Royal Bank of Scotland (RBS) is wrangling with the City regulator over the scale of its culpability in the Libor interest rate-rigging scandal amid fears that a settlement will leave the bank exposed to massive civil litigation.
I have learned that negotiations between lawyers acting for RBS and officials at the Financial Services Authority (FSA) have reached an impasse over efforts by the regulator to suggest that RBS employees acted as ring-leaders in an international conspiracy to manipulate benchmark rates.
Legal sources close to the FSA have told me that it has proposed that RBS pay a fine of in the region of £150m, which would be subject to a discount for early settlement.
The bank, which is majority-owned by British taxpayers, has rebuffed the terms of the proposed settlement on the basis that the available evidence demonstrates only limited culpability on the part of RBS employees.
The sources added that probes into RBS’s involvement in Libor-rigging was focused principally on Yen Libor and Swiss Franc Libor, and not sterling or dollar Libor, as some reports had suggested.
One newspaper report yesterday suggested that RBS would face penalties of "at least £350m" but people close to the bank dismissed this as "guesswork". Based on recent discussions between RBS and regulators, insiders anticipate that the eventual fines will be well in excess of this figure.
An agreement between RBS and the FSA is now unlikely until the new year although it may still come before the bank’s full-year results in February.
In addition to an FSA penalty, RBS is likely to have to pay hefty sums to the Commodities Futures Trading Commission and the US Department of Justice to end its involvement in the Libor-fixing scandal. Other regulators, including the state prosecutor in New York, may also levy fines.
Stephen Hester, RBS's chief executive, has been candid about the bank’s involvement in Libor-related misconduct, admitting that the bank "trod on too many of the landmines out there".
Such is the convoluted nature of the investigations into Libor that RBS and other banks may not be able to reach a co-ordinated agreement with the various international regulators investigating the issue. European watchdogs are also likely to impose significant penalties on banks including RBS for breaching competition law when their traders agreed to fix interest rates.
Barclays became the first bank to settle with regulators over the Libor-rigging scandal, paying £290m in June to regulators in the UK and US. The settlement cost Barclays boss Bob Diamond his job – a bitter irony for the American banker in that he had elected to settle first because he calculated that it would be viewed as positive for Barclays’ reputation.
Barclays' punishment included a £59.5m FSA fine that was reduced by 30% from £85m under the regulator’s discount scheme.
The attempt to impose a fine of approximately £150m on RBS should not be viewed as evidence that its employees’ transgressions were twice as bad as those of Barclays, an FSA insider said. Rather, it reflected an effort by the UK regulator to impose fines reflecting the severity of public and political concerns about the scandal.
Last week, the Serious Fraud Office announced that three City workers had been arrested as part of its probe into Libor manipulation. One of the trio, Thomas Hayes, had worked for RBS and UBS among other banks during his career.
In the next few days, UBS, the Swiss bank, is expected to pay in the region of $1.6bn to settle its Libor misconduct, a steep increase from the $1bn (£620m) reported at the end of last week.
The FSA and RBS both declined to comment.