The door has been opened by the Court of Appeal in PAG v RBS  for misrepresentation claims to be brought by a counter-party to a derivative which is linked to LIBOR, FX or key benchmark where the Swap is with a bank which has been found to have engaged in the manipulation of a benchmark.
This judgment is now the leading authority on claims concerning a customer’s ability to rescind contracts with a bank that has manipulated the London Interbank Offered Rate (LIBOR). Although this case focused on LIBOR-linked derivatives, the same principles will surely apply to other key benchmark rigging (including the manipulation of FX markets).
This decision will be of particular interest to customers that believe they have been mis-sold a Forex hedging products or a LIBOR-linked derivative. These customers of RBS, Barclays, HSBC and Lloyds Plc may potentially have grounds to rescind the derivative contract if the implied representations made by the banks are considered false due to regulatory findings of benchmark rigging. RBS, Barclays, HSBC and Lloyds Plc have all either undermined the integrity of LIBOR or have been fined for Forex failings.
PAG v RBS : The steps for a successful mis-sold LIBOR, FOREX or key benchmark referenced derivative claim
Steps 1-4 are laid out below.
1. A bank made an implied representation that it was not and will not manipulate LIBOR/FOREX/key benchmark when selling a Swap
The Court did find that RBS had indeed made an implied representation to PAG that it was not manipulating LIBOR:
“In the present case there were lengthy discussions between PAG and RBS before the Swaps were concluded as set out by the Judge in the earlier part of her judgment….RBS was undoubtedly proposing the Swap transactions with their reference to LIBOR as transactions which PAG could and should consider as fulfilment of the obligations contained in the loan contracts. In these circumstances we are satisfied that RBS did make some representation to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR.”
Property Alliance Group Ltd v The Royal Bank of Scotland Plc  at para 133
Therefore, the Court disagreed with Asplin J’s judgment that the proffering of Swaps was “not in the context of this case conduct from which any representation could be inferred”. There was an implied representation by RBS that it was not manipulating LIBOR when it sold PAG the Swaps.
If a bank says nothing about LIBOR/FOREX/key Benchmarks this counts as sufficient conduct to create an implied representation that they have not participated in benchmark rigging
PAG’s claim was that, if it had realised LIBOR was manipulated, it would never have agreed to enter into the Swaps in the first place and as such, the Swaps should be rescinded. No such representation was expressly made by RBS, so therefore the question was whether this representation could be implied.
The Court considered the interlocutory observations in Graiseley Properties Ltd v Barclays Bank plc  EWCA Civ 1372 and determined that to some extent, these comments should represent the law. In Graiseley, Longmore LJ strongly disagreed with the submission that when nothing was said by a bank in connection with LIBOR, there was no obligation to disclose its own dishonesty.
The Court accepted the principle that when a bank says nothing about LIBOR, there is an implied representation that “their own participation in the setting of the rate was an honest one”. Therefore, there was sufficient conduct on the bank’s part for such a representation to be duly implied. The Court rejected RBS’s submission that it would be wrong to hold that any representation should be implied as it “covered ground which would normally be covered by an implied term”.
An implied representation exists if the reasonable customer would naturally assume a key benchmark had not been rigged and if it was he would have been informed at the outset
As well as accepting the reasoning of Longmore LJ in Graiseley, the Court also considered Geest plc v Fyffes plc  1 All ER (Comm) 672 and endorsed Colman J’s “helpful test”:
“In evaluating the effect of the beneficiary’s conduct a helpful test is whether, having regard to the beneficiary’s conduct in such circumstances, a reasonable potential surety would naturally assume that the true state of facts did not exist and that, had it existed, he would in all the circumstances necessarily have been informed of it.”
Geest plc v Fyffes plc  at p683
Therefore, the Court endorsed the test that the existence of an implied representation can be found if a reasonable potential surety would naturally assume that the true state of facts did not exist and that if it did, he would necessarily be informed of it. This is the first occasion where this “helpful test” has been considered at this level and may now pave the way for future misrepresentation claims.
The approval of the dicta of Colman J is an important win for potential Claimants on this essential point of law, but it must be noted that there must be clear words and/or conduct from a bank from which the representation can be implied.
2. There have been regulatory findings or bank admissions of manipulation of LIBOR, FX or other key Benchmark
If there are regulatory findings of LIBOR (or other benchmark) rigging and the same benchmark has been used in the derivative, a customer will have an implied misrepresentation claim.
The Court did strongly chastise RBS for its LIBOR manipulation and noted that the admitted manipulation of Japanese yen LIBOR and Swiss franc LIBOR was “deeply shocking”. However, crucially for PAG’s case, no specific findings were made in relation to GBP LIBOR and as such there have been no regulatory findings of misconduct on the part of RBS in connection with GBP LIBOR.
The regulatory findings against panel banks (RBS, Barclays, HSBC & Lloyds Plc) are detailed below.
3. The proven manipulation of that particular benchmark is used in the derivative sold to the customer
The Court was unwilling to extend the scope of the representation to a currency to which the Swaps were not referenced. PAG contended that RBS should be held to have made general representations about “LIBOR encompassing every tenor and every currency”, whereas RBS claimed that any such representation should be confined solely to 3 month GBP LIBOR. The Court did not go as far as either contention. It was found that RBS during its discussions with PAG had made an implied representation and this representation extended to all tenors of GBP LIBOR, but not to LIBOR in other currencies.
The Court’s reformulation of Colman J’s helpful implied representation test failed on the facts of this case because although there was an implied representation, due to the particular derivative sold, this was not misrepresentation. Nevertheless, future Claimants will be assured that the Court left open the possibility of future cases extending the scope of implied representation beyond the particular transactions induced in this case.
4. Potentially claims could extend beyond manipulation of that particular benchmark if “cross-contamination” between benchmarks can be proved
The approach of Flaux J in Graiseley was raised by PAG, Flaux J having noted that:
“it is a wholly artificial exercise to seek effectively to divide up the various LIBOR fixings or manipulations into separate currencies. It is quite clear that there was fixing not only of sterling LIBOR but also of dollar LIBOR and of EURIBOR, and that, as I said during the course of argument, there is inevitably scope for cross-infection here.”
Graiseley Properties Ltd v Barclays Bank plc  at para 19
The court recognised the issue of “cross infection” but distinguished RBS because the main sterling submitter for RBS was a different person to other currency submitters.
The Court did strongly chastise RBS for its LIBOR manipulation and noted that the admitted manipulation of Japanese yen LIBOR and Swiss franc LIBOR was “deeply shocking”. But decisively, “that is not, of itself, a reason for holding that representations made to PAG should go further than representations about the sterling LIBOR rate.” Although the Court were clear that “any implied representation cannot legitimately extend further than the particular transactions allegedly induced by the representations”, the door was left open to extending the scope of implied representation if the facts of a case so dictate.
Future cases may test the boundaries of the scope of implied representation. One such example of when the “cross-infection” argument may become relevant was raised by the court: “If, of course, a submitter in yen or Swiss francs had also made sterling submissions, that might render false the representation about sterling LIBOR”.
Claims against RBS, Barclays, HSBC & Lloyds for LIBOR, FX or key Benchmark rigging: regulatory findings
LIBOR is a key interest rate which is set daily by a group of major London banks in relation to a variety of periods and currencies. While this notionally represents the interest rate applying when banks lend and borrow money between themselves (hence “Interbank”), we now know that at least some of the banks were making fraudulent submissions so as improve their trading positions.
The FCA began its investigations into the FX trading market in October 2013 and has found that, between January 2008 and October 2013, many banks and financial institutions did not exercise adequate and effective control over the business practices in the G10 spot FX market, including insufficient training and supervision of the FX traders. The FCA also found attempts by banks to manipulate the ECB and WM Reuters fix rates for their own benefit and to the potential detriment of some of their clients. Many banks also attempted to trigger clients’ stop-loss orders (which are designed to limit a client’s losses if exposed to adverse exchange rate movements) for their own benefit and to the potential detriment of some of their clients. Moreover, it was found that many banks conducted the inappropriate sharing of confidential information (including client identities and information about clients’ orders).
The following panel banks undermined the integrity of LIBOR or have been fined for FX failings. Please click here for a full list of benchmark fines issued by the FCA against panel banks.
If a customer has entered into a benchmark- linked derivative with any of these banks, a claim could exist that there are grounds to rescind the contract, due to implied representation:
Claims against RBS
Regulatory findings that RBS was involved in LIBOR manipulation
As the PAG case demonstrated, RBS has been found guilty of manipulating LIBOR. The Financial Services Authority (FSA) (now known as the FCA) investigated widespread LIBOR manipulation and in particular found that RBS had committed substantial breaches of Principles 3 and 5 of the Principles for Businesses. These breaches resulted in a fine of £87.5 million for RBS in February 2013.
In addition to the FSA fine, RBS had also been fined $325 million by the US Commodity Futures Trading Commission and $150 million by the US Department of Justice. The US Attorney General has described RBS’s conduct as “a stunning abuse of trust”. The CFTC notes that the unlawful conduct went back to at least 2006 and continued even after RBS was aware of the Commission’s investigation. The FSA describe the abuse as “widespread” and notes that in response to a specific query in March 2011, RBS assured the FSA that it had proper systems in place to prevent LIBOR manipulation, when this was false. All in all, the outcome of this international investigation into RBS’s affairs is a damning indictment of its culture and management practices.
Regulatory findings that RBS was involved in FX rigging
RBS were fined £217 million by the FCA for FX failings in November 2014. RBS were also fined $290 million by the United States Commodity Futures Trading Commission (“CFTC”) in relation to investigations into failings in the bank’s Foreign Exchange business within its Corporate & Institutional Banking division. The fines were for “attempted manipulation of, and for aiding and abetting other banks’ attempts to manipulate, global foreign exchange (FX) benchmark rates to benefit the positions of certain traders.” One of the primary benchmarks that the FX traders attempted to manipulate was the World Markets/Reuters Closing Spot Rates (WM/R Rates).
Claims against Barclays
Regulatory findings that Barclays was involved in LIBOR & EURIBOR manipulation
Barclays was fined £60 million by the FSA in June 2012. Barclays admitted to misconduct. The US Department of Justice and the Commodity Futures Trading Commission (CFTC) imposed fines worth £102m and £128m respectively, forcing Barclays to pay a total of around £290m. According to the FSA, Barclays acted inappropriately and breached Principle 5 on numerous occasions between January 2005 and July 2008 by making US dollar LIBOR and EURIBOR submissions which took into account requests made by its interest rate derivatives traders
Regulatory findings that Barclays was involved in FX rigging
In the largest fine imposed for any banks by the FCA, Barclays was fined £284 million by the FCA in May 2015. The bankers attempted to manipulate vital benchmarks used by companies around the world as a peg for foreign exchange transactions in the $5.3 trillion-a-day market. One Barclays trader wrote in electronic chats: “If you aint cheating, you aint trying.” Barclays also received fines from the Commodity Futures Trading Commission, New York State Department of Financial Services, US Departement of Justice and The Federal Reserve totalling $2.3 billion.
Claims against HSBC
Regulatory findings that HSBC was involved in FX rigging
HSBC was fined £216 million by the FCA in November 2014. HSBC was also fined $275 million by the CFTC, and recently paid a $100 million settlement of currency rigging to the US Departement of Justice. The FCA found that HSBC failed properly to control its London voice trading operations in the G10 spot FX market, with the result that traders in this part of its business were able to behave in a manner that put HSBC’s interests ahead of the interests of its clients, other market participants and the wider UK financial system.
Claims against Lloyds Bank plc
Regulatory findings that Lloyds Bank of Scotland was involved in LIBOR & BBA Repo rigging
Lloyds Bank of Scotland was fined £105 million by the FCA in July 2014. The bank breached Principle 5 and Principle 3 of the Authority’s Principles for Businesses through manipulating submissions to two benchmark reference rates, the Repo Rate and LIBOR, in order to seek to manipulate those rates. The Repo Rate benchmarked the rates offered by major banks in London for dealing GBP general collateral repo transactions, and was in operation between May 1999 and December 2012 when it was abolished.
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