UK - Pension funds might issue two types of claims against banks involved in the LIBOR manipulation scandal, but several issues remain, and an in-depth analysis of the potential outcome of the litigation will be needed, one law firm has claimed.
Following Barclays' recent admission that it attempted to fix the rates over a five-year period, and news of the involvement of other banks in the scandal, law firm Reynolds Porter Chamberlain (RPC) said schemes could either enter into a 'breach of contract' claim against banks found to have deliberately modified the rate or issue a 'misrepresentation' claim.
In the first case, Tom Hibbert, partner at RPC, said the courts could refer a term in a transaction, such as an interest rate swap, suggesting that the bank would not manipulate or distort LIBOR.
In the misrepresentation scenario, claimants might identify representations made by the bank in connection with LIBOR that were untrue at the time they were made.
However, according to RPC, the two claims might both present challenges.
With the breach of contract option, it said, the courts would be reluctant - for fear of unravelling a range of global banking transactions.
With the misrepresentation option, the claimant would need to prove it relied on the representation about LIBOR when entering into the transaction.
"Considering that the reference point for the swaps pension funds entered into is based around LIBOR and EURIBOR, and that those reference points have been manipulated in a way that pension funds can show they should have paid less, then the potential financial implication is quite substantial," Hibbert added.
"What becomes much more difficult is showing the link between the obligation take on by the bank and the actual losses that might have been suffered in those instruments."
At the moment, it is unclear whether pension funds have incurred any losses, and many in the industry have questioned the impact the attempt to manipulate the bank-lending rate has actually had on the published LIBOR rate.
"I don't think those problems are insuperable", Hibbert said. "The quantification of those claims is very complicated, and we are a very long distance between saying banks were contractually banned from manipulating LIBOR and that manipulation caused the losses pension funds suffered on those instruments."
Hibbert said pension funds would have a better understanding of the difficulties such claims could present after the overall number of banks involved in the scandal had been disclosed, which could occur before year-end.
But he also downplayed the possibility of a "tsunami" of litigation.
"Pension funds will need to take into consideration how clear the cases is, how big the losses are, the extent to which they think they have access to the necessary information, and how much pressure they will get from their beneficiaries," Hibbert said.
"It is easy to speak in generalities of a tsunami of litigation: the key point for claimants, however, is to focus on the claims with the most likelihood of success."
Hibbert finally pointed out that a long, ongoing commercial relationship between banks and pension funds was a "decent" way to settle cases.
"Quite often those cases are settled in relation to future businesses," he said. "This doesn't necessarily involve the transfer of large amounts of cash, but more the terms of future potential businesses between the two parties."
Last month, Boris Mikhailov, principal within Mercer's financial strategy group, told IPE that the real impact for pension funds would depend on their asset mix and derivatives positions at the time when the misconduct took place.
"Assuming that any manipulation did artificially lower LIBOR, then the implications for pension funds might be found on LIBOR obligations for the interest rate swaps or total return swaps they entered into," he said.
"In that case, a pension scheme could potentially be impacted in the sense that it would have paid less than it should have done.
"However, there might have been a knock-on impact to the long positions under these derivatives. In other words, the fixed rate locked-in could have been lower too."