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Professor Michael Mainelli,Executive Chairman, The Z/Yen Group

[An edited version of this article appeared as "Libor Needed Reform – But State Control Of Market Information Is Dangerous" City AM, City AM Limited (February 2013), page 18.]

An £87.5million LIBOR fine for RBS and a $5billion fraud accusation against Standard & Poor’s. In both the ongoing LIBOR and credit rating agency sagas previously free and private information services are being pulled under regulatory controls. The unwritten constitution goes, markets depend on information; information should be competitively provided; information should be diverse. The constitution regulators are writing goes, markets are wild; private information providers are irresponsible; here are some new regulations.

Governments now claim to help control markets by controlling information. Financial markets should ring loud warning bells about the dangers we have created for ourselves through our own greed. Information providers have significant responsibilities; responsibilities that some shamelessly shirked. Many of us must have known about LIBOR but kept silent. Many of us must have wondered at poor rating work but kept schtum.

Some people see the answers in greater government control and criminal offences. But this week’s absurdity of a majority shareholder fining itself grievously, that is the government fining RBS, and extracting value minority shareholders cannot, should be ringing brain cells. Still, I have had to favour speedy government intervention and reform of LIBOR. Martin Wheatley’s review of LIBOR was speedy and recognised the danger of letting management of LIBOR slip under government control. “…public ownership would: change the relationship between the market that created and developed LIBOR, and the future evolution of the benchmark; reduce the incentive and ability for LIBOR to adapt to the needs of market participants; and potentially affect the choice of benchmarks by these participants.” Let alone create new incentives for manipulation by politicians.

We need to set out clearly the case for private financial information provision, which shouldn’t be hard as it’s virtually the same case for a free, independent and competitive press. It’s not such a coincidence to me that the Leveson Inquiry and the Wheatley Review are contemporaneous. Both recommend more transparency. On credit rating agencies, there has been insufficient reform. In Brussels there are still calls for government-owned credit rating agencies, a terrifying prospect to fill a reform vacuum. The three major agencies invoke the US Constitution’s First Amendment, the ‘free speech’ clause, implying that they have virtually no responsibility for what they say. Here’s a simple transparency; companies and public organizations can declare the amount the pay for debt ratings in their accounts, as they do for their audits. This would start to shed important light on the scale of potential conflicts of interest in the rating agency process.

But there remains a deeper issue in all the dark corners, lack of competition. We need to root out, not tolerate, cosy cartels. LIBOR and credit rating agency problems emerged from areas where competition wasn’t enforced, again, and there remain several other information and assurance zones with poor competition. We need clear roadmaps to drive LIBOR and credit rating agencies and other information providers towards competitive private delivery. Do we want a Soviet financial system with a Pravda for capital markets, or are we prepared to face up to competition?

Professor Michael Mainelli, Chairman of Z/Yen Group, the City of London’s leading commercial think-tank and author of “The Price of Fish: A New Approach to Wicked Economics and Better Decisions”, co-authored with Ian Harris and winner of the 2012 Independent Publisher Book Awards Finance, Investment & Economics Gold Prize.