LONDON — British politicians took aim at the Royal Bank of Scotland for its role in a rate-rigging scheme, accusing management of fostering a profit-driven culture that encouraged traders to skirt the law.
In nearly four hours of testimony to Parliament’s commission on banking standards, current and former bank executives faced questions over management missteps, deficient controls and the broader environment that prompted employees to report false rates. The senior executives acknowledged that they missed the problems, as they focused on reviving the bank after the financial crisis.
“The behavior was the disgraceful failure of individuals,” Stephen Hester, the bank’s chief executive, said during the hearing. “We were slow to recognize that behavior and catch it.”
The Royal Bank of Scotland is dealing with the fallout from the global investigation into rate manipulation, which has ensnared more than a dozen banks.
Last week, the financial firm agreed to pay a $612 million fine to settle accusations by American and British regulators that traders influenced major benchmark interest rates to bolster profit. As part of the settlement, the Justice Department forced the firm’s Japanese unit to plead guilty to felony wire fraud.
While the settlement follows similar deals with Barclays and UBS, the case against the Royal Bank of Scotland has also proved to be politically sensitive. The bank is 82 percent owned by British taxpayers after receiving a multibillion-dollar bailout during the financial crisis.
“There would be enormous anger if U.K. taxpayers pick up the tab for the individual sins of traders who were trying to rig Libor rates,” said Pat McFadden, a Labour politician who sits on the parliamentary commission.
The case centers on the major benchmark rates like the London interbank offered rate, or Libor. Such rates underpin trillions of dollars of financial products like corporate loans and mortgages.
Libor Explained
In the settlement, British and American authorities detailed an effort to manipulate the rate-setting process, a five-year scheme that involved multiple currencies and countries. They claimed that the bank “aided and abetted” other financial firms, including UBS. According to regulatory filings, the Royal Bank of Scotland failed to monitor the submissions of benchmark rates, and employees continued to report false rates even after authorities began to investigate the wrongdoing.
“It has brought shame against the bank,” Rory Phillips, a lawyer working behalf of the commission, said at the hearing. “There’s been a loss of trust and confidence on behalf of the public.”
Senior executives said in testimony that Libor was not a major focus for the Royal Bank of Scotland, which almost collapsed in 2008 after an ill-advised deal to buy the Dutch financial giant ABN Amro.
“When we took control of the bank, it had had a cardiac arrest,” said John Hourican, the former head of the investment banking division, who resigned last week. “We had to prioritize dealing with the existential threat to the bank.”
After the subsequent bailout by the British government, senior managers focused on reviving the bank by selling off assets, reducing its work force and curbing exposure to risky trading activity. Mr. Hourican indicated that the bank’s operations had become stretched across too many countries and business units.
“The bank was doing too many things in too many countries with too little capital,” Mr. Hourican said.
At the same time, executives said they underestimated the potential for rate-rigging.
“I was not aware that derivatives traders were making these requests,” Peter Nielsen, Mr. Hourican’s deputy, told British politicians. “We had very serious issues. Senior management felt that it was a mathematical impossibility to alter the rates.”
British politicians demanded to know why Mr. Nielsen had not lost his job. When the manipulation occurred, Mr. Nielsen served as the global head of rates. Mr. Nielsen, who is now co-head of firm’s investment banking operations, said he had discussed resigning with Mr. Hourican, but decided to stay on.
Lawmakers repeatedly asked executives why the British bank did not have appropriate controls in place to catch the wrongdoing.
In 2011, the Royal Bank of Scotland told regulators in a letter that systems had been created to monitor Libor submissions. But American and British authorities discovered in their investigations that these controls had not been established, according to the recent settlement. Authorities said the firm did not deliberately mislead regulators.
“At the very least, there was a wholesale failure of systems and controls of the rate process,” said Mr. Phillips, the lawyer. “Somebody in management more senior in the structure should have known what was going on and put a stop to it.”
Facing political scrutiny, the Royal Bank of Scotland has moved to revamp its practices and overhaul its compliance.
The British bank said last week that it would claw bank past, current and future bankers’ bonuses totaling around $470 million to pay the Libor settlement. Mr. Hourican is forgoing past and current bonuses totaling around $14 million in response to the scandal.
A majority of the money will be used to pay the fines levied by American regulators. Because the Royal Bank of Scotland is majority-owned by British taxpayers, the penalty from the Financial Services Authorities, the British regulator, will be recycled back into the government’s coffers.
The bank has also fired six employees for their role in the rate-rigging scheme, while another individual was dismissed for an unrelated matter. Eight other people left the bank before the manipulation was discovered, and six employees have been disciplined but remain at the firm.
The bank “shouldn’t waste my death,” Mr. Hourican told lawmakers, referring to his resignation. “We must send a cultural shudder down our organization’s spine.”
DealBook: R.B.S. Executives Testify in Rate-Rigging Case
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DealBook: R.B.S. Executives Testify in Rate-Rigging Case
