It was recently reported (here) that the Financial Conduct Authority (FCA), the UK regulator of firms providing financial services, is not wholly satisfied with the work of banks in the UK following their implication in the manipulation of the London inter-bank lending rate (LIBOR). Commenting on the work of banks to identify and manage risks the FCA’s director of supervision Tracy McDermott stated:
“We recognise that this is a significant task and firms have made some improvements but he consistency of implementation and speed at which these changes have been taking place is disappointing.”
The manipulation of LIBOR is a particularly important issue for regulators as has been made very clear in recent years, with many financial institutions being handed substantial fines following their involvement. The jury for the first ever prosecution of an individual for the alleged manipulation of LIBOR has recently retired to consider it verdict, whose decision will play a crucial part in the policing of LIBOR in the future. Given the importance of the law governing LIBOR, we at Lewis Nedas thought it important to set out in this blog post what the rules are and to whom they apply.
What are the rules for LIBOR?
As mentioned earlier LIBOR is the benchmark by which banks may change each other interest on sums of money that they loan to one another. LIBOR is very important as it not only determines the interest to be applied to financial transactions, but also gives an indication of banks’ confidence in the stability of each other’s financial.
- Civil law
The FCA is the body charged under the Financial Services Act 2012, with the duty to regulate the activities of banks and other organisations, to ensure that they observe – amongst other things – accepted practice for loaning finances under LIBOR.
The rules governing LIBOR are part of a wide ranging body of regulations and laws in respect of banking practices more generally. As an organisation the FCA has particular expectations of the organisations that it regulates. These are known as the Principles for Businesses. These principles are broad in scope and cover all activities that banks as institutions will typically be involved in. With regard to LIBOR and the risk of its manipulation, some of the most important principles include:
- Principle 3: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management;
- Principle 5: A firm must observe proper standards of market conduct; and
- Principle 11: A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice
The FCA’s principles for businesses that it regulates are purposefully drafted in broad terms. This places the burden on banks to ensure that they take all reasonable measures to ensure that they do not take any course of action which risks the stability of the financial markets, allows their staff to act recklessly in their roles, or obstruct the work of regulators that are concerned that there has been some foul play in respect of adherence to LIBOR.
Where the FCA is convinced that there has been some violation of its principles for good business practice, it is empowered to issue sanctions against a bank. It may decide to issue significant fines against the bank or, if the circumstances warrant it, forbid a particular individual from working in the banking/ financial sector who is found guilty of manipulation LIBOR.
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Criminal law
The sanctions that the FCA may impose are largely civil in nature. The Financial Services Act 2012 also created three criminal offences in respect of LIBOR manipulation. Under Part 7 of the 2012 Act it is an offence to:
- Make a false or misleading statement;
- Create a false or misleading impression; and
- Making false or misleading statements or create a false or misleading impression in relation to specified benchmarks.
The phrase “…in relation to specified benchmarks…” is important as the Act expressly states that these crimes apply to LIBOR and its manipulation.
As the regulator the FCA will in most cases be the organisation that will institute criminal proceedings under the 2012 Act. The important point to note is that the consequences of a successful prosecution are severe: not only would a conviction have a detrimental impact on an individual’s career, it could also carry a lengthy period of imprisonment. The length of imprisonment that an individual would be faced with on conviction will depend on the court procedure in question. It has recently been reported in the media (here) that the jury in the first ever prosecution for Libor manipulation has retired to consider its verdict. The outcome of this case will be important for the future regulation of banks and their use of LIBOR.
At Lewis Nedas, we have a specialist team of lawyers who are routinely sought to advise on the rules applicable to banks and bankers in the UK. Our solicitors are highly experienced in assisting both individual and institutional clients that are facing investigations by the FCA on allegations of market manipulation. Our service places the needs of our clients at its core. We will handle every aspect of your dealings with regulatory bodies: our team will advise on how best to facilitate regulatory requirements; we will represent your interests in any negotiation or court appearances; and provide you with practical advice that has been tailored to reflect your circumstances. At Lewis Nedas we have a thorough appreciation of the law and how it applies to those working in financial services. We pride ourselves on being the trusted advisor to many working in this complicated and demanding sphere, where the rules are often difficult to understand. If you are concerned about the law, or are perhaps involved with the FCA already, contact our team today.
