The ongoing ramifications of the LIBOR scandal for global banks suggests that resolution of the problems for banks caused by the scandal have a way to go and no clear regulatory solution to prevent similar problems in the future is at hand.

As is now well known, the LIBOR scandal arose out of the behaviour of some global banks in submitting false returns to the London Interbank Offered Rate panel over a period of years, including through the Global Financial Crisis and even after a number of those banks had been bailed-out using taxpayer money. Hindsight has shown LIBOR is susceptible to manipulation because it is not based on observable market rates used by banks but is based on the bids made to the panel.

The first implication of the scandal has been the huge financial penalties imposed on the banks by regulatory authorities in agreed settlements. Penalties paid so far exceed $2.6 billion. 2. In June 2012 Barclays agreed to pay $200 million to the US Commodity Futures Trading Commission (CFTC), $160 million to the US Department of Justice (DoJ) and $93 million to the UK Financial Services Authority (FSA). In December 2012 UBS agreed to pay $700 million to the CFTC, $500 million to the DoJ, $260 million to the FSA and $63 million to the Swiss FINMA. In February 2013 RBS agreed to pay $325 million to the CFTC, $150 million to the DoJ and $137 million to the FSA. More bank settlements are expected in coming months. Clearly the cost of settlement is inflating for those banks involved in the scandal who have not yet settled. The lesson for banks from this scandal is that early cooperation and settlement where wrongdoing is clear, is clearly a preferred strategy. Criminal prosecutions against traders are also expected. The DoJ has already commenced prosecutions against 2 traders.

The second consequence arising out of the scandal is the possibility of class actions against banks for losses suffered by borrowers as a result of inflated rates. It has been estimated that the financial products that have been structured based on LIBOR interest rates run into the hundreds of trillions of dollars. In 2012 a class action was initiated in the Southern District of New York against various banks. In March 2013 the class action was largely struck out on the basis that it would be inappropriate for it to proceed while the ongoing regulatory investigations are undertaken by regulatory authorities. Copycat class actions have now been initiated in States such as California and Texas. The risk of copycat class actions in jurisdictions that are favourable for the conduct of representative actions where LIBOR interest rates have been used is very high.

The third area where the scandal may have implications is the possibility of cartel actions. A member of the European Commission confirmed in February 2013 that the possibility of an action of that nature is being closely considered by the European Commission. If cartel conduct were to be established in fixing LIBOR rates the potential fines could be huge. In the European Commission context alone, fines of up to 10% of global turnover can be imposed in cartel cases. Again, copycat actions by other regulators based on cartel conduct is a very real risk.

In terms of the way forward for regulatory redesign of the interest rate setting mechanism there is a divergence of views between England and the United States. In September 2012 the Wheatley Review recommended a new body to administer LIBOR with a charter to restore credibility in accordance with the UK Financial Conduct Authority Rules, a move over time to observable rates and strengthened obligations owed by approved persons within banks. That new body is expected to be in place by this European summer. However in the United States the CFTC has suggested a replacement standard based on observable rates is necessary to restore credibility. That suggestion has been given strong support by the Financial Stability Oversight Board of the US.

Clearly we are in the early stages of determining the full consequences of the LIBOR scandal. Experience to date suggests that the financial consequences to the banks in question will be huge. As to the regulatory consequences that flow from the lessons learned by the LIBOR scandal, that is very much a work in progress.

Bank Bill Swap Reference – Australia’s LIBOR equivalent

In response to these developments, the bank bill swap reference rate (BBSW), which is Australia’s equivalent to LIBOR, has come under increased scrutiny. BBSW is administered by the Australian Finance Markets Association (AFMA).

Like LIBOR, the BBSW rate setting process has relied upon submissions by panellist banks. A key difference, however, is that BBSW is based on observations from a traded market, rather than reported estimates. AFMA has stated that it is this feature that gives transparency and accountability to the process and makes it difficult for a panellist to influence a BBSW rate through a submission.

Nonetheless, recent events have led AFMA to reconsider the BBSW process and propose, in March 2013, a change from a panellist submission process to a process of obtaining rates directly from trading venues (brokers and electronic markets). This proposal will see an end to the BBSW panel structure, of which 10 banks are currently members. AFMA has suggested that this changeover will occur in a period of months.1