The FSA has handed out a fine of £87.5m to The Royal Bank of Scotland PLC for its role in the LIBOR scandal. RBS settled early and so qualified for a 30% penalty discount, without which the fine would have been an even more eye-watering £125m.

LIBOR's integrity is of course of fundamental importance to both UK and international financial markets. It is by far the most prevalent benchmark reference rate used in euro, US dollar and sterling over the counter interest rate derivatives contracts and exchange traded interest rate contracts. The notional amount outstanding of over the counter interest rate derivatives contracts in the first half of 2012 has been estimated as being as high as £315 trillion.

The LIBOR related misconduct at RBS was described by the FSA as "extremely serious". It occurred over a number of years and included the following breaches:

Breaches of Principle 5 (proper standards of market conduct):

  • Making LIBOR submissions that inappropriately took into account RBS's derivatives trading positions, and also the impact on its money market trading books
  • Allowing derivatives traders at times to act as substitute LIBOR submitters
  • Colluding with other panel banks and with broker firms, including entering into some wash trades with brokers, the purpose of which the FSA concluded was to garner influence with brokers.

Breaches of Principles 3 (management and control):

  • Failing to identify and manage the systemic risks of inappropriate submissions. RBS established a business model that sat derivatives traders next to LIBOR submitters and encouraged the two groups to communicate without restriction, despite the risk that derivatives traders could wrongly seek to influence RBS’s LIBOR submissions.
  • Having no systems, controls, training or policies governing the procedure for making LIBOR submissions until March 2011. In March 2011, RBS attested to the FSA that its systems and controls were adequate. However, this was not correct and its systems and controls were not adequate. (However, RBS did not deliberately mislead the FSA).
  • Failing to manage the relevant business areas appropriately. For example at least two managers were aware that derivatives traders acted as substitute submitters but did not take any action to address the situation, and one manager himself made inappropriate submission requests.

Please click for Final Notice for The Royal Bank of Scotland PLC


Much has been written about the LIBOR affair by others, and so we limit our comments just to the following, which strike us of particular interest.

This is the third LIBOR fine.1 All three cases were settled by the bank involved. This raises the important tactical issue of when may be the best time to settle relative to others. In some respects, there are a variety of reasons why settling first may be an advantage. For example, it allows the bank to portray itself in a particular light with the regulator, and it enables it better to set the agenda than if it follows the "precedent" of another bank. Indeed, there are areas of the law (more developed in the US than in the UK) that afford advantages to those who come first to the authorities. What is noticeable about the LIBOR cases, however, is that it was the bank that settled first in the UK (Barclays) for which the public's ire to date seems to have been greatest. Whether or not the FCA has the appetite to address from a penalty perspective the issue of the benefits of settling first, it is certainly something that firms will need to think carefully about in future matters.

Perhaps with its objective of "consumer protection in mind", the FSA was keen to point out that the direct impact of actual manipulation of the LIBOR fix on UK retail consumers is likely to be minimal.

The FSA said that the size and scale of its continuing investigations remained significant, including a number of significant cross-border investigations. Rumours of course abound of the others involved in the LIBOR affair. Further, no action has yet surfaced against individuals, and this remains an area to be watched. For example, whether it will be FCA disciplinary action that follows. Alternatively, it may be that the difficulties are perceived to be too large (see for example Enforcement Watch 8 "What is to come in relation to LIBOR") and the situation may instead be dealt with by the FCA challenging future applications for individual registration. Further, the SFO has been making belligerent noises about LIBOR. We shall have to wait and see what emerges on these.

The case is interesting as a further example of the problems that can arise on integrating new businesses. In this case, the FSA has pointed out that, in a complicated organisation where several legacy systems exist, it is essential that the organisation ensures its systems are correctly synchronised. (For another example of legacy issues causing enforcement difficulties, see Enforcement Watch 8 "11 September 2012: £9.5m Black Rock fine for client money breaches")

This is the second time during the calendar year 2012 that Bank of Scotland has been found by the FSA to have failed to comply with Principle 3. In June 2012, the FSA determined that Bank of Scotland had breached Principle 3 when the bank was found to have been guilty of very serious misconduct which contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS (see Enforcement Watch 7 "9 March 2012 FSA censures Bank of Scotland for very serious misconduct")