Simon Dawson/Bloomberg NewsTracey McDermott and Andrew Bailey of Britain’s Financial Services Authority testified before a parliamentary committee on Monday.LONDON – The relationship between regulators and banks came under scrutiny on Monday when senior officials from the Financial Services Authority of Britain testified before a parliamentary committee about the rate-rigging scandal.
Lawmakers accused the British regulator of not moving quickly enough to deal with the manipulation of the London interbank offered rate, or Libor. Politicians also took aim at the management style of Robert E. Diamond Jr., the former chief executive of Barclays, bank who resigned because of the scandal.
During more than two hours of testimony, the senior officials at the Financial Services Authority faced questions about the type of management style at the bank that may have caused the problems to occur.
“There was a culture of gaming” at Barclays, Andrew Bailey, head of banking supervision at the authority, told the parliamentary committee on Monday. “You couldn’t escape the fact that the culture from this institution was coming from the top.”
When asked if that referred to Mr. Diamond, Mr. Bailey said it was.
The revelations contradict the testimony of the former Barclays chief, who told the same committee in early July that regulators had not flagged concerns about the British bank’s senior management.
“The tone at the top was something that they were specifically happy with,” Mr. Diamond said in reference to the Financial Services Authority.
Adair Turner, chairman of the British regulator, said he had been “surprised” by Mr. Diamond’s recollection of the regulator’s view of senior management.
Mr. Turner had written to the chairman of Barclays, Marcus Agius, in April detailing specific worries about the bank’s corporate governance. He highlighted a number of irregularities, including the bank’s efforts to avoid paying around $770 million in taxes, and questioned some of the bank’s accounting methods.
On Monday, Mr. Bailey put it more bluntly.
“Whatever the form of governance, the substance wasn’t working,” he told the committee.
British politicians also aimed their anger at the regulators, blaming them for not moving quickly to stop the rate-rigging scandal.
Documents released by authorities and Barclays show that government officials had been told about the potential manipulation of Libor as far back as December 2007. Barclays had contacted the Financial Services Authority 13 times about problems with the rate, though Mr. Turner said the bank had not been completely forthcoming about its own role in the scandal.
“They were not entirely honest with us,” Mr. Turner added.
Despite signs that Libor was being manipulated, the agency only opened its official investigation in early 2010. It had been working with the Commodity Futures Trading Commission since 2008, the British officials told the parliamentary committee on Monday.
For the British lawmakers, the regulators’ were not good enough.
“This was unregulated, and you were warned about it,” said George Mudie, a British politician who sits on the committee overseeing the testimony. “It should have been settled before this whole thing blew up.”
Mr. Turner accepted that the British regulator had not dealt with the potential risks of Libor.
In part, that was because British government officials had not realized the rate, which underpins trillions of dollars of financial products worldwide, could be influenced by banks. He added that it was impossible to know if the manipulation of Libor had been completely stamped out.
“There was no indication between 2005 and 2007 that the Financial Services Authority perceived the submission produced for Libor as a risk area,” the regulator’s chairman told the committee. The chance of “deliberate manipulation was just waiting to happen.”
The Financial Services Authority is currently investigating several other global financial institutions about their role in the interest rate scandal, according to testimony on Monday from Tracey McDermott, the authority’s director of enforcement and financial crime.
Barclays agreed last month to a $450 million settlement with British and American authorities. Analysts have said that international banks may have pay tens of billions of dollars in fines to settle lawsuits. The Barclays case included incriminating e-mails from traders, who asked colleagues to alter Libor submissions to benefit their own trading positions.
When asked if further correspondence might surface from other banks, Ms. McDermott responded: “Yes, we have found a lot of e-mails.”