FCA sets out its stall on benchmarking

FCA sets out its stall on benchmarking
What lessons can financial services firms take from the latest enforcement action relating to benchmarking? Victoria Turner, a solicitor specialising in financial regulation with Pannone, part of Slater and Gordon, believes the latest development hammers home the need for robust systems and controls to combat manipulation.

Original news

Press Release: Lloyds Banking Group fined £105m for serious LIBOR and other benchmark failings

Lloyds Bank and the Bank of Scotland have been fined £105m for serious misconduct relating to the Special Liquidity Scheme (SLS), the Repo Rate benchmark and the London Interbank Offered Rate (LIBOR). The banks, both part of the Lloyds Banking Group, were found to have attempted to manipulate the Repo Rate benchmark to reduce the fees payable to the Bank of England for their participation in the SLS, a scheme designed to support UK banks during the financial crisis. The Financial Conduct Authority (FCA) said while the LIBOR-related misconduct is similar to that of other banks, the attempted Repo Rate manipulation is ‘misconduct of a type that has not been seen in previous LIBOR cases’.

What is the background to the enforcement action in the UK and the US?

Since 2009, the FCA, its predecessor the Financial Services Authority (FSA) and other international regulators have been extensively investigating allegations of widespread attempts in the banking sector to manipulate benchmarks—specifically LIBOR.

The FCA (and the FSA), has now taken action against seven regulated firms and issued fines totalling over £500m in connection with misconduct relating to LIBOR. This includes the £105m fine issued to Lloyds Banking Group.

In relation to the enforcement action taken against Lloyds, the FCA’s Final Notice identifies two benchmarks which Lloyds is said to have manipulated.


A benchmark reference rate that is fundamental to the operation of both UK and international financial markets. At the relevant time relating to this particular fine, LIBOR was published in ten different currencies for 15 different maturities.

Repo Rate

A benchmark rate (now discontinued) which was based on trade in sale and repurchase agreements. This benchmark was used to calculate fees for banks which were participating in the SLS, a short term taxpayer-backed scheme introduced by the Bank of England during the financial crisis to support UK banks.

All FCA-authorised firms must act in accordance with the FCA’s Principles for Businesses. The FCA found that Lloyds committed misconduct by breaching principles 3 and 5, by manipulating submissions of LIBOR and Repo Rates and thereby manipulating those rates to the benefit of Lloyds.

The FCA identified clear conflicts where traders responsible for making submissions on these benchmarks were also the traders who had responsibility for managing the banks’ participation in the SLS or who were also dealing on the money market desks—the profitability of which was directly affected by the LIBOR submissions. It was also found that the individuals who submitted the benchmarks were influenced by other internal traders and on some occasions by traders at other banks.

What did the FCA say about the breach?

The FCA has stated that the behaviours uncovered in this case fell ‘well short of the standards the FCA and the market is entitled to expect from regulated firms’. In addition, the FCA’s focus since its inception has been to restore and increase confidence in the market and this enforcement action is seen as a positive step in achieving this aim. The FCA also encourages regulated firms to learn lessons from their past mistakes.

In this particular case, the FCA states that it has concluded that neither Lloyds Bank nor Bank of Scotland, as firms, engaged in any deliberate misconduct. However, due to the poor culture and systems/controls in place, the banks failed to prevent the deliberate, reckless and blatant actions of their employees—which included in some cases managers within the banks.

What did the Commodity Futures Trading Commission (CFTC) say about the breach?

In addition to the action taken by the FCA, the US CFTC issued an order against Lloyds relating to charges for acts, committed by employees, of false reporting, attempted manipulation and in some instances actual manipulation of LIBOR in sterling, US dollars and Japanese Yen. The US order requires Lloyds to pay a civil fine of $105m.

Reflecting the sentiments of the FCA, the CFTC has stated that the unlawful conduct undermined the integrity of LIBOR. The director of enforcement, Aitan Goelman, stated that:

‘Lloyds is being held accountable for serious misconduct…The CFTC remains committed to taking all actions necessary to ensure the integrity of the markets [it] overseas.’

What did the Bank of England say about the breach?

The Governor of the Bank of England, Mark Carney, reportedly wrote to the chairman of Lloyds and stated that ‘such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved’.

Whether any criminal action against individuals will take place is unclear. However, it should be noted that criminal offences specific to benchmark manipulation, created by the Financial Services Act 2012,are not retrospective.

Why are these enforcement actions particularly noteworthy?

Since the financial crisis, the FCA has been keen to demonstrate that behaviour such as this will not go unpunished. This is the seventh enforcement case brought by the FCA in relation to LIBOR manipulation and it is clear the FCA is committed to taking enforcement action where necessary and will not hesitate to issue substantial fines.

The FCA has pointed out that the manipulation of LIBOR in this case was similar to other instances of LIBOR manipulation seen by the regulator. By contrast, the manipulation of the Repo Rate has not previously been seen and makes this case somewhat unique. It demonstrates that misconduct and manipulation has extended past just LIBOR. However, the FCA is keen to stress that the underlying failures—ie the failure to have adequate systems and controls in place and to identify potential risks—are not new and have been seen on repeated occasions in the banking sector. It is interesting to note that of the £105m fine issued by the FCA, £70m of this relates to the manipulation of the Repo Rate.

The FCA has previously indicated that it is investigating allegations of manipulation relating to forex in the banking sector and it will be interesting to see how this develops.

Should firms be concerned about the outcome in this case?

The majority of FCA-authorised firms will not deal with the submissions of LIBOR and so they do not need to be concerned with issues relating specifically to LIBOR. However, the importance of adhering to the FCA’s General Principles cannot be stressed enough and firms should ensure that they have adequate processes and procedures in place to ensure that they do not fall foul of FCA requirements.

What should lawyers advise their clients?

It should be noted that the fine issued to Lloyds was reduced by 30% due to the fact that Lloyds agreed to settle and co-operated with the FCA. Lawyers dealing with firms which are being investigated by the FCA should have this settlement procedure in mind and consider whether it is appropriate.

It should also be noted that engaging in activities relating to the submission of benchmarks is now a regulated activity and FCA-authorisation is required before an individual engages in these activities. Lawyers should also bear in mind that under new clawback rules announced by the Bank of England, from 1 January 2015 any bonus awards made could be recovered from employees for up to seven years where there is reasonable evidence of employee misbehaviour.

Further reading

If you are a LexisPSL Subscriber, click the links below for further information on FCA and the PRA:

PRA approach and enforcement powers (Subscriber access only)

Interaction between the PRA, FCA and FPC (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you.

Interviewed by Diana Bentley.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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