Bank of England blasts Lloyds for rigging bailout funding

Taxpayer-owned bank ordered to pay nearly £8m after 'reprehensible and unlawful' manipulation of repo rate – on top of £218m in fines for Libor rigging

The Guardian, Jill Treanor, Monday 28 July 2014

Lloyds Banking Group fined over Libor rigging. Photograph: Facundo Arrizabalaga/EPA

The Libor-rigging scandal took a new twist on Monday when Lloyds Banking Group faced accusations of unlawful behaviour after being ordered pay compensation to the Bank of England for manipulating the fees it paid for emergency funding during the height of the banking crisis.

In addition to £218m of fines from regulators in the UK and US for rigging the benchmark rate, the 24% taxpayer-owned bank was ordered to pay Threadneedle Street nearly £8m.

The fines imposed on Lloyds cover two main issues – manipulating Libor, for which seven other firms have been punished – and, for the first time, rigging another rate, known as the repo rate. This repo rate was used to calculate the scale of the fees paid to the Bank of England for its special liquidity scheme (SLS) which was created to pump money into the financial system amid fears banks were facing a credit crisis.

The Bank of England said Lloyds' manipulation of the repo rate was "highly reprehensible and clearly unlawful".

As has been the case with other Libor fines – Barclays was the first to be penalised in June 2012 – regulators on both sides of the Atlantic published emails and electronic chats exposing evidence of manipulation. In one exchange, a Lloyds trader remarks when asked about reducing a Libor rate: "every little helps... It's like Tescos".

Unlike other Libor penalties, Lloyds is also paying the Bank of England £7.8m in compensation because of the lower fees being paid for the SLS, which was introduced in April 2008 and closed in January 2012.

In a harshly worded letter, the Bank of England governer Mark Carney said this scheme was intended to help banks get through the worse of the financial crisis as Lloyds TSB rescued HBOS, which owned Halifax and Bank of Scotland.

"Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved," Carney said.

The Lloyds chairman, Lord Blackwell, replied: "I absolutely share your concern about the nature of the SLS conduct and in particular its implications for reducing fees. This was truly shocking conduct, undertaken when the bank was on a lifeline of public support".

Tracey McDermott, the FCA's director of enforcement and financial crime, said: "The firms were a significant beneficiary of financial assistance from the Bank of England through the SLS. Colluding to benefit the firms at the expense, ultimately, of the UK taxpayer was unacceptable.

"The abuse of the SLS is a novel feature of this case but the underlying conduct and the underlying failings - to identify, mitigate and monitor for obvious risks - are not new. If trust in financial services is to be restored then market participants need to ensure they are learning the lessons from, and avoiding the mistakes of, their peers. Our enforcement actions are an important source of information to help them do this," she said.

The Financial Conduct Authority, which issued fines alongside two US regulators, shows a manager from Bank of Scotland and a trader at Lloyds acknowledging their influence over the repo rate used to price the SLS. "While we've got two votes we should use this to our advantage, you know what I mean?" the Bank of Scotland manager told his colleague in 2009, four months after the two banks merged.

Four individuals at Bank of Scotland and Lloyds were involved in or knew about the repo fixing while 12 were involved in or knew about rigging Libor when priced in sterling, US dollars and Japanese yen, where there was collusion with the Dutch bank Rabobank.

The Libor fine also covers a period when Bank of Scotland was still part of HBOS and as it was being rescued by Lloyds. Bank of Scotland submitters to Libor were given direct instructions to ensure their rates did not appear too high. Submitting a higher rate than rivals may have indicated their bank was in financial distress. An individual at Bank of Scotland responsible for submissions to Libor sent a message to a rival: "I've been pressured by senior management to bring by rates down into line with everyone else". Only days previously, the rate had been half a percentage point higher than rivals.

Libor has been overhauled since the furore caused by the fines on Barclays and others, including Royal Bank of Scotland and UBS. During the period of the offences it was based on submissions from banks at the rate they believed their rivals would charge them to borrow for a number of periods, ranging from overnight to 12 months.

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Lloyds suspends seven people after £226m bill for rigging interest rates