The recent lawsuit against Barclays bank that was brought  by the owner of a chain of care homes (Guardian Care Homes) has been dropped in favour of settlement. Prior to this news, Barclays had insisted that they would be defending themselves in court against the charges that they knowingly mis-sold a loan with interest rate swaps that were linked to unfavourable LIBOR rates. Graiseley Properties, owned by Gary Hartland, will be granted a restructured loan from Barclays which is reported to be worth £40 million. In addition to the case being dropped, former Barclays head Bob Diamond will not have to testify in court about the nature of the interest rate swaps sold to the care home owners. This is most likely a welcome relief, as a previous court order in January forced at least 100 Barclays employees to relinquish their anonymity in order to gain access to in-house correspondence about LIBOR policies and interest rate swaps.

What are Interest Rate Swaps?

Interest rate swaps are a way for investors and businesses to manage risks while giving out and receiving loans. Between 2001 and 2008, thousands of small British businesses took on these loans from four major UK banks – Lloyds, Barclays, HSBC and the Royal Bank of Scotland. Because of this agreement, businesses who took on these loans would supposedly be protected against paying extra fees if the Bank of England raised interest rates during the life of the loan. However, the opposite occurred and interest rates were lowered during the height of the global financial crisis.

In the case of Graiseley Properties, this fluctuation in interest rates meant that they were forced to pay more on their loans than they should have. This process was repeated across the United Kingdom, with many businesses falling deeper into debt.

What is LIBOR and What Does it Mean?

LIBOR, which is short for “London Inter-Bank Offered Rate”, is a benchmark for interest rates used in financial deals across the world. Essentially, it is seen as a way to assign price and value to fiat currency. It is also used as a way to demonstrate the trust and faith that financial institutions have in each other. LIBOR rates affect transactions with a worth of approximately $300 trillion, which is almost four and a half times the actual global GDP. The rate is set each day when leading banks submit estimated values for 10 currencies and 15 different types of loans. The most important of these loans is the three-month dollar LIBOR, which is what institutions use to measure how much they would pay to borrow US dollars from another bank for three months.

It was discovered that during the economic crisis in late 2007 and in 2008, traders at banks submitted false numbers to the group. They then encouraged their colleagues to submit rates that were different to the actual estimate. This has had a marked negative effect on savers and investors. Faith in banks was severely damaged.

Where the case of the Guardian Care Homes is concerned, it was discovered that Barclays benefited from a lower LIBOR rate related to the interest rate swaps it offered to the company. The traders involved were attempting to manipulate the interest rates by consulting each other before submitting bids. This meant that Graiseley Properties was forced to pay even more on their loans than was forecast, prompting the lawsuit.

See: Barclays Fined for Manipulating LIBOR

See: Banks start Losing Legal Challenges

How Will the Settlement Affect Future Cases?

During the build-up to the abandoned court case, Barclays maintained that they would “vigorously” defend themselves against Graiseley Properties’ accusations. The fact that the bank has decided to settle may mean that the evidence that was to be brought forth would certainly cause them to lose their case. A number of banks have been fined for similar issues, including the Royal Bank of Scotland, who paid out £390 million to regulators due to their questionable LIBOR practices. The Swiss Bank UBS was fined £940 million for the role they played in LIBOR rigging.

While the legal proceedings between Barclays and Guardian Care Homes have come to a close, there still exists the possibility of more “test cases” against the LIBOR system. This may result in more settlements of this kind in the future, which could lead to the discrediting of LIBOR and its related practices as well as more fines levied against financial institutions. At the very least, there could be new regulations introduced that control how the system works. Only time will tell if potential lawsuits or new industry regulations will have any effect on global banking and investing. Unfortunately, it may already be too late for several British businesses.


Interest Rate Swap : News

 

Barclays Settles £70M Interest Rate Swap Claim

A high profile court case has been pending for a while, regarding Barclays and Guardian Care Homes. Guardian alleged that the bank mis-sold it two interest rate swaps that were worth £70 million.

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Interest Rate Swap Redress, Banks Managed to Dodge Larger Claims

Critics of the compensation paid out by banks in the interest rate swap scandal are starting to question moves made by the Financial Conduct Authority (FCA).

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Interest Rate Swaps: Redress, the Banks and Businesses

There were four big banks involved in the investigations surrounding mis selling of interest rate swap products to unsophisticated business customers. The banking institutions that were reviewed by Britain’s regulators included Barclays, HSBC, Lloyds and RBS.

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Nationwide drawn into Interest Rate Swap Mis-selling Allegations

Nationwide Building Society has become the first building society to be enveloped by the current scandal concerning the mis-selling of interest rate hedging products.

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Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim

 

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.