LONDON, Jan 10 (Reuters) - Britain cannot supervise foreign bank branches properly, making it harder to spot wrongdoing like Libor rigging, the former head of the Financial Services Authority said on Thursday.
Branches, unlike subsidiaries, are mainly supervised by the bank's home regulator rather than the FSA, which must take a back seat on matters like capital requirements.
Hector Sants, who stepped down as FSA CEO last June, told a UK parliamentary commission on banking standards that branches were a "significant problem", as shown by manipulation of the London Interbank Offered Rate or Libor benchmark.
"The vast majority of the wrongdoing was done outside of the supervisory net of the UK," Sants said. "These big branches in the UK pose a significant threat to effective supervision."
Libor setting was overseen in London by the British Bankers' Association with many non UK banks contributing. Libor rates, compiled from estimates submitted by large banks, are used to determine interest rates on trillions of dollars of contracts around the world.
Sants was being quizzed just after the lawmakers grilled former top officials at Swiss bank UBS, which last month paid a $1.5 billion fine for rigging Libor.
UBS, which has a substantial presence in London, paid a 160 million pound fine to the FSA as part of the settlement.
Sants defended the FSA's role in the Libor scandal, saying it had acted swiftly in conjunction with U.S. regulators.
"We took Libor very, very seriously," Sants said.
Sants is due to take up the top compliance job at Barclays , the British bank that was first to settle charges of rigging Libor, an interest rate used to price home loans, credit cards and other products worth over $300 trillion.
He said it would be difficult for any regulator to spot misconduct if it was not visible to the firm itself. Five internal audits at UBS failed to spot the Libor rigging.
In another case involving a subsidiary, the London branch of U.S. bank JPMorgan was hit by a $6.2 billion loss after trades in credit derivatives went wrong.
Sants said he would use his insights as a regulator to improve culture and values at Barclays, something all firms needed to do.
"Unless the firms put in place a radically different approach to compliance and a radically different set of incentives, there is a very high risk it will come back round again," Sants said.
Regulators should be able to suspend bankers suspected of wrongdoing and ensure they are "struck off" if misconduct is proven, steps which would help change behaviour.
Anyone who presided over a major failure at a bank should have to prove they are "fit and proper" to stay in the industry, rather than the regulator having to do this, Sants said.
Some of the traders mentioned in the Barclays and UBS settlements were still "approved persons" under FSA rules - meaning they could work in the industry - the watchdog's head of enforcement, Tracey McDermott confirmed to the hearing.
Criminal investigations into individuals are continuing, she said, declining to elborate.
The parliamentary commission is due to report around March and is expected to recommend changes to the law to help restore trust in the tarnished banking sector.