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UK clamps down on markets after trader scandals

[LONDON] Britain announced plans to clamp down on abuse in financial markets on Wednesday after a string of scandals that sullied the reputation of the financial system and have so far cost banks US$19 billion in fines.

Under the proposals, criminal penalties currently in place for insider trading in shares would be extended to fixed-income, currency and commodity (FICC) markets with jail sentences for offenders lengthened to up to 10 years.

So-called "rolling bad apples" or individuals who are fired from financial firms would no longer be able to move to another job without their new employer knowing about their history.

And far more managers in FICC markets would be on the hook for making sure that their staff stick to the rules although unlike bankers they will not automatically be presumed to be responsible for misconduct on their watch, potentially weakening its impact.

Bank of England Governor Mark Carney said central banks had shared in the failings of the system in the past. The new accountability rules would extend to him and his deputies at the BoE which was caught up in a foreign exchange scandal last year.

Carney said real markets were essential to guarantee prosperity.

"Not markets that collapse when there is a shock from abroad. Not markets where transactions occur in chat rooms. Not markets where no one appears accountable for anything," he said.

His comments were made in excerpts of an annual speech he was due to give later on Wednesday to London's finance industry chiefs.

The Fair and Effective Markets Review - which aims to plug gaps in the largely unregulated foreign exchange market in particular - was ordered by British finance minister George Osborne a year ago after several British banks were fined billions of pounds in 2013 for trying to rig a widely used interest rate benchmark, the London Interbank Offered Rate or Libor.

Some of the same banks were hit later by more fines for trying to manipulate the US$5 trillion-a-day foreign exchange market at a time when the Libor rigging was being uncovered.

"Individuals who fraudulently manipulate markets and commit financial crime should be treated like the criminals they are - and they will be," Mr Osborne said.

The review was carried out jointly by the Bank of England, the Financial Conduct Authority (FCA), Britain's top markets regulator, and the finance ministry.

Britain has already introduced a law to prevent manipulation of eight major market benchmark rates, including those at the centre of the Libor and foreign exchange scandals. Those rules feature the threat of prison sentences which will be increased under the new proposals.

The European Union is also close to approving a law to tighten supervision of market benchmarks after agreeing tougher rules to penalise abusive trading practices and to inject more transparency into trading.

The success of Britain's review will largely hinge on whether regulators from other parts of the world follow suit, given the global nature of the markets involved.

Mr Carney, who chairs a global regulators body, the Financial Stability Board, was due to say in his speech that he would urge his peers at a meeting in London next week to adopt similar measures.

Some market experts have previously said the creation of a new Markets Standards Board - one of the proposals made on Wednesday - may duplicate some of the responsibilities of the FCA, while having little or no enforcement powers of its own.

Mr Carney said that if firms did not meet the standards set by the new board, tougher rules would be inevitable.

Mr Carney made no mention of British monetary policy in his speech.

In his 2014 speech at the Mansion House, the official residence of London's lord mayor, Mr Carney told investors that interest rates could rise sooner than they were expecting, startling markets and causing a jump in sterling.

But the plunge in global oil prices in the second half of 2014 pushed back expectations of when rates would rise, leading to some criticism of Mr Carney for giving confusing guidance on the Bank's likely next steps.