The London Interbank Offered Rate [LIBOR] has resulted in a widespread scandal exposing banks to further criticisms and huge liabilities. It has resulted in vast  fines to banks (Barclays £290m, UBS £940m and RBS £390m) and it is understood that regulators in at least 10 countries are investigating the scandal.   The SFO has been involved since 6th July 2012. In addition various banks are subject to civil actions from private companies and individuals on both sides of the Atlantic. How did it arise and where is it likely to go from here?

The definition of LIBOR and the system itself was quite loose and was open to manipulation when times got tough in the banking sector. The definition was

"At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?" This question does not ask what rate they actually paid or even an average of interest rates that they actually paid but it asked rate did they predict they could borrow unsecured funds from other banks in the London wholesale money market in a reasonable market size. The definition relied to a certain extent on the bona fides of the banks and, as has been shown by the investigations carried out by the regulators some individuals in some banks manipulated the rates to assist and profit their traders. In addition, after the Lehman Bros collapse banks just stopped lending to each other compounding the difficulties for the application of the question.

Whilst regulators succeeded in pinning wrongdoing and liability on major banks for the payment of significant fines the way forward for companies and private individuals in seeking compensation through civil remedies has been more troubled. Defendant Banks were largely successful in fending off claims in a 161 page judgment in the United States District Court, Southern District of New York In re: LIBOR-Based Financial Instruments Antitrust Litigation. In this case US District Judge NAOMI REICE BUCHWALD on 29th March 2013 referred to LIBOR as “the world’s most important number” but dismissed various companies antitrust and RICO claims leaving them to decide whether they wanted to appeal. In the UK claimants Guardian Care have taken proceedings against Barclays. The proceedings have been delayed pending Barclays appeal to the Court of Appeal against the preliminary decision of Mr Justice Flaux allowing Guardian Care Homes to include claims relating to the LIBOR manipulation in its case against the bank. Guardian Care chief executive Gary Hartland has described this as a hugely opportunistic appeal by Barclays. The way forward for private companies or individuals seeking to claim compensation for the impact of LIBOR manipulation on their businesses is therefore less certain.

What are the proposals for change?

George Osborne commissioned the Wheatley report and this was published in September 2012. It set out a 10 point plan with the following recommendations

• LIBOR should be reformed, rather than replaced.

• Transaction data should be explicitly used to support LIBOR submissions, and strict and detailed processes should be used to verify submissions against transaction data.

• The British Bankers’ Association should transfer responsibility for overseeing LIBOR to a new administrator.

• Market participants should continue to play a significant role in the production and oversight of LIBOR.

• Individual LIBOR submissions should be withheld from publication for 3 months to reduce the potential for submitters to manipulate the market.

• Market participants should evaluate their use of LIBOR and consider using contingency procedures that would take effect if LIBOR publication is disrupted.

Legislation has already been introduced making it illegal to manipulate benchmark rates (see the Financial Services Act 2012 which came into force on 1st April 2013)

Now the EU joined the fray and in the Summer the European Commission is likely to publish a regulation to move the oversight of the benchmark from London to the European Securities and Markets Authority [ESMA] in Paris to stop banks rigging LIBOR. The Chairman of ESMA,Steven Maiijoor, said "The final principles now give clarity to benchmark providers and users in the European Union about what is expected of them when engaged in this critical market activity,"  The guidelines  set out that those setting the rates should have contingency plans if the data for setting the rates becomes unreliable or none existent as happened following the Lehman Bros collapse when banks were not lending to each other. Also the data should be based upon underlying asset and an "observable transactions entered into at arm's length". The ESMA principles do not cover whether banks should be forced to join in with benchmarks thus raising the concern that they will not be representative. The Treasury is said to be “relaxed” about the proposals. Participating banks will have to ensure their compliance arrangements are not just transparent but unimpeachable.

Bankside Law has assisted a senior banker facing questioning by the FCA and the CFTC in relation LIBOR. It is also advising the owner of a company seeking review and compensation of Bank miss selling linked to LIBOR hedge fund rates. If you have been affected by LIBOR and wish a 30 minute no obligation advice call telephone John Williams on 0844 745 4000.