The Financial Conduct Authority (FCA) has fined Lloyds Bank plc (Lloyds) and Bank of Scotland plc (BoS), both part of Lloyds Banking Group (LBG), £105 million for serious misconduct relating to the Special Liquidity Scheme (SLS), the Repo Rate benchmark and the London Interbank Offered Rate (LIBOR).
£70 million of the fine relates to attempts to manipulate the fees payable to the Bank of England for the firms’ participation in the SLS, a taxpayer-backed government scheme designed to support the UK’s banks during the financial crisis. The £105 million total fine is the joint third highest ever imposed by the FCA or its predecessor, the Financial Services Authority, and the seventh penalty for LIBOR-related failures.
Whilst the firms’ LIBOR-related misconduct is similar in many ways to that of other financial institutions, the manipulation of the Repo Rate benchmark in order to reduce the firms’ SLS fees is misconduct of a type that has not been seen in previous LIBOR cases.
Tracey McDermott, the FCA’s director of enforcement and financial crime, said:
“The firms were a significant beneficiary of financial assistance from the Bank of England through the SLS. Colluding to benefit the firms at the expense, ultimately, of the UK taxpayer was unacceptable. This falls well short of the standards the FCA and the market is entitled to expect from regulated firms.
“The abuse of the SLS is a novel feature of this case but the underlying conduct and the underlying failings - to identify, mitigate and monitor for obvious risks - are not new. If trust in financial services is to be restored then market participants need to ensure they are learning the lessons from, and avoiding the mistakes of, their peers. Our enforcement actions are an important source of information to help them do this.”
Repo Rate manipulation
Between April 2008 and September 2009, the firms manipulated their Repo Rate submissions in order to reduce the fees payable by them to the Bank of England for participation in the taxpayer-backed SLS. The Repo Rate, a now discontinued benchmark rate, was published daily by the BBA until December 2012. Repo Rate panel banks submitted the rates, across a range of maturities, at which they were prepared to trade in the repo market.
By artificially inflating their Repo Rate submissions, the firms sought to narrow the Repo Rate-LIBOR spread and thereby reduce the fees properly payable to the Bank of England for their participation in the SLS. A total of four individuals (a manager and a trader at each firm) colluded with each other in the manipulation of the firms’ Repo Rate submissions without any oversight or challenge.
This was an extremely serious failing, with the potential to reduce the fees due to the Bank of England from all the firms that participated in the SLS.
Lloyds Banking Group has paid the Bank of England £7.76 million in compensation for the reduction in the amount of Special Liquidity Scheme (SLS) fees received by the Bank (from all users of the SLS) as a result of manipulation by Lloyds and BoS of their submissions to the BBA GBP Repo Rate.
Failings related to LIBOR
LIBOR is based on daily estimates of the rates at which LIBOR panel banks borrow funds from one another. In relation to LIBOR, the firms’ misconduct between May 2006 and June 2009 included:
- The firms making GBP, USD and JPY LIBOR submissions that took into account the profit and loss (P&L) of their money market trading books;
- Lloyds colluding with Rabobank to seek to influence JPY LIBOR to benefit their respective trading positions;
- The firms engaging in “forcing LIBOR” to influence the GBP LIBOR submissions of other LIBOR panel banks to benefit trading positions; and
- BoS manipulating its GBP and USD submissions as a result of at least two directives from a manager to avoid negative media comment and market perception in respect of its financial stability during the financial crisis.
This meant that the firms’ affected LIBOR submissions, and some of the LIBOR submissions made by other panel banks, did not fairly reflect the cost of inter-bank borrowing. This undermined the overall integrity of the LIBOR benchmark.
Sixteen individuals at the firms, seven of whom were managers, were directly involved in, or aware of, the various forms of LIBOR manipulation, including one manager who was also involved in the Repo Rate misconduct.
FCA principle breaches
The firms failed to identify, manage or control the relevant risks or meet proper standards of market conduct in relation to both the Repo Rate and LIBOR benchmarks. This breached two of the FCA’s fundamental principles for businesses, which underpin its objectives to ensure that markets function effectively, and to promote market integrity.
The firms agreed to settle at an early stage and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount the total fine would have been £150 million.
This was a significant cross-border investigation and, in particular, the FCA would like to thank the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice (DoJ) for their cooperation in this investigation.
Notes for editors
- Final Notice for Lloyds Bank plc and Bank of Scotland plc
- The SLS, a short term taxpayer-backed scheme, was introduced by the Bank of England during the financial crisis to ensure the continued financial stability of UK banks. This was done by allowing banks to swap illiquid, mortgage backed securities for highly liquid UK Treasury Bills. Banks could subsequently use these liquid Treasury Bills to raise cash, as and when required. Participating banks were charged a fee by the Bank of England, based on the spread between the 3 month LIBOR and 3 month Repo Rates, with a narrower spread resulting in a smaller fee and vice versa (subject to a 20 basis point minimum). The fee was intended to make the overall cost of SLS funding comparable with commercial borrowing.
- The BBA Repo Rate was a benchmark interest rate based on trading in sale and repurchase agreements (repos) which was published by the BBA from May 1999 until December 2012 when the benchmark was abolished.
- On 27 June 2012, the FCA fined Barclays Bank plc £59.5 million for misconduct relating to LIBOR and EURIBOR. On 19 December 2012, the Financial Services Authority (FSA), the FCA’s predecessor, fined UBS AG £160 million for significant failings in relation to LIBOR and EURIBOR, and on 6 February 2013, the FSA fined The Royal Bank of Scotland plc £87.5 million for misconduct relating to LIBOR. On September 2013, the FCA fined ICAP Europe Limited £14 million. On 29 October 2013, the FCA fined Rabobank £105 million for misconduct relating to LIBOR. On 15 May 2014, the FCA fined Martin Brokers (UK) Limited £630,000 for misconduct relating to LIBOR.
- On 2 July 2012, the Chancellor of the Exchequer commissioned Martin Wheatley, chief executive of the FCA (formerly managing director of the FSA), to undertake a review of the structure and governance of LIBOR and the corresponding criminal sanctions regime. On 28 September 2012, the Wheatley Review published its final report ‘The Wheatley Review of LIBOR’ which included a 10-point plan for comprehensive reform of LIBOR. On October 2012, the Government accepted the Review’s recommendations in full, and enacted the Financial Services Act 2012. This Act, which amended the Financial Services and Markets Act 2000 came into force on 1 April 2013. On 25 March 2013, the FSA published its Policy Statement (FSA PS13/6) setting out the new rules and regulations for financial benchmarks, following on from the recommendations of the Wheatley Review and the new provisions of the Financial Services Act 2012. These rules came into force on 2 April 2013. On 12 June 2014 the Chancellor announced the Fair and Effective Markets Review, which will look at conduct in wholesale markets. The review will be led by Bank of England Deputy Governor for Markets and Banking, Minouche Shafik, and co-chaired by Martin Wheatley and Charles Roxburgh, Director General, Financial Services, HM Treasury.
- The LIBOR benchmark reference rate indicates the interest rate that banks charge when lending to each other. It is fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
- LIBOR is used to determine payments made under both over the counter (OTC) interest rate derivatives contracts and exchange traded interest rate contracts by a wide range of counterparties including small businesses, large financial institutions and public authorities. Benchmark reference rates such as LIBOR also affect payments made under a wide range of other contracts including loans and mortgages. The integrity of benchmark reference rates such as LIBOR is therefore of fundamental importance to both UK and international financial markets.
- LIBOR is by far the most prevalent benchmark reference rates used in euro, US dollar and sterling OTC interest rate derivatives contracts and exchange traded interest rate contracts. The notional amount outstanding of OTC interest rate derivatives contracts at end-2012 totalled USD $490 trillion.
- Throughout the relevant period, LIBOR was published on behalf of the British Bankers’ Association (BBA). There were different panels of banks that contributed submissions for each currency in which LIBOR was published. Throughout the relevant period between 7 and 16 banks contributed to the different LIBOR currency panels. Every LIBOR rate was calculated using a trimmed arithmetic mean. Submissions for each currency and maturity made by the banks were ranked in numerical order and the highest 25% and lowest 25% were excluded. The remaining contributions were then arithmetically averaged to create the final published LIBOR rate. On 1 February 2014, the Intercontinental Exchange Benchmark Administration Ltd (“ICE BA”) took over responsibility of LIBOR from the BBA. LIBOR is now published on behalf of ICE BA.
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers. You can find more information about the FCA, as well as how it is different to the PRA.
- Find out more information about the FCA.