UK: Professional And Financial Lines - Weekly Bulletin - July 2012

Last Updated: 7 August 2012
Article by James Cooper


Criminal Investigations

Bank employees found guilty of attempts to fix interbank lending rates in the future may face criminal sanctions, including jail time, according to current EU plans which were presented this week in an effort to prevent a reoccurrence of the LIBOR scandal. The proposals detailed specific provisions prohibiting rate-manipulation and consequences for violations , which also include fines and administrative sanctions.

American prosecutors are preparing to make "imminent" arrests in relation to LIBOR rate-fixing. In the UK, the SFO has not yet decided what offence to press charges under, whilst EU regulators investigate leads into a ring of traders from at least four banks who conspired to manipulate rates.

International Regulatory Investigations

TUS Treasury Secretary Timothy Geithner appeared before the Senate Banking Committee on 26 July 2012 to answer questions relating to his knowledge of LIBOR manipulation in 2008, when he was President of the Federal Reserve Bank of New York. He stated that he had recognised that rate-fixing was a concern, and that he immediately alerted the appropriate regulatory officials in the UK. Mr Geithner said it was the responsibility of UK regulators to address the issue of rate-fixing, and that UK regulators could have prevented the LIBOR scandal if they had acted on his advice.

The Federal Reserve Bank of New York has posted on its website a statement acknowledging that it was aware that "some banks" were potentially under-reporting LIBOR rate submissions as early as 2007. According to the New York Fed, a Barclays employee had said in April 2008 that they were artificially lowering rates to avoid "stigma." On 23 July, Republican representative Randy Neugebauer requested more information from the New York Fed on its communications with banks involved in LIBOR rate-fixing, spanning August 2007 until July of this year.

US regulators will brief congressional staff on 30 July 2012 on the "regulatory oversight of LIBOR" as part of on-going investigations.

France's financial regulator is now ready to contribute to ongoing investigations in the US and the UK. Regulator President Gerard Rameix said that the decision stems from the fact that "prejudice" caused by LIBOR manipulation extends beyond London, affecting markets around the globe.

Germany's financial regulator, Bafin, intends to submit a report on Deutsche Bank's role in LIBOR and EURIBOR rate-fixing. The report will focus on whether any senior staff at the bank were aware of the activity. The bank has stated that CEO Anshu Jain was not involved in any wrongdoing and will remain in his position. Bafin states that it is too early to understand the consequences of rate-fixing, but they are conducting their investigation with "the utmost urgency."

The Danish Bankers Association will investigate whether CIBOR, the Copenhagen interbank offered rate, was manipulated, although it denies the involvement of any Danish bank in the LIBOR rate-fixing scandal. Results of the CIBOR investigation are due to be released by the end of summer.

Guido Raovet, the European Banking Federation's CEO, has said that he doubts that EURIBOR rates were ever successfully manipulated because it would have been impossible for the 44-bank panel to coordinate rate manipulation.

The Canadian Competition Bureau is currently conducting an investigation into the involvement of Canadian banks in LIBOR rate-fixing, with a focus on the Canadian branches of HSBC, RBS, Citibank and ICAP interdealer broker.

Commercial News

A Belgian news source has reported that LIBOR-manipulation could have accelerated the failure of Dexia SA, a Belgian bank that required government assistance last year and has now collapsed.

Major investment firms BlackRock Inc., Fidelity Investments and Vanguard Group Inc. are currently assessing how their clients have been affected by LIBOR manipulation, and whether or not to take legal action. Firms have stated that they are looking into their options, but that it will take some time before the precise scope of the damage becomes apparent .

Financial Services Reform

The EU has promised to enact tougher regulation in respect of interbank lending rates, and may expand its antitrust probes in response to the LIBOR investigations worldwide. Michael Barnier, the EU's Financial Services Chief, pledges to present proposals by the end of the year to reform the regulation of LIBOR, EURIBOR and other market indices.

FSA Chairman Lord Adair Turner has indicated that he would consider succeeding Mervyn King as Bank of England Governor. Lord Turner has used the Barclays fine as proof of progress toward a tougher regulatory environment, stating with regards to the scale of the fine "we would never have done this back in 2007 and 2008." As regards the Bank of England position, Canadian banker Dr Mark Carney is considered by the media as a likely front-runner for the position, as he has no political ties and no affiliation with the LIBOR scandal.

European Central Bank President Mario Draghi said that rate-fixing has undermined confidence in the world's financial system, and there is "lots to be done" in terms of rebuilding the financial industry internationally.

Litigation & Costs

John Coates, a Professor of Law and Economics at Harvard Law School states that the LIBOR litigation "has the potential to be the biggest single set of cases coming out of the financial crisis" because of the complex interaction between LIBOR and financial contracts.

Charles Schwab Corp. and the City of Baltimore filed lawsuits last month, before the fine was levied on Barclays, suing lenders for artificially suppressing LIBOR rates which had a negative impact on money funds, short-term debt strategies and interest-rate swaps. New York lender Berkshire Bank is the latest Plaintiff to file a class-action suit, naming as defendants LIBOR-panel banks including Barclays, Citigroup, Lloyds, RBS, JP Morgan Chase and Bank of Tokyo Mitsubishi.

Lloyds may face fines of up to £420 million by regulators for its role rate-fixing, and may face an additional £38 million to settle civil suits according to Morgan Stanley analyst Betsy Graseck in the 12 July 2012 report. A spokesperson for Lloyds has said it is not possible to predict the scope or ultimate outcome of litigation or various regulatory investigations.

Banks are under pressure to provide shareholders with an estimate of the cost of the investigation into LIBOR rate-fixing. Morgan Stanley estimates a total costs of £9 billion for 11 banks by the end of 2014.


Business News

Alison Carnwath, the head of Barclays' remuneration committee, has resigned, becoming the fourth senior figure to resign from the bank in the last month. She cited 'personal reasons' as an explanation for the resignation, although there is speculation that it follows an increasing amount of pressure to leave after approving Bob Diamond's £12 million compensation package.

Barclays has decided to seek its new Chairman externally following board member Sir Michael Rake's withdrawal from candidacy after significant protest from shareholders. Several leading investors have indicated that the next Chairman should be someone unaffiliated with the LIBOR scandal and other controversy. Barclays speculates that they won't appoint a new Chairman until autumn at the earliest.

Barclays has hired Andrew Salz, Executive Vice-Chairman at Rothschild and a corporate lawyer, to review the "culture" of the bank in an effort to improve its image further to its June fine by the FSA.

In addition to the LIBOR investigation, Barclays is the subject of another FSA probe into whether it fully disclosed all fees paid to advisors when raising more than £5 billion of emergency capital from middle eastern investors in 2008.

Despite ongoing investigations, Barclays announced a half-year profit of £4.22 billion, a rise of 13%.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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