Libor appeals leave future misconduct cases Hayes-y

UK authorities must develop a more effective framework for punishing bad bankers

Key points Summary Q&A

• The UK’s supreme court has quashed Tom Hayes’s 2015 conviction for Libor manipulation, with the government agency responsible for the prosecution saying it will not seek a retrial.
• The successful appeal (and others like it) raises questions about the legal response to future cases of banking misconduct.
• Evidence suggests that manipulation of Libor was directed by senior bank officials, rather than solely by traders like Hayes.
• UK regulators introduced the SMCR to hold managers accountable, but the regime is under review and is set to be loosened.

These summaries are generated by an LLM, but edited by humans.

Tom Hayes may have had his conviction overturned, but justice in the case remains frustratingly elusive.

Last week, the UK’s supreme court quashed the former UBS and Citi trader’s 2015 criminal fraud conviction for manipulating the Libor benchmark. While the court didn’t go so far as to fully exonerate Hayes, who spent five-and-a-half years in jail, the government agency that brought the prosecution has said it won’t pursue a retrial.

The verdict ends a tortuous (and for Hayes torturous) episode that not only casts doubt on the UK’s justice system, but raises nagging questions about how misconduct at banks will be handled in the future.

Hayes was the unwilling poster child for benchmark rigging. His was the highest profile of more than a dozen cases against individuals accused of manipulating the Libor rate. The trials served as a lightning rod for public anger at the supposed misdeeds and excesses of bankers in the years leading up to the global financial crisis, and resulted in a series of guilty verdicts.

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Does it matter if Tom Hayes is acquitted? 

It matters to him, but changes to UK rules are meant to avoid an exact repeat of the Libor case

Now, Hayes is the latest banker to have his conviction overturned, after US courts granted the appeals of two ex-Deutsche Bank traders in 2022. In last week’s judgement on Hayes, the court ruled that the original trial judge had misdirected the jury, rendering the conviction unsafe. The verdict has heralded at least four more appeals from other benchmark offenders.

Hayes and his co-defendants have long argued that they were scapegoats – that Libor was manipulated on an industrial scale at the behest of senior managers. The judge in Hayes’s 2015 trial acknowledged as much, saying in his sentencing remarks: “Your immediate managers saw the benefit of what you were doing and condoned it and embraced it, if not encouraged it.”

Those words would have offered little comfort for Hayes. Indeed, he originally gave evidence to the UK’s Serious Fraud Office in the belief that he was acting as a whistleblower against those higher up, only for the SFO to turn on him.

More recently, evidence has emerged in recordings of phone conversations among Barclays executives. The calls, first broadcast on BBC podcast The Lowball Tapes in 2022, suggest that directions to lowball Libor, or quote a falsely low rate, came from senior bank officials, and even from individuals at the Bank of England and UK government. Rather than a plan cooked up by lowly traders, the manipulative actions seemed to emanate from higher up. This evidence was made available to the SFO, yet senior managers avoided prosecution.

A group of UK parliamentarians are calling for an official enquiry into the matter amid whiffs of an establishment cover-up. The group, including Conservative party grandee David Davis, claim that the scapegoating was a result of “collusion” between banks and the government. It remains to be seen what appetite there is for further investigations.

In any case, UK law has changed since Hayes’s conviction. In 2016, UK regulators introduced the Senior Managers and Certification Regime in an effort to prevent managers from wriggling out of their responsibility for firm-wide misconduct and leaving the little guys – the Tom Hayeses – to shoulder the blame.

Tom Hayes and then-wife Sarah Hayes arrive at Southwark Crown Court on the final day of his Libor rigging trial on August 3, 2015

However, the SMCR has lacked bite. In the six years since its roll-out, the UK Financial Conduct Authority launched 53 investigations into senior managers. Only one enforcement action was successful: against former Barclays chief exec James ‘Jes’ Staley, who was censured and fined for mishandling a whistleblower complaint. Five years later, Staley was banned from holding senior financial roles for making misleading statements about his relationship with the late convicted sex offender Jeffrey Epstein.

And now, the Bank of England is consulting on watering down the SMCR. A review of the regime was initially unveiled at the end of 2022, with the move gaining greater impetus after UK chancellor Rachel Reeves issued a call to arms in January this year to all UK regulators to scrap red tape and boost growth. A deregulatory drive is also under way in the US.

The concern is that Hayes’s successful appeal may deter the SFO from pursuing similar prosecutions at a time when oversight of senior managers is set to be loosened.

It would be naive for regulators to assume there will never be another financial scandal on the scale of Libor and benchmark rigging. The absence of an effective framework to hold bankers accountable for misdeeds in a future crisis could further erode public trust in the financial system. The financial authorities must make a renewed push to close the legal and regulatory gaps that have so far allowed misconduct by bankers – and especially senior managers – to go unpunished, and fast.

Editing by Kris Devasabai