Taxpayer-owned bank must repay nearly £8m on top of £218 in Libor fines – and could face criminal action over repo rate

Lloyds Banking Group has been accused of unlawful behaviour by the Bank of England after it emerged its traders had manipulated interest rates in order to cut fees for its emergency lifeline at the height of the financial crisis.

The latest chapter of disgrace in the Libor rigging scandal left Lloyds with a bill of £226m, including £218m of fines from regulators on both sides of the Atlantic. It also exposed a new form of manipulation, which has resulted in the 24% taxpayer-owed bank being forced to repay £8m to the Bank of England.

The revelations unleashed an angry attack by Mark Carney, the Bank of England's governor, who said: "Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved."

The case is a setback to the two-year-long attempt by the industry to clean up its reputation in the wake of Barclays' fine for Libor rigging.

The fines imposed on Lloyds – the third largest ever levied by the City's Financial Conduct Authority (FCA) – covered two main issues: rigging Libor, for which seven other institutions have already been punished; and for the first time, manipulating another rate, known as the repo rate.

This repo rate was used to calculate the scale of the fees paid to the Bank of England for its special liquidity scheme (SLS), which was created in April 2008 to cheapen the prices at which money could be obtained by banks as the credit crisis unfolded.

Tracey McDermott, the FCA's director of enforcement and financial crime, said collusion between traders at Lloyds to influence the rate paid to the Bank of England "at the expense, ultimately, of the UK taxpayer was unacceptable".

As has been the case with other fines for rigging Libor – used to price £300tn worth of financial products around the world – regulators on both sides of the Atlantic published emails and electronic chats exposing evidence of manipulation. In one exchange, a Lloyds trader remarks when asked about reducing a Libor rate: "Every little helps ... It's like Tescos."

But Lloyds will also pay £7.8m in compensation to the Bank of England because of the lower fees the bank paid for the SLS, which was closed in January 2012. The enlarged Lloyds group was one of the largest beneficiaries, paying a total of £1.3bn fees by the end of the crisis.

The Bank of England said this scheme was intended to help banks get through the worst of the financial crisis, which ultimately forced Lloyds TSB to rescue HBOS, the owner of Halifax and Bank of Scotland, in September 2008. Eventually nearly £20bn of taxpayer money was pumped into the enlarged bank.

Carney referred the matter to the Bank's regulation arm, the Prudential Regulation Authority, while the Serious Fraud Office said its investigations into Libor were continuing. In response, the Lloyds chairman, Lord Blackwell, said: "This was truly shocking conduct, undertaken when the bank was on a lifeline of public support."

The Libor rigging scandal, first exposed by Barclays' £290m fine two years ago, led to a public outcry and the creation of the parliamentary commission on banking standards. Andrew Tyrie, the Conservative MP who chaired that commission, said: "One of the central recommendations of the commission was to ensure that individuals carry responsibility for their decisions and behaviour, and that they will be held accountable when they rig markets."

Mark Garnier, the Conservative MP who sits on the Treasury select committee, said: "This is, on the face of it, a deliberate action to defraud the taxpayer. We will need to look at what exactly has been going on. People will be very angry about it and rightly so."

The fines cover the period 2006 to 2009, before the current Lloyds boss, Antonio Horta-Osorio, took the helm. The FCA fine is likely to go to armed forces charities. The bank's results are due on Thursday and the chancellor, George Osborne, is keen to capitalise on positive news from the bank to signal the selloff of the rest of the taxpayers' stake before the election.

Four individuals at Bank of Scotland and Lloyds were involved in or knew about the repo fixing. Twelve were involved in or knew about rigging Libor when priced in sterling, US dollars and Japanese yen, where there was collusion with the Dutch bank Rabobank, which has already been fined for Libor rigging.

In total, 22 former and current employees either knew or were involved in rigging, seven of whom were suspended as the fine was announcedon Monday.

The Libor fine also covers a period when Bank of Scotland, as part of HBOS, was being rescued by Lloyds. During this period the market was watching banks' submissions to Libor - set by a panel of banks in a number of currencies and based on what they thought their rivals would charge them to borrow - for signs of distress.

Bank of Scotland submitters to Libor were given direct instructions to ensure their rates did not appear too high, which might have indicated that the institution was in trouble. An individual at Bank of Scotland responsible for submissions to Libor sent a message to a rival: "I've been pressured by senior management to bring by rates down into line with everyone else". Only days previously, the rate had been half a percentage point higher than rivals.

But much of the focus was on the impact on the Bank's emergency funding scheme. Owen Watkins, barrister in the corporate team at Lewis Silkin, said: "This is effectively a fraud on the taxpayer as the SLS was a taxpayer-backed measure. Not only is this reputationally damaging for Lloyds, being at odds with the friendly brand image they are aiming for, it also raises questions as to whether its competitors might have been doing the same thing. It seems that the bad news for banks just keeps on coming."

The DoJ has also imposed a two year deferred prosecution agreement on Lloyds, subjecting the bank to tight conditions for the next 24 months. Libor has been overhauled since the furore caused by the fines on Barclays and others, including Royal Bank of Scotland and UBS.