The Barclays Debacle – how does it affect you? by Dean Dunham

What is this actually about?

The wrongdoing of Barclays here relates to the daily setting of the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor).

These are two of the most important interest rates in the global financial markets and directly influence the value of financial deals between banks and other institutions. These rates can also have a direct effect on lending rates to the public, for instance with some mortgage deals and to credit card interest rates.

In setting the Libor and Euribor rates, the banks have to submit what is known as benchmark reference rates (which is basically where they disclose what it is costing the bank to borrow money from other financial institutions). The integrity of the benchmark reference rates is therefore of fundamental importance to both UK and international financial markets.

What has Barclays done wrong?

Put very simply, they lied about what their cost of borrowing was to make the bank look more secure during the financial crisis and, sometimes, working with traders at other banks to make a profit.  As a result they have been fined £290m.

Why does this matter to you?

It matters because a significant number of deals involving clients of Barclays used the interest rate into which Barclays was feeding this information, about its own borrowing costs, to determine the profit and loss on their own deals. 

Examples of where you could be affected:

• If you have a buy to let mortgage or a sub-prime loan. Many of these have therefore been linked to Libor. Typically, the interest rates on these mortgages were set using a formula such as "three-month Libor 1.5%". Every three months, the lender sets the interest for the next three months according to the Libor rate. Even if a mortgage wasn't initially priced at Libor, it is likely to have contained a provision that it would revert to Libor at the end of a particular term, such as a two-year fix.
• If you have a fixed-rate deal. In this case even though the rate was fixed, Libor influences the setting of the interest rate.

However, it is not all negative as on some occasions Barclays manipulated the figures in a way that "reduced" the Libor amount. This means that for those landlords with Libor-linked buy-to-let loans they would have enjoyed interest rates lower than they might otherwise have had to pay.

What should you do now?

As always with the banks, the Barclays PR machine is out in force and we are hearing all sorts of speeches from the top execs about how this is shocking and they will get to the bottom of it. It is also important to note that Barclays have admitted that they have done wrong.

Anyone who thinks that they have been affected should first of all contact their local branch and specifically ask how this shocking news affects their lending. In this respect we have posted a template letter on youandyourrights.com.

There is no doubt that this whole debacle will result in litigation against the bank and we will see group actions. At youandyourrights.com we are calling for tighter regulations over banks and their employees/representatives. This is certainly not the first horror story about a bank that we have heard and it will doubtless be the last.

To keep up to date with the latest developments on the banking scandals and for further information visit Dean's website www.youandyourrights.com.