Poachers & Gamekeepers

January 28, 2014 tags: Blog

There are trillions of £ worth of financial products pegged to the LIBOR rates. The attraction of these products to the borrower is that interest rate control is taken out of the hands of the lender and ceded to an ostensibly independent market-based external rate. The borrower can therefore back his/her judgement on whether the rates will rise or fall as against a fixed rate deal, and gives some measure of control that the rate will be broadly in line with the market. However, where a lender is able to influence the rate secretly this attraction is removed from the borrower without his/her knowledge. This is particularly important in situations where the peg is fixed on a quarterly basis (quite commonplace) as the rates can be adjusted to rise on the quarter day and then fall again thereafter. The High Court is trying a case in April brought by commercial borrowers against Deutsche Bank and Barclays, where one of the issues is that a borrower should be able to rescind a LIBOR-based financial product where a lender has been guilty of rigging the rate at the time of inception or thereafter. This would mean that the borrower is released from an onerous financial product in such circumstances. The parties would each have to repay what they had taken from the other, but if the innocent borrower had sustained a loss he would not need to repay that amount. A loan secured on a property in negative equity would only need to be repaid to the extent of the sale value.

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