RBS Fined $612 Million for Libor Manipulation

The combined penalty, levied by the UK Financial Services Authority (FSA), the US Department of Justice and the US Commodity Futures Trading Commission (CFTC) makes RBS the third bank to be penalized over rate fixing, following heavy settlements by both Barclays and UBS.

Details of attempts by major banks to influence Libor, which not only sets the rate at which banks borrow from one another but also provides a glimpse of an institution's financial health and positioning, have been circulating for several years.

RBS is accused of operating a system where derivatives traders were able to communicate freely with, and influence, staff responsible for Libor submissions, which would take into account their trading positions. The bank was also accused of entering into so-called "wash trades", essentially risk-free transactions with little material benefit, in order to provide corrupt payments to interdealer brokers. The payments were an attempt to gain influence, through the broker, with Libor-submitting personnel at other banks.

Long Running
The FSA said that the activities took place between 2006 and 2010, and at least 219 documented requests─along with an unquantifiable number of oral requests─for inappropriate submissions were made, involving 21 staff in the UK, US, Japan and Singapore.

Libor is calculated by Thomson Reuters in London from bank submissions every day, on behalf of the British Bankers Association, covering ten currencies and various time periods. Tenders for Libor reform are expected imminently.

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. This was not correct.

"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," says Tracy McDermott, director of enforcement and financial crime at the FSA. "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. 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."

McDermott added that the range of the Libor investigation remains "significant".

In addition to the fine, John Hourican, chief executive of markets and international banking at RBS, will resign and give up his estimated £4 million (approximately $6.2 million) bonus pot. No wrongdoing on Hourican's part is alleged.

"Libor manipulation is an extreme example of a selfish and self-serving culture that took hold in parts of the banking industry during the financial boom," says Stephen Hester, group CEO at RBS, in a provided statement to the press. "We will use the lessons learned from this episode as further motivation to reject and change the vestiges of that culture."

US regulators levied $475 million collectively, with the FSA fining RBS $137 million.

Wide Nets
More than a dozen major banks have been caught up in the scandal, which has seen startling evidence of manipulation at institutions being released by regulators. Junior traders to senior management staff have been implicated. Investigations and negotiations over settlement are reportedly ongoing at the other institutions, some of which have confirmed the process.

Barclays paid $450 million in fines and lost its CEO, Robert Diamond, as result of its ongoing legal troubles, along with other executive staff. UBS was fined $1.5 billion in total, and is undergoing a process of shrinking its investment operations.

The issue over RBS' fine is politically sensitive in the UK, however. During the height of the financial crisis, the UK government was forced to bail out the ailing institution, which suffered tremendously from its previous acquisition of Dutch lender ABN Amro. The state aid effectively nationalized the bank, and UK taxpayers now own around 80 percent of the institution. Government officials at the highest levels are pushing for any damages related to the fine to be paid out of the bank's bonus pool, rather than funds which are seen as belonging to the public.