Posted on Feb 07, 2013 by | 0 Comments
RBS and the LIBOR fine – what is this likely to mean for swap misselling?
In breaking news yesterday,
it emerged that RBS had been fined a total of £391 million for manipulation of the LIBOR rate: The London Interbank Offered Rate is a daily reference rate based on the interest rates at which banks borrow unsecured funds and lend money to each other for the short-term in a particular currency. A new Libor rate is calculated every morning by financial data firm Thomson Reuters based on interest rates provided by members of the British Bankers Association (BBA).
The Financial Services Authority's announcement was published yesterday afternoon. In a press release, the FSA said that the practice of Libor rate-rigging was "widespread", with "at least 219 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made.
The FSA also says that at least 21 people were involved, including "derivatives and money market traders" and at least one manager. Investigators found that RBS traders colluded with other traders to try to fix Libor rates between 2006 and 2010.
The practice was designed to make money by investing in interest rate swaps - financial instruments which allow you to bet on interest rates, which can be influenced by the Libor rate.
Excerpts from what has been described as “the embarrassing transcripts” show comments made by RBS employees such as “its just amazing how libor fixing can make you that much money” and “this libor setting is getting nuts”. For more on the transcripts, read here:
One of the key questions which is emerging from the news that RBS, like Barclays, has now been found guilty of fixing the LIBOR rate, is what this is likely to mean for the many businesses to whom LIBOR based swap products and derivatives were sold.
In earlier blog post we commented on this question in the context of the Barclays fine and an ongoing case brought in Birmingham Mercantile Court by Guardian Care Homes against Barclays in respect to the mis-selling of two interest rate swap agreements sold to them by Barclays. Guardian claim they had been mis-sold these agreements which they then had to pay fees in the region of £9m to exit.
Guardian are arguing that the swap agreements, which were based on Libor, are void. They maintain that it was an implied (i.e. non-written) term of the swap agreements that representations made by Barclays as to the Libor rate were true. Barclays knew, or ought to have known, that that the Libor rate they were providing to Guardian was not the true Libor rate. As a result they were in breach of this implied term of the swap agreements, effectively allowing them to be considered void by Guardian. Despite attempts by Barclays to put the case on hold, the court ahs ordered the matter to proceed to trial, and additionally has ordered Barclays to reveal the identity of the bank employees involved. The case is proceeding to trial.
It now seems perfectly possible, in the wake of yesterday’s FSA announcement, that such an argument could now be deployed against RBS in respect of their LIBOR swap products. Clearly, any RBS customer sold a swap product should check the fine print on their swap agreement – not all swap products were based on LIBOR, but many were.
If you would like further information, or would like to talk through any of these issues, please do not hesitate to contact me.