(Corrects first paragraph in Sunday story to indicate questioning is this week, not next week, on Tuesday)
By William Schomberg and William James
LONDON, March 9 (Reuters) - Mark Carney faces probably his toughest questioning so far as Bank of England governor on Tuesday when lawmakers will seize on a foreign exchange scandal to press their demands for tighter oversight of the central bank.
Carney arrived from Canada last July as an outsider with a mandate to shake up the 320 year-old institution, from monetary policy to its relationship with the powerful banks of the City of London.
A group of influential members of parliament wants Carney to change the way the BoE polices itself too.
Their long-standing frustrations with what they say is the Bank's outdated governance system broke out again last week when the BoE suspended an official amid an internal review into whether Bank staff turned a blind eye to possible manipulation of key rates by foreign exchange traders.
The meetings at which the BoE and traders discussed possible problems in the market took place as far back as 2006, seven years before Carney's arrival in London.
But lawmakers are angry that the Bank's Court of Directors - its governing board - only asked its oversight committee to investigate last week. Carney may also be asked to show how quickly he responded to the first signs of the case last year.
Mark Garnier, a member of the Treasury Committee which will hear Carney on Tuesday, said any perceptions that the BoE was not tough enough on tackling problems could damage London's reputation as a financial centre, potentially weakening Britain's hand in European Union talks over financial reforms.
"We will be asking the governor what steps he is taking to bring management arrangements and committee structure up to the standards of the 21st century," Andrew Love, another member of the Treasury Committee, said.
Former finance minister Alistair Darling said in 2011 that the governance arrangements were antiquated. "It is all to do with the governor being some sort of Sun King around which the Court revolves," he said.
The Court has since gained new oversight powers. But critics say it still lacks clout. Its chairman David Lees acknowledges he plays second fiddle to the BoE governor.
"It's lower down the pecking order than you would be used to in the corporate sector," he told the Evening Standard newspaper last month.
The Sunday Telegraph newspaper reported the Court's oversight committee may name a judge, academic or senior financial industry executive to run its investigation.
There could also be tough questions for another BoE policymaker official due to attend Tuesday's hearing.
Paul Fisher, a member of the Monetary Policy Committee, was previously BoE's head of foreign exchange and he chaired the Foreign Exchange Joint Standing Committee, a forum for Bank officials and market players to discuss market issues.
It was at a sub-group of that committee that dealers raised concerns with BoE officials as early as July 2006 over attempts to move the market around the time of daily benchmark fixings.
Last week, when it announced the suspension of the unnamed official, the BoE stressed the importance of staff keeping records and flagging concerns to managers. It also said it had found no evidence that its staff colluded in any manipulation.
Tuesday's meeting was originally scheduled as a regular hearing on monetary policy. Carney is likely to face some criticism over the way the BoE scrambled to revamp its policy of signalling the likely path of interest rates last month, after it misjudged the speed of the labour market's recovery, leading to questions about the value of the policy that Carney introduced.
MORE CHANGE COMING?
The Canadian has already made his mark on the BoE in ways beyond the forward guidance revamp of monetary policy. He has established a less hostile tone towards bankers than his predecessor Mervyn King and created the new post of chief operating officer to oversee an internal Bank shake-up.
Consultants McKinsey are working on ways to pursue that modernisation drive and its findings are expected soon.
Lawmakers hope that on the list will be the BoE's Court.
John van Reenen, director of the Centre for Economic Performance at the London School of Economics, said a natural extension of Carney's push to improve transparency at the Bank would be to bring more clarity to its internal supervision.
"He's not as respectful of venerable British institutions as many people are, and from time to time you want to take a cold, hard look at whether the existing set of institutions really is fit for purpose in a modern age," he said.
"He seems to be a person who is prepared to make those kind of changes." (Additional reporting by Jamie McGeever and David Milliken; Editing by Louise Ireland)
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