By HUMA YUNUS Sinels Advocates
Mis- Selling
The financial crash is less than a decade old and has led to increasing scrutiny of the City of London and major banks and financial institutions. We are now becoming accustomed to learning about the myriad ways in which financiers have been alleged to have manipulated interest rates, rigged foreign exchange rates and mis-sold an array of financial products.
l“We have seen an increase in victims
ooking for advice, particularly in respect of potential actions in Jersey.
”
Recently RBS, HSBC, JP Morgan, UBS and Citi faced record fines totalling £2.6 billion for their respective roles in the foreign exchange market rigging scandal. So far Barclays has refused to sign up to the agreement that the aforementioned institutions have
is not just a City of London problem
reached with the British and American regulators. Barclays, of course, was one of the key participants in the previous scandal centring on the manipulation of the LIBOR (London Interbank Offered Rate). LIBOR is the rate that underpins trillions of financial contracts and affects, among other things, mortgages, loans (both personal and commercial), and the cost at which banks will lend to each other. LIBOR affects approximately $800 trillion worth of financial transactions, which equates to more than ten times global gross domestic product (GDP).
LIBOR is a borrowing rate set by a panel of banks for ten currencies across fifteen different maturity periods. The most important combination is the three-month dollar LIBOR which is fixed in essence each day by taking estimates from a panel of eighteen banks. LIBOR is defined as the London Inter Bank Offered Rate. Theoretically it is a truthful estimate by lending banks in London as to the rate at which the average lender can borrow if it borrows from another bank of similar strength. LIBOR was seen as an indication of bank strength. In financial markets interest rates are an indicator of the strength of the borrower, i.e. ability to repay. Thus if LIBOR is low it denotes strength in the borrower. Customers have alleged that LIBOR was artificially depressed in order to strengthen the banks’ appearance of strength.
In light of the involvement of the banks in the process, it is not difficult to see how such an informal system could be open to abuse. LIBOR is based on estimates not the precise prices at which banks have lent to other banks. Moreover those individuals involved in setting the rates on behalf of the banks had a strong personal motive to ensure the banks perform well and make a profit as they were part of a structure that may see them enjoy large bonus payments. Derivative traders at several banks are known to have boasted about attempts to influence the LIBOR rate to increase profits or reduce losses on their market positions.
Banks may present such activities as the work of Page 76 20/20 Finance & Investment
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