UK: Professional And Financial Lines Weekly Bulletin - November 2012

Last Updated: 8 November 2012
Article by James Cooper

LIBOR manipulation coverage

Investigations and regulator action

The UK High Court has ruled that a case brought by Guardian Care Homes Ltd against Barclays will be allowed to proceed, after refusing an application by Barclays to have the case thrown out. Judge Julian Flaux ordered the case to go ahead, saying that it had a reasonable chance of success. Guardian Care Homes is alleging that an interest-rate swap it purchased from Barclays should be invalidated because the bank knew, or should have known, that the LIBOR rate to which the swap was linked was not accurate. Barclays had previously applied to have the case decided by a panel of financial regulators rather than in court, but this was denied. Following the ruling, it is expected that Barclays will be forced to disclose thousands of emails relating to LIBOR-rigging, including the names of those involved, and the case is set to become a "test case" for the numerous other businesses and individuals which purchased financial products tied to LIBOR from major banks.

Andrew Haldane, executive director for financial stability at the Bank of England, has said that current banking reform was sparked by the LIBOR affair and provided the impetus that banks needed to "rediscover their social usefulness." Mr Haldane contended that reform must be based on banks changing their cultures and approach to banking. He said that if this cultural change does not work, it may be necessary to split banks and ring-fence retail and investment bank operations.

UBS and RBS have suspended three more traders in Singapore, as their internal investigations continue into allegations of LIBOR manipulation. RBS has put Ken Choy, a director in its emerging markets foreign exchange trading unit, on leave and UBS has also put two traders in its foreign-exchange trading unit on leave. The moves come as regulators expand the scope of their investigations to include more benchmark rates, with other rates, such as the Russian ruble spot rate, also being investigated.

The Financial Times has reported that LIBOR investigations undertaken by UK and US authorities will result in multinational settlements with one or two more banks by the end of the year, with settlements with at least a dozen banks expected over the next 12 months. No indications have been given as to which banks are likely to enter into settlements this year.

Another report in the Financial Times has stated that EU lawmakers are considering new rules which will impose custodial sentences on those engaged in market abuse, with curbing insider trading and market manipulation the two primary objectives behind the new legislation. The European Parliament expects that the new laws will take effect from the end of 2013 and will apply to all 27 Member States. The UK will have the right to opt in or out of any such directive which comes into force.

A preliminary inquiry has been opened by authorities in Paris over manipulation of LIBOR, after a complaint filed in July by a shareholder of Societe Generale claimed that lenders manipulated the market. The lawyer for the investor, Frederik Karel Canoy, said that "all the banks" were involved in the manipulation of the rate. The inquiry was opened in September and is ongoing.

Nine more banks have been subpoenaed in New York as part of an investigation by New York Attorney General Eric Schneiderman into manipulation of LIBOR. The nine banks which have been subpoenaed are: Lloyds Banking Group, Societe Generale SA, Royal Bank of Canada, Bank of America Corp, Credit Suisse AG (CS), Bank of Tokyo Mitsubishi UFJ Ltd, Norinchukin Bank, Rabobank and West LB AG. A total of 16 banks have now been subpoenaed since the investigation commenced in August.

A request from the Troubled Asset Relief Program (TARP) in the U.S. to use a reference rate other than LIBOR has been rejected by the U.S. Treasury Department and the Federal Reserve. Both the Treasury and Federal Reserve have defended the continued use of LIBOR, saying that neither entity has the power to change the interest rate on the loans which currently rely on LIBOR and that it would not be in the interest of borrowers to do so now. The special inspector-general for TARP, Christy Romero, had previously submitted a request for the Treasury and Federal Reserve to use an alternative benchmark rate, saying that LIBOR was unreliable and was putting taxpayer money at risk.

The FSA has said that tougher jail sentences would help deter market abusers and aid in market abuse investigations. Appearing before a parliamentary committee, Martin Wheatley, Managing Director at the FSA, said that while the investigatory powers in the UK are robust, more aggressive powers in the U.S., such as stricter sentencing guidelines, would encourage co-operation from individuals and banks which are being investigated.

The Financial Times has reported that the Crown Prosecution Service has issued guidelines on how to deal with inter-jurisdiction investigations, after tensions were highlighted between the methods and objectives of U.S. and UK regulators.

In an attempt to encourage companies to admit wrongdoing and address an ever-growing fraud bill, UK authorities will be able to use U.S. style plea-bargaining deals going forward. Damian Green, Justice Minister, has said that this will be a valuable tool for investigators and will allow them to focus on cases where companies which are being investigated refuse to admit liability. Concerns have been raised, however, about the lack of protection afforded to company directors who may still be personally liable following any deal between the company in question and the investigator.

The UK Government has accepted the recommendations set out in Martin Wheatley's review of LIBOR in full, and has appointed Baroness Hogg to lead a panel which will undertake the process of identifying a successor to the BBA.

Donald Cruickshank, former Chairman of the London Stock Exchange, has said that unless the new Prudential Regulation Authority and the Financial Conduct Authority have competition as their main objective, then new powers handed to the Bank of England will do little to ensure that consumers have more choice in the market. Mr Cruickshank has said that the LIBOR affair was just the beginning and that regulated entities should not themselves be responsible for carrying out regulatory functions.

Lanny Breuer, U.S. Assistant Attorney- General, recently visited London to discuss the status of joint LIBOR investigations between the U.S. Department of Justice and various UK regulators. Discussing LIBOR, Mr Breuer said that any potential settlements with entities could take well over a year and prosecutions of individuals could take considerably more time.

Industry response

The fallout from the LIBOR manipulation affair has caused investors to become hesitant to invest in British banks, with some financial institutions factoring in LIBOR activities when deciding which banks to do business with. Morgan Stanley has estimated that total losses resulting from the LIBOR affair could reach as much as US $6 billion and be shared by as many as 16 different banks, including RBS and Deutsche Bank.

Companies considering laying off employees are having to carry out more extensive compliance procedures, demonstrating the degree to which firms are seeking to prevent employees taking sensitive data with them when they leave. Stephen Bonnor, former executive at Barclays but now a consultant at KPMG, has pointed to the LIBOR affair as evidence that banks are putting a greater emphasis on understanding how information and client data is handled, and this includes monitoring email activity over the months preceding a layoff and often after as well. The fact that the enforcement case against Barclays in June, which led to a record fine, was based largely on email, instant messaging and voicemail data makes such compliance activity even more relevant for banks.

Barclays coverage

Commercial

Following promises by Barclays CEO Antony Jenkins to undertake a large-scale review of operations at the bank, plans have been announced to cut about 10% of staff in the equities units in Europe, Africa and the Middle East. This follows consolidation of the bank's equities and fixed-income operations earlier this month. In another personnel change, Group Human Resources Director, Sally Bott has resigned after just 18 months in the position. These moves come as part of a wider management overhaul and reflect attempts by Barclays to reduce costs and improve its reputation.

The Financial Times has reported that Sir David Walker, who will become the Chairman of Barclays, will overhaul the bank's management and clear out the Board of Directors in an attempt to repair Barclays' image.

Comment

Coverage of the LIBOR affair continues apace, with interesting developments from both a regulatory and a litigation perspective over the past fortnight. Investors and individuals will be keen to follow the Guardian Care Homes 'test case' in the UK, and we now have an indication that one or two banks will settle with regulators before the year is over.

Industry experts' opinions on both sides of the Atlantic over whether LIBOR is dead or not have been somewhat quashed with the UK Government's complete endorsement of Wheatley's review and reform proposals.

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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