Barclays has been hit with penalties totalling ÂŁ290 million by the US and UK authorities for misconduct in how interbank interest rates were set. The UK regulator imposed its biggest ever fine on the bank.

Barclays today picked up the unwanted record for the biggest fine - ÂŁ59.5 million ($92.5 million) - ever imposed by the UK financial regulator, for misconduct relating to how key interbank interest rates were set. The fine formed part of a ÂŁ290 million penalty imposed by the UK and US authorities.

The Financial Services Authority fined the UK-listed group for what it called “misconduct relating to the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR).”

Robert Diamond, the bank’s CEO, said he and a group of his senior colleagues will forgo any annual bonus this year.

The FSA said that it is pursuing a number of other cross-border investigations into this area of interbank rates, but did not disclose any names of institutions involved. Media reports today speculated on whether other big banking groups around the world were involved.

Besides the FSA fine, the rest of the ÂŁ290 million penalty came from a non-prosecution agreement with the US Department of Justice and a settlement with the US Commodity Futures Trading Commission (CFTC).

Barclays co-operated fully during the FSA’s investigation, the FSA said, and the bank settled at an early stage, obtaining a 30 per cent discount; otherwise, it would have been fined £85 million.

The bank has also been granted “conditional leniency” from the anti-trust arm of the DOJ in connection with potential US antitrust law violations with respect to financial instruments that reference EURIBOR, Barclays said in a separate statement.

The ÂŁ290 million settlement is a huge embarrassment for a bank that had managed, unlike some of its peers, to avoid the need for big taxpayer-funded bailouts in the aftermath of the 2008 credit crunch.

“The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business. When we identified those issues, we took prompt action to fix them and co-operated extensively and proactively with the authorities,” Diamond said in a statement.

“I am sorry that some people acted in a manner not consistent with our culture and values. To reflect our collective responsibility as leaders, Chris Lucas, Jerry del Missier, Rich Ricci and I have voluntarily agreed with the board to forego any consideration for an annual bonus this year,” Diamond said.

FSA fine

“Barclays’ breaches of the FSA’s requirements encompassed a number of issues, involved a significant number of employees and occurred over a number of years,” the FSA said.

Its misconduct included making submissions which formed part of the LIBOR and EURIBOR setting process that took into account requests from Barclays’ interest rate derivatives traders.  These traders were motivated by profit and sought to benefit Barclays’ trading positions, the FSA said. Other failings included “seeking to influence the EURIBOR submissions of other banks contributing to the rate setting process”, it said, and “reducing its LIBOR submissions during the financial crisis as a result of senior management’s concerns over negative media comment”.

Barclays also had inadequate systems and controls in place relating to its LIBOR and EURIBOR submissions processes until June 2010 and the bank did not review its systems and controls at a number of appropriate points, the FSA said. The bank also did not tackle issues concerning its LIBOR submissions when these were escalated to Barclays’ investment banking compliance function in 2007 and 2008, the FSA said.

“Barclays’ misconduct was serious, widespread and extended over a number of years.  The integrity of benchmark reference rates such as LIBOR and EURIBOR is of fundamental importance to both UK and international financial markets.  Firms making submissions must not use those submissions as tools to promote their own interests,” Tracey McDermott, acting director of enforcement and financial crime, said.

“Making submissions to try to benefit trading positions is wholly unacceptable.  This was possible because Barclays failed to ensure it had proper controls in place.  Barclays’ behaviour threatened the integrity of the rates with the risk of serious harm to other market participants,” she said.

The British Bankers’ Association, the body representing UK banks, is undertaking a review of the way LIBOR is set and will publish its findings shortly.

Professor Philip Booth, editorial director of the UK-based Institute of Economic Affairs, commented on the case's implications for the inter-bank interest rate market. 

“The LIBOR scandal should raise the question of whether we need a financial regulator. Clearly, the FSA were not able to prevent the manipulation of the interest rates used to calculate LIBOR – they are only acting after the fact. If this is a matter of fraud, then it should be treated as such and Barclays – or the employees - should be taken through the normal court processes rather than being fined by a government bureau," he said.

"If, on the other hand, the problem is not fraud, then the `LIBOR club' itself – administered by the BBA - should administer sanctions. If necessary, members who abuse the system could be suspended. Private rule-making and enforcement has a glorious history within the London Stock Exchange. Since statutory regulation, behaviour in financial markets has not improved and regulation has become bureaucratic, misdirected and arbitrary," Professor Booth added.

In the UK parliament, chairman of the Treasury Select Committee, Andrew Tyrie MP, said:

“This was a serious breach. I am very concerned about it. “The price setting mechanism of Libor is crucial to the integrity of the markets. “This appears to have been put at risk. From the information I have, it looks inexcusable.”