LIBOR (the London Inter-Bank Lending Rate) is the average interest rate at which a selection of lending banks are prepared to lend to each other. One of the most important interest rates in finance, LIBOR is the global benchmark against which banks lend to each other. Importantly, LIBOR is also how banks set rates for a range of financial products sold to customers, from mortgages to complex derivatives.
Is it estimated that there are up to £400 trillion of financial products all linked to LIBOR.
How is LIBOR set?
LIBOR is set by a group of lending banks who submit – on a daily basis – the interest rates at which they are willing to lend to other financial institutions. The rates are offered in 10 currencies covering 15 different lengths of loan, ranging from 24 hours to 12 months. An average of the submitted rates forms the LIBOR rate on that particular day.
The most important rate is the three month dollar LIBOR – this is the rate that banks estimate they would pay to other banks should they borrow dollars for three months on the day the rate was set.
Manipulation of LIBOR – What exactly happened?
Since the rates submitted by the lending banks are estimates, not actual transactions, it has been suggested that banks could have submitted false figures. The allegations are that traders at several banks conspired to influence the average LIBOR rate, and that by agreeing amongst themselves to submit rates, they were able to manipulate LIBOR to be higher or lower than the actual estimates.
In 2012, the Financial Services Authority (FSA), the predecessor of the Financial Conduct Authority (FCA), fined a number of banks between £59.5m to £160m, for significant failings in relation to LIBOR and EURIBOR (Euro Interbank Offered Rate which relates to banks within the Eurozone). As the regulators have investigated further, widespread manipulation of LIBOR has been uncovered with Barclays Bank, JP Morgan, Swiss bank UBS, Royal Bank of Scotland and Deutsche Bank (to name a few) all being fined by financial regulators for market manipulation.
Such is the severity of the scandal that in August 2015 former city trader Tom Hayes was criminally convicted of conspiracy to defraud as a result of manipulating Libor. He was jailed for 14 years.
Why does this matter to you?
“We always share the risks of litigation with our clients”
If you are a customer of any major bank, and have financial products which are (or may be) linked to LIBOR, you might have a claim. It may be that you have been overpaying in your regular repayments and are entitled to be reimbursed or, in the most extreme cases, entitled to rescind (i.e. cancel) the contract you have entered with the bank.
Whilst there has not yet been a judgment on LIBOR case, from a claimant’s perspective it is encouraging that all issued cases have been settled.