The Barclays Libor scandal involving price fixing of key interbank lending rates has already led to two major resignations at the bank, and has increased scrutiny on the global financial industry.
Barclays (NYSE ADR: BCS) last week was slapped with a $456 million fine for rigging Libor rates, the rates banks charge each other for loans.
The record fine was levied to settle an investigation into attempted manipulation and false reporting related to two benchmark interest rates. Those rates help determine terms of loans and financial contracts around the world that form the basis for hundreds of trillions of dollars' worth of transactions.
The news has been a major blow to Barclays' once stellar reputation, and now led to the fall of Chief Executive Officer Bob Diamond.
Barclays CEO Diamond Resigns
Diamond resigned Tuesday, a day after Chairman Marcus Agius stepped down amid the scandal.
"The external pressure placed on Barclays has reached a level that risks damaging the franchise – I cannot let that happen," Diamond said in a statement Tuesday.
Agius took the blame Monday, acting as the fall guy. He said in a statement, the "buck stops with me, and I must acknowledge responsibility by standing aside."
Then a pressured Diamond announced he would leave, and Britain's politicians and regulators labeled this the first step towards "a new culture of British banking."
Scores of shareholders lobbied for Diamond to take responsibility.
John Mann, a Labour politician and among the panel of lawmakers who this week will question Diamond and Agius, said Monday on Sky News, "He (Diamond) must resign. He"s got to go. There is no role for people like him if banking is to be trusted again in this country and if British banking is to restore its tarnished reputation in the world, which of course is of great importance to our economy."
Agius will lead the bank temporarily and help search for a new CEO.
Barclays' board, trying to do some damage control, announced it would begin an audit of the financial services firm's business practices.
The Barclays Libor Scandal Aftermath
In the wake of the scandal, some 20 institutions all over the world are under investigation in connection with interbank lending rates. Those under scrutiny include behemoths HSBC (NYSE ADR: HBC), Royal Bank of Canada (NYSE: RY), Royal Bank of Scotland (NYSE ADR: RBS) and Citigroup (NYSE: C).
The fine, the inquiry and the heads that are starting to roll should be a "watershed" moment for the wider financial industry to "clean up its act and restore public trust," Britain's Financial Services Authority said.
Regulators have emphasized that the idea that Britain's top four banks may have mis-sold interest rate swaps to businesses means the financial sector cannot govern itself.
"Instead, it sells products to the wrong people at the wrong time in the wrong way," Tracey McDermott, acting head of enforcement at the Financial Services Authority, told an FSA conference. "To change things in the future, to restore that trust and confidence… requires tough action from the regulator but it's not our job alone."
"Perhaps the reaction to the penalty imposed last week on Barclays will be a watershed moment, the point when the industry realizes that it also has to rise to the challenge and to recognize that things have to change," McDermott continued.
What Barclays Scandal Will Do to Industry
The Barclays Libor scandal is not an isolated case.
Since the financial crisis of 2007-09 financial watchdogs have stepped up their efforts to punish rogue and dishonest traders and executives, while protecting investors.
With that in mind, the FSA will be replaced early next year by the new Financial Conduct Authority. The FCA will have the ability to act faster and intervene earlier to ban products without an initial detailed probe if consumers are being cheated.
Martin Wheatley, chief designate of the FCA, told an FSA audience, "We will not be deterred from taking on and tackling wrong doings no matter how complex the case."
Barclays is the first offender to have been assessed and settle, and is now the poster child for this abuse, according to Euan Stirling of Standard Life Investments.
"I think this is going to spread far and wide through the industry," Stirling told BBC radio.
Change has already begun. On June 27, the U.S. Commodity Futures Trading Commission ordered Barclays to keep detailed records on how it determines its London interbank rate submissions and to erect so-called Chinese walls between traders and rate-setters.
Lenders should be prepared for random checks from regulators on whether their submissions reflect actual borrowing costs, and be willing to provide data to regulators on the spot.
The new requirements will provide a blueprint for what might be required of other banks.
"You've got to have everybody playing the game by the same rules,' Owen Watkins, a former FSA regulator and now a London lawyer, told Bloomberg News. "It's like playing baseball with some guys throwing proper baseballs, while some guys throw golf balls."
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