Brussels has unveiled plans to police financial market benchmarks in an attempt to prevent a repeat of the Libor and Euribor rigging scandals that erupted across the City and other financial centres last year.
Michel Barnier, the European commissioner responsible for financial services, said some of those responsible for the market abuse should be jailed as, he argued, the cartel-like collusion in supplying financial market benchmarks had created conditions where the entire financial system "was built on sand".
He claimed that the proposed regulatory framework would "deliver a safer and more robust financial system".
But in a victory for British government lobbying, Barnier backed away from putting the Paris-based European Securities and Markets Authority in charge of regulating Libor – the interbank borrowing rates that are set and policed in London.
Regulatory power over Libor is to remain with the UK's Financial Conduct Authority (FCA), which received powers to oversee the key benchmark rate in the wake of last year's scandal.
Senior EU officials had wanted the new powers to go to Paris and the commission proposed that earlier in the summer.
Barnier denied there had been any climbdown, arguing that the regulatory powers would stay with national bodies because it was easier and quicker to do it that way.
The FCA had learned from past mistakes, Barnier said. "The British authority to whom I give this role will be sovereign … It is a question of trusting them on that." The FCA's predecessor, the Financial Services Authority, fined Switzerland's UBS bank £160m, the Royal Bank of Scotland £87.5m and Barclays £59.5m for manipulating the key interest rate.
A number of European banks have also been contacted by regulators investigating Euribor rigging, with Deutsche Bank under investigation by Germany's financial watchdog.
If agreed, the legislation will affect how all benchmarks are set, including North Sea Brent crude, which helps to determine the price of petrol.
The reform will introduce a basic legal framework, with standards and sanctions, to govern all benchmarks across the 28-country EU.
The plans outlined on Wednesday still have to be approved by EU governments and also by the European parliament, meaning there could be further fights ahead.
UK officials said there remained questions over the scope of the proposed new rules. If adopted, the new regime would enter force by 2015 at the earliest.
According to commission analysts financial transactions worth some €500tn (£419tn) have been based on the London- and EU-set benchmarks, with a huge knock-on effect on mortgage-rate setting, business and consumer lending.
Barnier said the scandals of market-rigging and rates manipulation occurred because there was no regulator, in the case of the UK until last year.
He said the new system should also extend to commodities price-fixing, noting that the EU commissioner for competition was currently investigating practices in the oil markets while the British were looking into a potential gas price-fixing scandal.
In May European commission officials raided the offices of Shell, BP and Statoil in an investigation into suspected manipulation of oil prices.
Barnier, a former French government minister, denied that the proposed new powers were weak.
They would entail inspection rights, demands for firmer data on rate-setting practices, rather than the widespread use of estimates, and powers to fine miscreants.
"Some people have so manipulated," he said, "that they should go to prison."
The commission said: "Where a benchmark is not robust and is subject to the risk of manipulation, as was the case with Libor and Euribor, its use may harm investors, markets and the wider economy.
"Consumers will be harmed when their mortgage repayments or the returns from pension funds in which they invest their savings are altered as the result of the manipulation or unreliability of the benchmarks to which they are referenced."
According to the European Central Bank, €3tn was on loan to the non-financial sector in spring last year at floating interest rates assumed to use the Euribor as the benchmark.
Legal action has been launched by consumer groups in Italy arguing that rigging of the Euribor rate cost 2.5 million Italian households €3bn.
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