Britain's financial regulator warned Barclays four months before it was hit by a record fine for rigging interest rates that the bank's culture was too aggressive and must change, a person familiar with the matter said.
The disclosure to Reuters that the regulator believed Barclays had "pushed the boundaries" in some areas came two days after its U.S. chief executive, Bob Diamond, was forced to resign because the bank was found to have manipulated the interest rate that underpins global transactions worth trillions of dollars.
A contrite Diamond, 60, appeared on Tuesday before a committee of British lawmakers who raised concerns about the relationship between Barclays, the country's third-biggest bank with a reputation for aggressive business dealings, and the country's financial regulatory authorities.
Barclays under Diamond had become known as a hard-charging bank that paid big salaries and bonuses, something that has attracted growing political, public and press criticism in Britain as the country bumps along in a double-dip recession that has seen the ranks of the unemployed swelling.
Boastful emails promising gifts of champagne between Barclays traders involved in the rate rigging scandal prompted calls for big banks to be broken up, with their retail units split from the riskier investment banking arms, whose activities the media has said amount to no more than "casino banking".
Andrew Bailey, head of banking supervision at Britain's Financial Services Authority (FSA), attended a meeting of the entire Barclays board in February and told the bank to change its ways, the source told Reuters on Thursday.
"It was made clear that there were some cultural issues that needed to be addressed and some perceptions of the firm that they pushed the boundaries on certain things," the source said.
"It was made clear it was a matter for the board to deliver that," the source said. The bank was told it also needed to improve its relationship with the FSA and its supervisors.
"They were told you need to change that, you need to address it, and you as the board need to come up with ways to do it," the source said.
Barclays and the FSA declined to comment.
There were a dozen people on the main Barclays board, including Diamond, chair Marcus Agius and Finance Director Chris Lucas. Other non-executives include Michael Rake, chairman of BT Group and with 30 years experience at KPMG, and John Sunderland, former chairman and CEO at Cadbury Schweppes.
Board members contacted by Reuters this week have so far declined to comment.
Agius resigned on Monday in a failed attempt to divert the heat from Diamond.
Barclays was fined a record $450 million last week by U.S. and British regulators for rigging the London Interbank Offered Rate, or Libor, between 2005 and 2009, sparking fierce criticism about its culture and risk-taking.
While some of the banks' traders rigged the rate, which is compiled from submissions by major banks, for profit, Barclays also manipulated Libor, which indicates the interest rate at which banks borrow, in order to make its own borrowing costs look lower at the height of the financial crisis.
Libor is used as a basis for anything from student loans to mortgages and complex financial instruments.
Diamond suddenly resigned on Tuesday, after sources familiar with the matter said the Bank of England and FSA made clear they wanted him to go. Diamond said he resigned because his leadership had become a focus for criticism.
Andrew Tyrie, chairman of the House of Commons Treasury Select Committee, on Wednesday revealed that the FSA was concerned about a "breakdown of trust" with Barclays as well as the bank's aggressive culture.
"They felt there were some cultural issues," Diamond admitted to Tyrie during three hours of testimony before the committee.
"There had been a series of things, such as Protium, which became quite an issue between the FSA and ourselves," he said.
Protium was a controversial deal set up by Barclays three years ago to ring-fence $12 billion of toxic assets. Barclays said it would cut risk, but it was run by former Barclays bankers and involved a costly 10-year loan, which the bank subsequently has tried to end early.
Barclays has also been accused of running "highly abusive" tax avoidance schemes, and all big British banks have been hit by a multi-billion-pound insurance mis-selling controversy.
The government has said it will launch an inquiry into the banking industry.
Bailey said on Friday that bank boards need to be aware of potential dangers, and need to "think very hard" about how to regain trust among the public.
Barclays' board also includes Andrew Likierman, chairman of Britain's National Audit Office and a former managing director at the Treasury and director of the Bank of England; Alison Carnwath, a 20-year veteran of investment banking; and Dambisa Moyo, a former Goldman Sachs banker and previously at the World Bank.
The Libor figures submitted by banks are compiled by Thomson Reuters, parent company of Reuters, on behalf of the British Bankers' Association.