LIBOR Fixing – what does this mean for me?

Recent focus has been on the mis-selling of LIBOR-related products, primarily swaps, a form of Interest Rate Hedging Product (which are the focus of a separate blog article by Sinels’ dedicated business intelligence agency, Sintel Global: You can read the Sintel blog here.

The claims involving swaps in which Sinels has acted arose as a direct consequence of LIBOR having been artificially depressed in order to demonstrate strength in the banking system.

LIBOR is the London Inter-Bank Offered Rate. It represents the interest rate applied by a lending bank to a borrowing bank. Low interest rates denote capital strength, while high interest rates denote relatively lower strength, and therefore higher risk. Findings by the Financial Services Authority, US Commodity Futures Trading Commission and United States Department of Justice in 2012 concluded in banks being fined significant sums as a penalty for fixing between them the interest rates paid on inter-bank lending. The banks had conspired to fix the LIBOR rate in order to give the appearance of more security/strength than was actually the case.

Mark Carney, the Governor of the Bank of England, pointed out in November 2014 that financial penalties alone are insufficient to deter the banks:

“Fundamental change is needed to institutional culture, to compensation arrangements and to markets, penalise the people directly responsible, dock pay and ensure they forfeit their bonuses.”

Until governments find the political will to introduce legal regimes that will criminalise banking excesses, no amount of fines or lost pay are likely to dent the colossal riches that these companies and their employees enjoy.

In August 2015 Tom Hayes, a former trader for UBS and Citigroup, was sentenced to fourteen years in prison for dishonestly driving manipulation of the LIBOR, to enhance his trading results. Hayes maintained his innocence through the trial process notwithstanding having stated during SFO interviews:

“Well look, I mean, it’s a dishonest scheme, isn’t it? And I was part of the dishonest scheme, so obviously I was being dishonest.”§

Case study

Sinels currently acts for a trustee, First Names, which took over a trust from Zedra previously known as Barclays Trustees, in a claim alleging breach of trust for lack of oversight of the trust’s investments. Having learnt of the impact on the trust’s investments of the LIBOR manipulation, Sinels applied to amend First Names’ claim in order to plead the fraudulent manipulation of LIBOR and the fraudulent manipulation of the foreign exchange markets by, inter alios, Barclays Bank plc, the parent company of Barclays Trustees. On 1 December 2016 the Master of the Royal Court of Jersey declined an application by Zedra to strike out parts of First Names’ claim in relation to the fraudulent manipulation of LIBOR and the fraudulent manipulation of the foreign exchange markets. In other words, First Names was permitted to proceed with its claim alleging loss resulting from LIBOR and foreign exchange rigging. The Master’s judgment can be found on the Jersey Law Website.

First Names complains that the outgoing trustee, Barclays Trustees, effectively delegated its investment functions to Barclays Wealth, being an investment banking division of Barclays Bank plc, like Barclays Trustees, a part of the Barclays Group.

Of particular focus was the investment of the trust monies into three structured loan notes with a face value of £7 million.

A structured loan note is a complex financial instrument, normally marketed as providing income and some form of capital protection. In this case, the structured notes allegedly provided capital protection through an underlying investment in a basket of bank shares. However, the underlying investment was in derivatives, not the shares themselves, and as it turned out this mechanism left the structured note exposed to enormous losses.

The trust suffered a loss of over £6 million (on the original £7 million invested) within a twelve-month period.

This investment took place in 2008 when Barclays Bank plc and several other mainstream banks were engaged in fraudulently manipulating LIBOR and the foreign exchange markets. The enormous extent of those frauds has been the subject of damning investigations and hefty fines on both sides of the Atlantic. In 2012, Barclays Bank was fined approximately £290 million by the Financial Services Authority for LIBOR rigging. It recently reached a £100 million settlement with over 40 US states in relation to LIBOR rigging. It was also recently among a group of six banks fined almost £6 billion for rigging foreign exchange markets. Barclays Bank’s share of that fine was approximately £1.53 billion.

The above illicit activities are directly relevant to the performance of the structured loan notes which were related to the value of a basket of bank shares which had collapsed within weeks of the “investment”. Barclays Bank plc must have known that if its actions relative to LIBOR came to light the effect on the share prices of UK banks would be devastating.

The effect of the conduct of Barclays and others was to dislocate LIBOR from reality to such an extent that it is now widely discredited as a reliable indicator of the rates at which the banks are willing to lend to each other.

As Barclays Trustees was a wholly-owned subsidiary of Barclays Bank plc, First Names alleges that Barclays Trustees had implied knowledge of at least the manipulation of LIBOR by Barclays Bank plc. In any event, it is alleged that the structured notes were mis-sold because they did not have the qualities which they were said to have (for example, capital protection).

What does this mean for bank customers?

LIBOR underpins trillions of financial contracts and affects, among other things, mortgages, loans (both personal and commercial), foreign exchange rates, credit card rates, interest rates of deposits, and the cost at which banks are supposed to lend to each other. LIBOR affects approximately $800 trillion worth of financial transactions, which equates to more than ten times global GDP.

Many people are therefore likely to have purchased bank products or services which are based on, or relate to, LIBOR. Due to the manipulation of LIBOR, many of those products and services could be tainted.

That is not to say that all bank customers will have a claim because of the LIBOR fixing. In most circumstances, any loss is likely to be so small that the cost of seeking a remedy will almost immediately outweigh the sum which might be recovered.

However, there exist a certain category of claims where the sums at stake are adequately elevated, and something additional to the LIBOR fixing happened, such as to give rise to a breach of a duty of care which caused loss, as in the case study above where the investment was, according to First Names’ claim, mis-sold. In some cases, the fact of the LIBOR fixing may simply increase the sum claimed where some other wrong has been done.

Mis-selling has been, and continues to be, colossal news. Regulators and the victims may have an uphill struggle, but more is becoming known about banking practices which may give rise to possible claims.

Sinels has acted in a number of mis-selling cases and has achieved very favourable results for plaintiffs. If you think that you could benefit from advice about a possible mis-selling claim, please contact Philip Sinel, Steven Chiddicks, or Robin Leeuwenburg.