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The Royal Bank of Scotland Group plc (RBS - Snapshot Report) has finally conceded to paying a penalty of £390 million ($612 million) to the Financial Services Authority, Commodity Futures Trading Commission and Department of Justice to resolve charges against the bank for its involvement in the manipulation of the London Interbank Offered Rate (LIBOR).

RBS - 82% owned by UK taxpayers - said that 21 employees found guilty of the scandal have either been removed or left the company before the settlement. However, the remaining have been closely controlled.

Moreover, John Hourican, head of RBS’ investment banking division was compelled to resign, following the LIBOR scandal. Though Hourican had no role to play in the wrongdoing, the scam occurred during his tenure, thereby depriving him of the past and present compensation worth about $14.1 million.

Further, RBS will take back past and present bonuses from the traders associated with the rate-rigging scam as well as from the staff involved in the bank’s operations. Therefore, total compensation is expected to amount to around £300 million ($470 million).

As part of a proposed agreement with the U.S. Department of Justice, RBS’ Japanese subsidiary, RBS Securities, entered into a plea for issues related to the manipulation of certain benchmark interest rates, including Yen LIBOR. Therefore, the subsidiary will pay $50 million of the total settlement.

Moreover, RBS has to pay a $100 million penalty above the fine forced on the subsidiary as part of the deferred prosecution agreement (DPA). Further, out of the total penalty amount, $325 million will be paid in fines to the U.S. Commodity Futures Trading Commission and $137 million in fines to the UK’s Financial Services Authority.

The Back Story

As a matter of fact, RBS had been subject to scrutiny over this issue for quite some time by the U.S. Commodity Futures Trading Commission, the Justice Department and the UK Financial Services Authority.

In addition to RBS, several of the big banks including Bank of America Corp. (BAC - Analyst Report) and JPMorgan Chase & Co. are under the strict vigil of regulators around the world in connection to the LIBOR manipulation scam.

The LIBOR is determined on the basis of estimates of rates at which banks find it appropriate to borrow from each other. It is alleged that banks coordinated amongst themselves and submitted false rates. This fraudulent move was made to profit from trades or to appear more creditworthy than they actually are.

Since LIBOR is used as a benchmark for several lending transactions around the world, any manipulation would impact billions of users around the globe. Hence, regulatory authorities are investigating the matter thoroughly and plan to put forward an exemplary judgment so as to terminate such shrewd practices in the future, bring justice to the sufferers and punish the wrongdoers.

Earlier in 2012, Barclays Plc. (BCS - Snapshot Report) admitted to its fraudulent practices and agreed to pay a penalty of $450 million for rigging the LIBOR. On the other hand, UBS AG (UBS - Analyst Report) has finally agreed to pay a penalty of CHF 1.4 billion ($1.5 billion) to the U.S., UK and Swiss authorities.

In Conclusion

While the settlement will put to rest a long-drawn investigation and RBS can breathe relief, this will also adversely impact its financials. Further, this settlement could be referred to as an exemplary one and could trigger similar settlements by other banks depending on their wrongdoings.

Notably, RBS’ business has been severely impacted by the financial crisis and the company suffered huge losses on credit bets during that time. However, the British government came to its aid and currently the company is subject to stringent capital norms. Moreover, the tax probe and mounting legal claims have added to its woes.

We believe the troubles for this stock are far from over. Hence, RBS currently carries a Zacks Rank #3 (Hold).

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