to set lending rates on home loans and commercial loans (and it is also closely watched by the Reserve Bank).
In the report released yesterday ASIC warned banks and others to follow its blueprint for setting these key benchmark rates, or face further punishment.
The report was released as ASIC investigates the potential manipulation of the bank bill swap rate – a probe the media has reported is being frustrated by banks – with the ANZ named in some reports (it has suspended seven dealers).
ASIC has already said it is looking into the conduct of both domestic and foreign banks and has already accepted enforceable undertakings from three foreign banks – UBS, BNP Paribas and Royal Bank of Scotland – totalling $3.6 million.
ASIC’s probe follows on similar scandals in the UK in particular where a number dealers at major banks have been found to have manipulated the key London Interbank Offered Rate (Libor) for the benefit of their employers.
Multi billion dollar fines have been levied as a result in what is merely a series of illegal behaviours by banks and their employees in the UK, Europe and the US involving manipulating key rates (such as the old gold fix or foreign exchange settlement prices).
ASIC said in yesterday’s report that benchmark rates were manipulated to increase the value of positions held by a certain bank, to trigger stop losses among clients and force them into losses, by sharing confidential client information and submitting low rates to force down an institution’s cost of funding.
Poor oversight, bad culture or incentives that encouraged such actions had contributed to misconduct that had resulted in client losses, while undermining confidence in financial markets, the report said.
"Poorly-designed incentives are central to misconduct. However strong the compliance structures that are put in place, poorly-designed incentives will inevitably increase the risk of non-compliance with legal requirements at the individual level," the report said.
ASIC said banks must improve “compliance systems, controls, procedures, policies, governance and senior management oversight arrangements, as well as incentive structures”.
The culture and behaviour of banks and their employees has already been criticised repeatedly by key regulators such as the Reserve Bank and by APRA on at least four occasions since March of this year.
These comments have been taken to apply to the behaviour of banks over the various financial planning rip off and scandals.
ASIC has also joined the critics and from yesterday’s report it’s clear it has included this benchmark manipulation in its commentary.
ASIC said that dealers should also review past conduct and report any findings to ASIC while wealth managers and other investors should engage with dealers to make sure they are handling orders appropriately.
ASIC Commissioner Cathie Armour said in yesterday’s statement that "Financial institutions must get this right. That is, have the right culture, oversight, and incentives in place to make sure they do not abuse client trust and threaten market confidence."
Ms Armour said, "ASIC is looking at the conduct of Australian institutions here and overseas, as well as foreign financial institutions that are active in Australia”.
