Barclays faces Libor claim in landmark UK court case

Matt Scuffham

* Preliminary hearing in High Court on Monday

* Guardian Care Homes claims mis-sold interest rate swaps

* Company claims swaps based on manipulated Libor rates

* Seen as test case for swaps mis-selling/Libor claims

LONDON, Oct 24 (Reuters) - Barclays will face on Monday the first claim for damages stemming from manipulation of the Libor interest rate in a landmark case before Britain's High Court that could have major implications for all UK banks.

Guardian Care Homes, a residential care home operator based in Wolverhampton, central England, is suing Barclays over the alleged mis-selling of interest rate hedging products known as swaps on which it has lost 12 million pounds ($19 million).

The company says it should be fully compensated for its losses because the swap rates were based on Libor. Barclays agreed to pay $450 million in fines to U.S. and British authorities in June to settle allegations that it manipulated Libor and other key interest rates. More than a dozen other banks are also being investigated.

Monday's hearing will be a test case for thousands of small British firms who believe they were mis-sold such swaps and raises the prospect of other companies linking future claims to interest rate rigging by banks.

Guardian Care Homes issued proceedings in the High Court against Barclays in April. The case was originally scheduled to be heard in Birmingham Mercantile Court but has since been transferred to the High Court in London.

A preliminary hearing will take place on Monday at which the claimants and defendants will argue the details of the case before the Judge determines whether it will go to trial.

Barclays, which has set aside 450 million pounds to compensate customers mis-sold interest rate swaps, said it would respond to the claims ``if and when appropriate and in accordance with the court's processes''.

Britain's financial regulator has estimated that about 44,000 interest rate swaps were wrongly sold to UK companies since 2001. The swaps were supposed to protect companies against rates going up by making their future repayments more predictable, but many borrowers didn't realise they would pay far more if lending rates fell significantly and would face substantial fees to get out of the arrangements.

The country's biggest four banks agreed in June to review past sales of interest-rate hedging products to small businesses and to compensate customers for mis-selling loan insurance after the Financial Services Authority said it had found ``serious failings'' in the way that they were sold.

However, the compensation scheme subsequently set up by the FSA, which allows banks to appoint an independent arbitrator to assess claims, has been criticised by businesses for being too slow and for lacking transparency. The Federation of Small Businesses has urged the FSA to consider an alternative scheme that is entirely independent of banks.

Companies also have the option of bypassing the FSA scheme and pursuing banks directly through the courts.

Guardian Care Homes, which operates 27 homes providing care for 1,000 elderly or vulnerable patients, says it has lost 12 million pounds after being sold two swaps in 2007 and 2008 against two loans it held with the bank that were worth a combined 70 million pounds ($112 million).

The hedging contracts tied in the company for 20 years even though the two loans, of 41 million pounds and 29 million pounds, were taken out for only 10 years and five years, respectively. To get out of the arrangement, Guardian Care Homes would have to pay break fees of 25 million pounds.