The storm surrounding the manipulation of Libor rates by some of the world's leading banks has been brewing largely unnoticed since 2005. That storm finally broke in spectacular fashion last week when Barclays was fined a total of £290 million by regulators in the UK and the US. This includes a fine of £59.5million by the FSA – the largest it has ever levied. But this seem likely to be just the tip of the iceberg with other banks in the UK, including RBS, Lloyds and HSBC also apparently under investigation and regulators in Canada and Japan, as well as the US and UK, continuing to pursue their enquiries. It is widely reported in the press that RBS will face a fine of £150 million. Extensive civil litigation also seems likely with one class action in the US already announced and others threatened. So what is it about and what does it mean for insurers?
Libor is the interbank lending rate which is set in London every day on the basis of information from the leading banks about their own interbank lending rates; the highest and lowest rates are discounted and the remaining rates averaged to obtain the day's Libor rate. A similar system is used to fix the Euro Interbank Offered Rate or Euribor which is also said to have been manipulated by the banks.
During the financial crisis of 2007/8, Barclays is said to have put in low figures for its own interbank rate in order to avoid suspicion that it was under financial stress and thus having to borrow at a higher rate than its competitors. It is suggested that Barclays may have (mistakenly) believed that the Bank of England supported this activity in order to try to protect the UK banking system through the financial crisis.
In addition, traders in the bank lobbied the staff responsible for submitting figures for the daily Libor fixing to put in figures which would benefit their trading position and enable them to realise a profit which might not otherwise have been available.
It is suggested also that attempts by Barclays traders to manipulate Libor rates date back to at least 2005. It was not until an article in the Wall Street Journal in May 2008, however, that questions began to be asked publically about the setting of the Libor rate. Shortly afterwards, in June/July 2008, banks received the first requests for information from Japanese, European, US and UK regulators. These were followed by formal requests for information by way of subpoenas in July 2010. In November/December 2010, and throughout 2011, a number of employees of the banks under investigation either resigned or were dismissed allegedly because of their role in the Libor fixing process and, in June 2012 the first formal fines were announced by UK and US regulators.
What will all this mean for insurers?
At this stage it is not entirely clear who will have lost what as a result of the attempted manipulation of Libor, Euribor and similar international benchmarks – new information is continuing to emerge and it may not be possible to understand the position clearly until the investigations into the other banks have been completed both here and overseas.
Some commentators have suggested that insurers of the banks and other financial institutions involved with Libor, Euribor and their equivalents may face claims on a number of fronts including:
- The costs of regulatory investigations;
- The costs associated with appearances before public enquiries;
- Shareholder Actions;
- Crisis management/Public Relations/brand management and other forms of mitigation;
- Alleged collusion/manipulation/anti –competitive behaviour by the banks;
- Defending unfair dismissal claims by sacked employees/directors/officers;
- Whistle blowing allegations by employees who identified concerns;
- Loss of value to investors; and
- Loss of opportunity to obtain a mortgage and/or a lower rate mortgage by bank customers;
Careful scrutiny will be required, however, to establish whether some of these claims have any merit. While some insurers have already been paying defence costs for the multi -jurisdictional regulatory investigations, it remains to be seen whether the attempt to manipulate libor and its equivalents has caused wide spread or profound loss to third parties in the UK or overseas. Each potential claim should be reviewed on its merit and facts and individually analysed in the context of the economic circumstances existing at the time of any alleged loss; issues of causation seem likely to be particularly important.
Among the questions which remain unanswered include: whether or not the attempted manipulation was successful and, if so, when and with what result (it is important to recall in this regard that traders seeking to exploit Libor rates would, on occasion, have been trying to push the rate up as well as down).
It also remains to be seen whether any manipulation which can be demonstrated to have occurred caused loss to any identifiable counter parties or groups. The Libor rate directly impacts an estimated £300 trillion of financial instruments and deals between banks and other institutions. The FSA has said, however, that British consumers and businesses are unlikely to have lost out as a result of the attempted rate manipulation by Barclays but that conclusion is challenged by, among others, US law firms intent on initiating a class action law suit in England 'on behalf of British litigants'. Further, on the announcement of the Barclays fine, the banks share value fell by some 15% and the value of shares in other potentially implicated banks also dropped significantly. It is quite possible, therefore, that there will be a shareholder backlash against the implicated banks.
A careful and considered analysis will be required to see how much substance there is beneath the heat and smoke of the public outrage which last week's announcement has generated.
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