No sign of an end to bank woes

Libor claims are next in line to plague beleaguered bankers, with a streamlined claims route proposed

Tim Bowden

Barclays: £290m; UBS: £940m; RBS next: rumoured to be around £400m. The big banks are forming a queue to take their punishment from regulators for attempted London Interbank Offered Rate (Libor) manipulation. And they await claimants queuing up to recover losses potentially suffered through products based on the allegedly manipulated rate.

It is feared the costs of such claims could dwarf any regulatory fines and exceed the amounts paid out as a result of the PPI mis-selling scandal. The problem is the vast array of products that were predicated on Libor, and their value. Estimates of the total value of products linked to Libor go as high as £500tr. Even the smallest variation in Libor matters.

Barclays and others have admitted they attempted to manipulate the Libor, but that is no admission they succeeded.

The claimants will have to prove the rate was influenced by false submissions by the particular defendant bank at the material time.

Libor was set on the basis of submissions from a number of institutions, with the more extreme submissions excluded from the calculation.

To show the defendant bank’s submission was not excluded, that it was false, that it manipulated the rate and the extent to which that submission manipulated the rate over a period of time is a daunting task.

The potential for a simpler approach has been reported in recent days. It has been suggested that claimants could rely on a law normally used in the sale of consumer goods such as fridges – the Sale of Goods Act 1979.

The argument is based on the idea that if the Libor rate underlying the product may have been false, the product itself would be faulty. Where goods are sold in the course of a business, the act implies a term that they must be of satisfactory quality and, given the nature of these products, price would surely be a relevant factor in deciding whether goods are of satisfactory quality. Would a reasonable person consider that a product is of satisfactory quality when it is based on a lie? With this approach, the argument goes, the burden switches to the bank to prove either that the Libor was not adversely affected by the attempted manipulation or that the product was nevertheless of satisfactory quality. This is rather tricky – if the rate was not being affected, why did people keep trying for so long?

This is not a silver bullet. The act only applies to the sale of goods. The definition of ‘goods’ is restricted to ‘personal chattels other than things in action and money’. Some products, such as some futures and options, may therefore be covered if they are linked to tangible goods. Others will surely not be and it will be difficult to bring purely financial products within the act.

That is not to say the possibility will not be causing some nervousness in City boardrooms. The bad news just keeps on coming.