Libor Fixing Scandal: RBS and Lloyds Could Receive FSA 'Taxpayer' Discount

The Royal Bank of Scotland and Lloyds Banking Group could receive a major discount to possible UK libor-rigging fines given each lender is substantially owned by the British taxpayer, legal experts have told the IBTimes UK.

RBS, which is 83 percent owned by the government, is said to be within days of agreeing a settlement with US and UK authorities that could mean around £500m ($785m/€577m) in fines. Lloyds, which is 41 percent owned by the taxpayer, is one of a number of banks being investigated by US and UK authorities for its role in the scandal but has yet to reach a settlement.

"It is possible but it if there were to be such a discount, you would not find any piece of paper that referred to such a move. It's also possible that RBS, being a primarily tax-payer owned bank, will be in the back of the FSA's mind when it comes up with the settlement figure, said Owen Watkins, a corporate barrister at the London based firm Lewis Silken, noting that the Financial Services Authority has unique criteria for establishing the levels of fines it imposes.

"One of the main factors for the regulator is to assess how high to set the fine in relation to acting as a deterrent, which has become an increasingly relevant factor for the FSA enforcement team over the last few years," said Watkins, who has worked for both the FSA and the Securities and Investments Board.

FSA fines are based, in part, on policy set out in Chapter 6 of its Decision Procedure and Penalties Manual and its Enforcement of Financial Penalties addendum. Lawyers say that fine reductions across a number of clauses, such as a "significant discount for self-reporting and for effective cooperation", could be applied in addition to the unsaid 'taxpayer discount.'

"The FSA's policy statement about how fines are calculated is non-exhaustive and therefore the unique situation we are in whereby RBS and Lloyds are substantially taxpayer owned banks can be considered by the FSA when they determine the level of any wrongdoing fine imposed," said Ali Akram a solicitor/barrister at the London-based practice LexLaw. "It is impossible to say if the FSA would be minded to discount a fine to a substantially taxpayer owned bank although they do retain a level of discretion within their published policy guidance. It would seem however to be quite practically difficult for the FSA to assess and levy the fine in a way in which the taxpayer as shareholder would not be adversely financially affected."

UK Chancellor George Osborne is said to have demanded that any RBS fine paid from bank bonuses that are either clawed-back from previous years or deducted from future payments.

While a source close to the FSA told IBTimes UK that it doesn't consider ownership when it imposes fines on the firms it regulates, others argue that imposing large penalties for RBS and Lloyds would make little sense.

"Fining banks, such as RBS, may seem counter intuitive as the money is effectively being passed from one pocket to another (and) the money is going back to the UK Treasury and not to offset general regulation, so it is a little self-defeating," said Watkins. "However, if the fine is deemed too low or discounted then a lot of questions would be asked."

Robert Jones, also a barrister at LexLaw, said this is complicated by the change in UK law that allows the Treasury to collect fines once enforcement costs are deducted by either the FSA or the Financial Conduct Authority which will replace it on 1 April.

"Historically the fines were placed in a pool for the benefit of all the approximately 27,000 financial services institutions regulated by the FSA and were used to reduce the annual cost of regulation by reducing membership fees," he said. "It therefore used to be the case that FSA fines ended up back in the hands of (member firms) who did not commit any wrongdoing in the previous year."

With the new rules effectively backdating to 1 April 2012, "the Treasury will catch all of the Libor manipulation fines to date and in future," said Jones.

Both RBS and Lloyds declined to comment on the details of this story but each bank provided the following statements on the institution and the Libor fixing scandal.

Lloyds said: "As with many others in the sector, the Group is assisting various regulators in their ongoing investigations into the setting of Libor. Until these investigations are completed, it would be inappropriate for us to comment any further."

RBS said: "Discussions with various authorities in relation to Libor setting are ongoing. We continue to co-operate fully with their investigations."

The FSA declined to comment.