The Royal Bank of Scotland (RBS) has been fined a total of US$610m (£390m) by UK and US regulators for its role in the London Interbank Offered Rate (Libor) rate-fixing scandal, which so incensed corporate treasurers and others who found out they had been paying the wrong rates for years.
RBS is the second UK bank to be fined for its part in the manipulation of Libor, following Barclays‘ $425.5 fine in June last year. Subsequent action was also taken against UBS, which was hit with a $1.5bn Libor fine. The instances of banks’ manipulating Libor has angered many treasurers who have been given a false base lending rate for their hedging activities over many years. Other banks such as Citi, Lloyds, Deutsche Bank and others are still under investigation and likely to be fined at a later date.
Libor sets the rate at which banks borrow from each other and acts as the base from which mortgages, car, business loans and everything else is set. It underpins trillions of dollars of derivatives contracts around the world for treasurers and others, as well as being used as a reference for all corporate lending.
The Financial Services Authority (FSA) in the UK issued a fine of £87.5m against RBS today as part of the coordinated action against the bank, while about £300m was levied by US regulators and the US Department of Justice (DoJ) for the Libor manipulation. RBS revealed its internal investigations had uncovered wrongdoing by 21 employees, all of whom have either been disciplined or left, it says. The head of RBS’s investment banking arm, John Hourican, is to leave the bank it has been confirmed.
The announcement of the fine follows earlier speculation today that RBS was about to settle on the exact figure for its fine from the regulators.
FSA Takes Action
According to the FSA the misconduct at RBS was widespread. At least 219 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made said the UK regulator. At least 21 individuals including derivatives and money market traders and at least one manager were involved in the inappropriate conduct, confirmed the FSA, while also highlighting the fact that RBS failed to identify and manage the risks of inappropriate submissions, even maintaining that it had adequate controls in place in 2011 when it obviously didn’t.
RBS established a business model that sat derivatives traders next to Libor submitters and encouraged the two groups to communicate without restriction despite the obvious risk that derivatives’ traders would seek to influence RBS’ Libor submitters, said the FSA. Incredibly, the regulator also found the bank allowed derivatives traders to act as substitute Libor submitters, which created an obvious risk that derivatives traders would make submissions that took into account their own trading positions. Additionally, RBS failed to identify and manage the risk that money market traders would take the profit and loss (P&L) of their money market books into account when making RBS’ Libor submissions.
“The integrity of benchmark reference rates such as Libor is of fundamental importance to both UK and international financial markets,” commented Tracey McDermott, director of enforcement and financial crime, FSA. “The findings set out in our notice today demonstrate a failure by RBS to take that wider context into account.
“The failures at RBS were all the more serious because of the attempts not only to influence the submissions of RBS but also of other panel banks and the use of interdealer brokers to do this.
“During the course of the FSA’s work on Libor, RBS provided the FSA with an attestation that its Libor related systems and controls were adequate,” added McDermott. “This was not correct. Primary responsibility for the conduct of the individuals within firms and the efficacy of the controls that are in place, rests with those firms. The FSA takes it very seriously when firms tell us that they have appropriate systems but do not.
“The extent and nature of the misconduct relating to Libor has cast a shadow on the reputation of this [FS] industry,” she added, “and we expect firms to take steps to ensure that this can never happen again. This is the third penalty we have imposed in relation to Libor related misconduct. The size and scale of our continuing investigations remains significant.”
Clawback of RBS Bonuses Enacted
The FSA revealed that the bank qualified for a 30% discount on its fine because it agreed to settle at an early stage of the investigation. Without the discount the FSA fine alone would have been £125m. The bank maintains that the majority of the total £390m fine would be paid using money clawed back from bonuses already paid, and reductions to future bonuses, sidestepping a potential furore about UK taxpayers paying fine money to US regulators from the taxpayer-owned RBS, which was saved from going bust back in 2008 by the UK government.
RBS has also entered into a deferred prosecution agreement with the US Department of Justice on other charges.
Commenting on the fines, Stephen Hester, chief executive of RBS, condemned the actions of certain staff, adding that: “We are dedicated to creating a safe and secure RBS that serves customers well and that, in the right way, creates value for those who rely on us.”
- Subsequent reports in the FT and elsewhere in the press of the on-going scale and global ramifications of the Libor manipulation scandal show that the malfeasance by the banking industry was not just confined to London. The Libor accusations have been mirrored in Japan where ex-derivatives trader, Hideto ‘Eddy’ Takata, has claimed that the Tokyo Interbank Lending Rate (Tibor) has been kept artificially high, adversely impacting loan prices for treasurers, consumers and others –Ed.
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