UPDATE 3-UK plans to make currency-rigging a crime but rejects EU rules

Thu Jun 12, 2014 4:00pm EDT

* UK plans to ban rigging FX, commodities and fixed income prices

* UK's Osborne rejects similar EU law, plans to design own

* Opting out of EU law seen making no difference in practice

* BoE to lead review, to report in one year's time

* Foreign bank branches to face tougher management rules (Updates with full speech, adds Carney comments)

By David Milliken and Huw Jones

LONDON, June 12 (Reuters) - British finance minister George Osborne rejected European Union plans to outlaw currency market manipulation on Thursday and instead set out his own proposals to make rigging exchange rates a criminal offence.

EU laws taking effect in 2016 will make it a criminal offence with a four-year jail term to rig key prices in a wide range of financial markets.

But Osborne does not want these laws to apply in London, the world's biggest centre for currency trading.

Instead, he wants a panel led by the Bank of England to recommend new criminal sanctions which meet the needs of London, where much of the loosely regulated $5-trillion-a-day trade in foreign exchange takes place.

Britain has already introduced a maximum seven-year jail term for trying to manipulate the LIBOR interbank interest rate, and plans to introduce similar criminal penalties for rigging benchmarks in currency, commodity and fixed income markets.

"We will introduce tough new domestic criminal offences for market abuse, rather than opt in to European rules we do not think suitable or sufficient for our needs," Osborne said in a speech to London's financial community.

The finance ministry said the new rules would be as tough, if not tougher than the upcoming EU laws.

The opposition Labour Party said Osborne was acting too late to root out malpractice, and critics are likely to warn that the new legislation will be excessively influenced by Britain's financial sector.

But rejecting EU proposals may please lawmakers in Osborne's Conservative Party who oppose transferring more powers to Brussels. The large number of Britons who voted for the anti-EU UK Independence Party in last month's European Parliament election may also welcome the move.

"I am sure it's a big deal for political reasons but it won't make any difference at all as far as the process of prosecuting wrongdoers," said Simon Gleeson, a financial services lawyer at Clifford Chance.

Osborne has already clashed with the EU over laws which limit bankers' bonuses, and Britain has the right to opt out of EU rules that involve criminal penalties.

Bank of England Governor Mark Carney, speaking at the same event, backed Osborne's plans, saying they would complement existing efforts to raise professional standards in banking and promote the principle of "true markets".

"Seeking to manipulate, game or profit from unfair access transgresses that principle," Carney said. "It should thus have clear consequences, including professional ostracism."

The British Bankers' Association also welcomed the plan. "The key task ... will be ensuring that we have a system that is robust and punishes any wrongdoing while being sensitive to the need to continue to attract global banks and investors to the UK," its chief executive Anthony Browne said.

Antony Jenkins, chief executive of Barclays, which was fined for rigging Libor, said Osborne's plans will help restore trust and confidence in a vital part of the global financial infrastructure.

MANSION HOUSE SPEECH

Osborne set out the proposals in a speech at the Lord Mayor of London's ornate Mansion House residence, stressing the importance of integrity in Britain's financial markets to the economy as a whole.

More than 40 currency dealers around the world have now been fired or suspended following claims that traders used client order information improperly to attempt to manipulate prices. But no-one has been prosecuted under England's existing laws.

Some bankers worry privately that Osborne is trying to front-run and shape a similar study into forex market practices by the global Financial Stability Board (FSB), which is chaired by Carney.

Osborne argued that UK-specific laws are not about favouring London's financial sector - in the past a major source of tax revenue and economic growth - but about ensuring rules are appropriate to a financial centre that dwarfs those in most of continental Europe.

"I am going to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them," he said.

Britain's Financial Conduct Authority is investigating allegations that there were attempts to manipulate benchmark foreign exchange rates in London, and is only due to report back on this early next year.

The finance ministry wants the new rules to reflect those findings as well as the FSB's report on forex, due in a few weeks, as markets call for a common, global approach to reform.

"Regulators across the world need to coordinate as it's far from optimal to have different regimes, as we have already seen with EU and U.S. derivatives rules," said James Kemp, managing director of banking lobby AFME's global FX division.

"The end result has to maintain easy access to currency markets for users while also being safe and sound."

As well as criminalising benchmark price manipulation, the proposals suggest requiring branches of foreign banks operating in London to meet stricter rules on senior staff that are due to apply to British banks from next year.

Under these new rules, senior staff will be directly accountable if a bank goes bust, making it easier for regulators to prosecute individuals than after the 2007-09 crisis. (Additional reporting by William James; Editing by Hugh Lawson and Catherine Evans)

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