Barclays can be sued for allegedly mis-selling interest rate swaps while rigging the Libor rate, in a landmark claim seen as a test case for thousands of businesses, a London judge rules.
The case will be the first of its kind and is being closely watched by thousands of small and medium enterprises that may decide to file similar claims, the Federation of Small Business said in a statement today. The Financial Services authority estimates 44,000 interest rate swaps – effectively insurance to protect companies from interest rate changes – have been wrongly sold to UK companies since 2001.
“It is simply wrong that with one hand a bank is aggressively selling a highly complex financial product designed to protect someone against an interest rate rise, while the other hand is manipulating the rate for its own benefit,” Gary Hartland, GCH chief executive, said in a statement.
It is the first time that a UK court will determine whether damages should be awarded in a case linked to allegations of Libor rigging, and it could have widespread ramifications for Barclays and other banks involved in Libor probes by financial regulators worldwide.
Barclays agreed in June to pay £290m in fines to UK and US regulators to settle allegations that it manipulated Libor. The bank also set aside £450m to compensate customers mis-sold interest rate swaps. But the Financial Services Authority said not all businesses will be owed redress. Among those that are, the exact redress will vary from customer to customer.
Barclays had argued that GCH’s advisers include Rothschild’s bank and several law firms with financial expertise and in-house skill, so the company should have understood the products they were buying and the terms.
“Barclays understands the client entered into their swap agreements with sufficient understanding to exercise their own judgment as to whether the products would meet their business objectives,” the bank said in an emailed statement.
“This is a significant business which owes Barclays £70m. We do not believe any aspect of the case has merit and are defending it.”
Barclays, HSBC, Lloyds and Royal Bank of Scotland agreed with the FSA to compensate customers where the mis-selling of interest rate swap arrangements had occurred.
John Walker, national chairman of the Federation of Small Businesses, called today’s decision an “unfortunate outcome”.
“This is likely to lead to a lengthy process through the courts which could have been avoided if an independent scheme were in place,” he said. “We are concerned that this will just extend the time it takes to get redress for small firms and be very costly.”