Royal Bank of Scotland Group Plc is set to pay 400 million to 500 million pounds ($783 million) in fines for manipulating interest rates, the second-largest penalty imposed in a global regulatory probe, two people with knowledge of the matter said.

An announcement may be made as soon as today, said the people, who requested anonymity because they weren’t authorized to speak publicly. An RBS unit will plead guilty to criminal charges as part of a deal with the U.S. Justice Department, a person familiar with the talks said. It’s the third fine to result from a probe into whether lenders rigged the London interbank offered rate, or Libor. Investment banking chief John Hourican also was expected to resign, the people said.

The penalty is the biggest blow to Chief Executive Officer Stephen Hester’s attempt to overhaul the Edinburgh-based bank after it took 45.5 billion pounds in a 2008 taxpayer bailout, the largest in history. The fine, the third to result so far from the global probe, would exceed the 290 million pounds Barclays Plc paid in June, and be second only to the $1.5 billion UBS AG paid in December. Chancellor of the Exchequer George Osborne said this week that RBS should pay the U.S. fines by clawing back bonuses from its investment bankers.

‘Taxpayer Money’

“The sight of money coming in from the taxpayer to pay RBS Libor fines would have caused enormous public anger,” Osborne said Feb. 4 during a question-and-answer session in Bournemouth, southern England. “I’ve made it very clear to the bank, and the bank management accept this.”

Britain’s largest publicly owned bank fell 0.2 percent to 337 pence at 8:06 a.m. in London. The shares have gained 17 percent over the past year. The U.K. paid the equivalent of 502 pence for the shares as part of the government rescue and British taxpayers own about 81 percent of the firm.

The combined penalties are closer to 400 million pounds than 500 million pounds, according to another person close to the inquiry.

RBS is in “late-stage” discussions with regulators and settlements will include the “payment of significant penalties as well as certain other sanctions,” according to a statement today. The company said it will “update the market on all pertinent issues relating to this matter shortly.”

No individuals will be criminally charged as the Justice Department announces its settlement with the bank, according to two people with direct knowledge of the matter.

Hourican Departure

RBS may pare the bonus pool at its investment bank by more than a third, a person with knowledge of the plan said last month. The bank plans a reduction of as much as 150 million pounds, which would cut the amount the unit sets aside for bonuses to 250 million pounds from 390 million pounds for 2011. RBS also will offset the fine by clawing back bonuses awarded to employees in previous years, two people familiar with the discussions said last week.

Hourican, 42, will give up some of the bonus payments he received in previous years, according to one person with knowledge of the decision. He was expected to resign because he had responsibility for the parts of the company where alleged wrongdoing occurred, even though he didn’t have direct knowledge of the behavior, people familiar with the talks said.

Managers who oversaw the money-markets business should be held accountable for the manipulation of interest rates, Osborne said in his Bournemouth speech.

Bad Loans

“Those who were doing the supervising must also bear their share of the responsibility,” he said. “The RBS board and the RBS senior management are well aware of that.”

Hourican, who took over the securities unit in October 2008, was responsible for shrinking the operation and making it safer following a decade of expansion under CEO Fred Goodwin that led to a surge in bad loans and credit market losses. RBS announced more than 3,500 job cuts at the investment-banking unit in January 2012, and said it would sell or close its cash equities, merger advisory, corporate broking and equity capital markets operations.

RBS held a separate probe, alongside its investigation of rate-rigging, into who in senior management should be held responsible for the wrongdoing even if they had no direct knowledge of the behavior, a person familiar with the discussions said last month.

The RBS talks, which were close to completion last month, were prolonged as the Justice Department pressed RBS to plead guilty to criminal charges, two people with knowledge of the discussions said on Jan. 29. Zurich-based UBS’s Japanese unit pleaded guilty to one count of wire fraud in the U.S. in its December settlement. London-based Barclays accepted no criminal liability.

Libor is calculated by a poll carried out daily on behalf of the British Bankers’ Association that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The top and bottom quartiles of quotes are excluded, and those left are averaged and published for individual currencies before noon in London.

(Source: Bloomberg)