Changes in light of the Libor scandal

04 December 2013

Patrick Gilfillan

As of 2 April 2013, three new criminal offences were introduced under Part 7 of the Financial Services Act 2012:

  • making false or misleading statements,
  • creating false or misleading impressions, and
  • making false or misleading statements or creating a false or misleading impression in relation to specified benchmarks. 

These replaced the criminal offences of making misleading statements and manipulative practices contained in section 397 of the Financial Services and Markets Act 2000 ("FSMA").  Critically, section 401 of FSMA now grants the Financial Conduct Authority ("FCA") the power to prosecute criminal offences relating to financial services - including making false or misleading statements or creating a false or misleading impression in relation to specified benchmarks – as part of the FCA's ever widening range of enforcement powers. 

Currently LIBOR is the only relevant benchmark to which the new criminal offence applies. Given the scale of the alleged manipulation this is perhaps unsurprising. Nor is it surprising that LIBOR is similarly being subject to close scrutiny in the civil context.  In November, the Court of Appeal in the so-called "LIBOR test case", Guardian Care Homes (Barclays Bank plc v Graiseley Properties Limited & Ors [2013] EWHC 3093 (Comm)), confirmed the High Court's decision to grant Graiseley permission to amend its civil claim to include deceit/fraudulent misrepresentation and/or implied contractual terms on the basis of Barclays’ improper fixing of LIBOR.  In other words, manipulation of LIBOR was held to be relevant to the wider claims against Barclays, potentially opening the door for other claims of mis-sold products linked to LIBOR.

Although LIBOR is currently stated to be the only relevant benchmark for the purposes of the new criminal offence under Part 7, it is likely to be only a matter of time before the criminal offence is extended to other benchmarks.  At present the global investigations into foreign exchange ("Forex") manipulation are ever widening - including latterly, investigations into the private accounts of Forex traders.  To the extent that Forex manipulation is found to involve the manipulation of benchmarks, it is likely that the remit of the new criminal offence will be extended to include these.  

Bird & Bird comment: The new offence of manipulating benchmarks, introduced as a reaction to the LIBOR manipulation scandal, indicates a susceptibility of certain markets to conduct which allows for personal and proprietary interests to be placed ahead of client interests.  It is not every case where this is found to have occurred in a criminal context that such clients will be afforded redress through the civil courts. Whether any proven manipulation of the Forex markets will also indicate civil claims will largely depend on the facts of the individual case but such claims could include claims for conspiracy and unjust enrichment.  Should an institution find itself the subject of criminal investigation, its response could be critical not just in any criminal proceedings but in any civil action that may yet follow.