Is your business affected by Libor?

Does the interest rate benchmark influence your business’s bottom line? We take a look at the points to consider – and the steps to take if it does

Posted by Jonathan Dinsdale

Associate Solicitor, Colemans ctts

Wed 19th, Aug

Since the issue of Libor manipulation reared its head in 2012, there has been a lot of concern among businesses – and their legal advisors – as to who may have been affected financially. The combination of increased media focus on the activities of high-street and investment banks, the hangover from the financial crisis and further scrutiny of regulatory obligations have all served to intensify customers’ fears about potential losses. Jonathan Dinsdale, of national law firm Colemans-ctts, offers some guidance on how businesses can identify whether they are affected by Libor rate manipulation and the steps to take in response.

What is Libor?

Libor (the London Interbank offered rate) is the average interest rate at which a selection of leading banks on the London market are prepared to lend to one another. It is calculated as an average of estimates that are submitted by the banks in question and announced once every working day.

Libor is the benchmark used by banks and other financial institutions to calculate interest payments for customer products, such as mortgages, loans and more complex derivative products.

What exactly happened?

Libor is calculated on the basis of estimates submitted by banks and it was suggested that some of those banks might have submitted false figures – conspiring together to provide numbers that were either higher or lower than their actual estimates, in order to influence the final average.

In 2012, the Financial Services Authority (FSA), the predecessor of the Financial Conduct Authority (FCA), fined a number of banks sums ranging from £59.5m to £160m, for significant failings in relation to Libor and Euribor. Further fines followed for misconduct relating to Libor in 2013. Most recently, the UK operations of Deutsche Bank was fined £227m by the FCA for Libor and Euribor failings, and for misleading the regulator.

How might Libor manipulation have affected businesses?

SMEs, partnerships and sole traders may be affected where they have used financial products that are benchmarked to Libor. If you think you may be affected, carefully check your contracts and agreements.

Is it possible to make a claim where this has happened?

There has been a lot of discussion over whether the manipulation of Libor may give rise to action. However, the guidance that was hoped for from a recent case failed to materialise and this has resulted in some confusion.

The Guardian Care Homes case against Barclays bank was settled a few weeks before the trial was due to start. Had Guardian Care Homes been successful, it could have opened the door for cancellation of other Barclays customers’ derivative contracts where it could be shown that the interest rates charged were calculated on the basis of a Libor rate manipulated by bank employees.

How is a claim made?

Businesses considering a claim will be faced with a two-fold test: 1) establishing their level of loss and 2) showing, on the balance of probabilities, that the bank’s manipulation caused the loss. This is likely to be more straightforward for those customers who defaulted on particular covenants in their financial products as a result of the Libor rate at the time. Customers should seek advice from accountants or financial advisors in relation to specific covenants embedded within products and whether Libor was instrumental in any breach situation.

Is there any way of knowing if a claim will be successful?

In view of the lack of judicial authority, it’s difficult to say. The first step is to look at the terms and conditions of financial products purchased to establish whether Libor is the benchmark used to calculate payments. After that, legal advice will establish whether any losses were directly attributable to the Libor rate during the relevant period when the losses occurred.

So it is simply a case of wait and see?

For anyone thinking of making a claim, it’s a good idea to keep an eye on the separate ongoing action launched by Guardian Care Homes against Lloyds banking group. This second piece of litigation by the same claimant is for just over £8m in relation to Lloyd’s involvement in the Libor manipulation. It will be interesting to see how this further claim goes and whether it will result in any judicial guidance. However, many are expecting another settlement, as it seems doubtful that Lloyds will want to expose itself to a contested trial and the clear risks of an adverse judgment.

Is there a time limit within which to make a claim?

Yes. Contractual limitation runs from the date the agreement was made and any claim in tort (such as negligent misstatement or misrepresentation) runs from the date of the breach. In both cases, the applicable time limit is six years. It’s a good idea to take legal advice in relation to limitation and, where necessary, to issue a claim protectively in order to stop the clock ticking.

Jonathan Dinsdale is an associate solicitor in the dispute resolution team atColemans ctts.  This blog was first posted on The Guardian

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