UK-listed RBS, which provides services including wealth management, has been fined for misconduct over LIBOR interest rates. Some of the persons involved were in Japan. RBS joins UBS and Barclays as banks punished for what happened.

The UK regulator, the Financial Services Authority, has fined the Royal Bank of Scotland £87.5 million (about $137 million) for misconduct relating to the London Interbank Offered Rate. The offences involved individuals located around the world, including Japan.

The bank also agreed to pay penalties $325 million and $150 million to two US authorities - the CFTC and DOJ respectively, to resolve the investigations. 

The UK-taxpayer supported bank’s breaches of the FSA’s requirements encompassed a number of issues, involved a number of RBS employees and occurred over a number of years, according to the regulator’s findings. The individuals involved in the misconduct were located in the UK, Japan, Singapore and the US.

Between January 2006 and November 2010 the misconduct included:

· making Japanese yen and Swiss franc LIBOR submissions that took into account the bank’s derivatives trading positions.

· allowing derivatives traders to act as substitute submitters and make JPY LIBOR submissions that took into account its derivatives trading positions.

· making JPY, SFr and US dollar LIBOR submissions that took into account the profit and loss of its money market trading books.

· RBS derivatives traders colluding with other LIBOR panel banks and interdealer broker firms to influence the JPY LIBOR submissions made by other panel banks, including one derivatives trader entering into “wash trades” (i.e. risk free trades that cancelled each other out and for which there was no legitimate commercial rationale) in order to make corrupt brokerage payments to one broker firm to garner influence. The derivatives trader used this influence to get the broker firm to try to change other panel banks’ JPY LIBOR submissions.

· RBS derivatives and money market traders colluding with individuals at other panel banks and interdealer broker firms whci sought to influence RBS’ JPY and SFr LIBOR submissions.

The misconduct was widespread: at least 219 requests for inappropriate submissions were documented and an unquantifiable number of oral requests were also made. At least 21 individuals including derivatives and money market traders and at least one manager were involved, the FSA said.

RBS sat derivatives traders next to LIBOR submitters and encouraged the two groups to communicate without restriction despite the obvious risk that derivatives traders would seek to influence RBS’ LIBOR submissions. It also allowed derivatives traders to act as substitute LIBOR submitters which created an obvious risk that derivatives traders would make submissions that took into account their trading positions. RBS also failed to identify and manage the risk that money market traders would take the P&L of their money market books into account when making RBS’ LIBOR submissions.

RBS did not have any LIBOR-related systems and controls in place until March 2011, failed until June 2011 to adequately address the risk that derivatives traders would seek to influence RBS’s LIBOR submissions and failed until March 2012 to adequately address the risk that money market traders would take into account the impact of LIBOR on the profitability of transactions in their money market books.

In response to a specific request, RBS told the FSA in March 2011 that its LIBOR-related systems and controls were adequate. This was inaccurate as RBS’ systems and controls were inadequate, the regulator said. Although it had reviewed its LIBOR submission process in February and March 2011 at the FSA’s instigation, RBS had failed to identify the risks that submitters would make LIBOR submissions that took into account derivative trader requests and the impact on the profitability of transactions in their money market books.

From January 2005 through to March 2012, RBS also failed to have adequate transaction monitoring systems and controls that would have assisted it to detect wash trades.

Benchmark integrity

“The integrity of benchmark reference rates such as LIBOR is of fundamental importance to both UK and international financial markets. The findings set out in our notice today demonstrate a failure by RBS to take that wider context into account.

And Tracey McDermott, FSA director of enforcement and financial crime, did not pull her punches.

“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…The FSA takes it very seriously when firms tell us that they have appropriate systems but do not,” she said in a statement on the affair.

“The extent and nature of the misconduct relating to LIBOR has cast a shadow on the reputation of this industry and we expect firms to take steps to ensure that this can never happen again. This is the third penalty we have imposed in relation to LIBOR related misconduct. The size and scale of our continuing investigations remains significant.”

The FSA continues to pursue a number of other “significant” cross-border investigations in relation to LIBOR and other benchmark rates.

Without an early settlement discount the fine would have been £125 million.

The FSA was assisted by the US Department of Justice and the FBI, the Monetary Authority of Singapore and the Japanese Financial Services Authority.

Response

In a statement issued by bank, Stephen Hester, RBS' group chief executive, said: "I want to speak very clearly and on behalf of the 137,000 employees of RBS. We condemn the behaviour of the individuals who sought to influence some LIBOR currency settings at our bank from 2006-2010. There is no place at RBS for such behaviour. We are also determined to correct the broad range of control and risk management failures that originated in RBS during the financial boom years. LIBOR manipulation is one example. This is a painstaking task undertaken carefully and diligently over five years. We know that we cannot detect and solve every problem as fast as we would like. But our commitment is absolute.

“We are dedicated to creating a safe and secure RBS that serves customers well and that, in the right way, creates value for those who rely on us. 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. We will use the lessons learned from this episode as further motivation to reject and change the vestiges of that culture. RBS is making substantial progress overall. Today's announcement is not the first and will not be the last reminder of the scale of the changes that need to be made. But our determination to clean up RBS for all is undiminished."

In connection with the LIBOR allegations, it has been widely reported in the media that RBS’ chief executive of market and international banking John Hourican will resign, forfeiting a bonus worth £4 million (around $6 million). However, the bank declined to comment on the matter when contacted by this WealthBriefing.

RBS is the third bank to settle allegations related to the LIBOR-rigging affair with US and UK authorities. In June of last year, UK-listed Barclays agreed to pay £290 million ($454 million) to settle such claims, and its high-profile chief executive Bob Diamond, among other senior figures, resigned.

More recently, last month UBS agreed to pay around SFr1.4 billion in fines and related payments to the US, Swiss and UK authorities to settle investigations that Switzerland’s largest bank manipulated interbank interest rates.