The Manipulation of LIBOR by the Banks and the Impact on Interest Rate Swap Mis-selling Claims

The Financial Services Authority (FSA) have issued a press release indicating that Barclays Bank has been fined for the manipulation of global benchmark interest rates LIBOR and EURIBOR.

Barclays Bank, who had self-disclosed their own conduct earlier this year, will pay penalties of £290m ($450m) for misconduct in trying to fix the key interest rates at which banks lend money to each other. The penalty from UK and US authorities followed “serious and widespread” misconduct, the Financial Services Authority said “This is the largest ever penalty imposed by the FSA”.

The FSA communication states that Barclays’ breaches of the FSA’s requirements encompassed a number of issues, involved a significant number of employees and occurred over a number of years. The US Commodity Futures Trading Commission reported in some detail the allegations and emails against Barclays Bank in an enforcement order. Of particular interest to customers sold interest rate protection derivatives such as interest rate swaps is that Barclays’ misconduct included:1. Making submissions which formed part of the LIBOR and EURIBOR setting process that took into account requests from Barclays’ interest rate derivatives traders. These traders were motivated by profit and sought to benefit Barclays’ trading positions;2. Seeking to influence the EURIBOR submissions of other banks contributing to the rate setting process;and3. Reducing its LIBOR submissions during the financial crisis as a result of senior management’s concerns over negative media comment.

Legal Impact of LIBOR Fixing on Swap Mis-selling Claims

LIBOR manipulation seems to have occurred on a regular and often daily basis in the period from 2005-2009 and is likely to have an impact on many interest rate swaps mis-selling claims which stem from that period. The impact of the manipulation of LIBOR can be explained as follows:

LIBOR, described as the world’s most important number, is used in the pricing process for a number of financial products and instruments in particular OTC derivatives. Interest Rate Swaps, Collars and Caps with varying levels of complexity have been sold to a multitude of small businesses in the UK. These complex instruments have regularly been proffered by banks as “Interest Rate Protection Products” accompanied with inadequate explanation of the true nature of the complexities involved in the derivatives nor the contingent liabilities. The most common interest rate swap is one where Counterparty A pays a fixed rate (the swap rate) to Counterparty B, while receiving a floating rate indexed to a reference rate (such as LIBOR or EURIBOR).

Often these derivatives are linked specifically to LIBOR as a reference rate. Even where the derivative is linked to base rate we understand that because there is no Base Rate hedging market in the UK the derivatives traders make an internal adjustment / calculation of the value of the hedge by making a comparison to the prevailing LIBOR rates.

When interest rate swaps were sold to SMEs this would have been on an implied representation by the bank to the customer that the reference rate(s) would be set fairly. The banks would impliedly or by conduct represent that they were neither aware of any conduct that would undermine the integrity of LIBOR nor party to any such conduct.

Such representations would seem to be untrue and in breach of (1) a bank’s duty to take care as to the truth of the representations; (2) an implied warranty as to the truthfulness of the representations; and (3) an implied term as to conduct. The remedies which ought to be considered include rescission (termination of the contract) and/or a claim for damages.

Are any other Banks involved? RBS, Lloyds, HSBC?

There is a growing scandal over such manipulation. Whilst Barclays have settled with the FSA and various US regulatory and enforcement authorities, there are allegations in the public domain against not only Barclays (now seemingly admitted), but also Lloyds Banking Group, Bank of America, Royal Bank of Scotland Group, Citigroup, Deutsche Bank, HSBC Holdings, J.P. Morgan Chase & Co and UBS.

Of these, Barclays and Barclays Capital, HSBC and HSBC Global Markets, RBS/Natwest and RBS Global Banking & Markets and Lloyds HBOS and Lloyds Corporate Markets have all had litigation surrounding the alleged mis-sale of ‘interest rate protection’ OTC derivatives to UK SMEs.

If your business is a party to an interest rate swap which you feel was mis-sold we, as specialist interest rate swaps lawyers, can assist. Get in touch with us so we can assess your claim. Visit our practice area page for further information: Interest Rate Swap Claims.