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Banking: Key ruling goes against banks and could drive up compensation bill

An important court ruling has gone against the big banks, meaning that compensation claims resulting from their rigging of the Libor rate could soar much higher, reports Reuters.

Both Barclays and Deutsche Bank had gone to court to have their involvement in the Libor rate rigging scandal removed from evidence for two ongoing cases against them.

The Libor rate is the international lending rate that banks use when borrowing money from one another.

Several banks, including Barclays and Deutsche, stand accused of altering the rate in order to benefit transactions between them, to the disadvantage of their customers.

Barclays is being sued by Guardian Care Homes for £70m, for mis-selling financial products based on the Libor rate. Meanwhile, Deutsche Bank is facing a similar action from Indian company Unitech, which claims that a loan swap deal was linked to the rigged Libor rate.

The two banks were in the Court of Appeal, seeking to have the Libor rigging scandal removed from evidence in both cases, arguing that the rate had no material influence on the key facts of each case.

However, in a landmark decision the Court of Appeal ruled that the Libor rate was central to both cases, and that it should be open to consideration by the trial judges when the cases go to court next year.

It is understood that the judgment is being considered a test case for several other companies which believe they were mis-sold products by banks that were manipulating Libor.

"The banks did propose the use of Libor and it must be arguable that, at the very least, they were representing that their own participation in the setting of the rate was an honest one," said Judge Andrew Longmore.

"If the day after the contracts had been made, the banks had told their counterparties that they had been manipulating Libor, the borrower would arguably be sufficiently horrified so as to think he would be entitled to rescind the deal," he added.

Barclays was fined £290m for its involvement in the scandal, which also involved several other banks including UBS and RBS.