Libor fix: new wave of claims?
On 27 June 2012, the Financial Services Authority (FSA), US Department of Justice and the Commodity Futures Trading Commission imposed fines totalling £290 million on Barclays Bank Plc (“Barclays”), following the bank’s admission that it had manipulated Libor (as well as Euribor).
The FSA has also since announced that it will investigate the conduct of other banks, including HSBC Bank Plc (“HSBC”), Lloyds Banking Group (“Lloyds”) and The Royal Bank of Scotland Plc (“RBS”).
What is Libor?
Libor, the “London Inter-Bank Offer Rate”, is a benchmark giving an indication of the average rate at which banks can obtain unsecured funding in the London inter-bank market. Libor is fixed daily by the British Bankers’ Association (BBA), by surveying a panel of major banks on the rate at which they can borrow funds. Each morning, just after 11am, the banks respond to the following question:-
“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 11am?”
The top and bottom quartiles (highest and lowest contributions) are discarded, leaving the middle two quartiles to calculate an average. This is Libor. (There are, in fact, many indexes for Libor – with rates of different maturities, ranging from overnight to 12 months.)
Manipulation of Libor
Barclays was found guilty of manipulating Libor, by providing false submissions.
The manipulation typically involved small adjustments – only a few basis points. But, with extremely high-value trades in complex derivative products, banks could stand to gain substantial sums through these minor modifications in Libor rates.
We await the FSA’s further investigations to see whether this was part of a wider collusion between banks, intentionally fixing Libor at an artificial rate. After all, the averaging process – discarding the highest and lowest contributions – is designed specifically to put it out of the control of any individual panel contributor to influence Libor.
What does this mean for customers?
For many customers, there may have been little or no impact.
However, in large customer contracts and trades, the impact might, in some cases, have been significant. For instance, even where fluctuations in Libor were minor, they may have triggered opt-in or opt-out clauses in agreed trades, resulting in losses for customers. Where fluctuations were artificial, these losses may be recoverable.
Other customers may have loans or interest rate hedging products linked to Libor. Even where any losses resulting for Libor manipulation were minor, there may be scope for investigating a claim.
Scope for claims
It remains to be seen on what basis customers could bring claims for Libor manipulation.
One possible route for a claimant could be to demonstrate that there had been an implied false representation by the bank on the Libor rate, which “induced” him to enter into the contract. The interest rate must have been fundamental to the contract.
To prove that the interest rate was fundamental to the customer’s decision to enter into the contract, evidence of negotiations over the contractual interest rate would be especially relevant, particularly when the negotiation was over a small percentage – say, a tenth or a hundredth of a per cent.
In light of the FSA’s findings, it may be that customers can establish that Barclays – or, at least, some of its traders – knowingly or recklessly made false representations on Libor. Evidence of fraud may circumvent any exclusion clauses (contained in the relevant contracts) on which the bank may, otherwise, seek to rely. However, one present difficulty – which may be resolved through the FSA’s further investigations – is whether the actions of a few traders can be credited to the bank as a whole. It will depend on whether the Bank’s management instructed traders to manipulate Libor; if that is established, the management’s conduct may be attributed to the bank.
If it is proved that the bank, and not just a few traders, negligently or fraudulently represented that Libor was legitimate, it will be interesting to see whether claimants can, potentially, recover all sums paid to date under their contracts.
Interest rate hedging product claims
Going forward, for claims based on the mis-selling of interest rate hedging products – presently those involving Barclays, but (subject to the FSA’s investigation) perhaps other banks too – it may (in some cases) be worth considering whether to include a claim for Libor manipulation, on the basis that the bank was in breach of an implied warranty that the representations it made on Libor were true.
If you would like to discuss your options with us, please contact Stevie Loughrey or Adam Tudor.