So far, fines for rigging foreign exchange markets have topped £6.3bn, and recently nine banks paid £1.28bn to settle claims brought by investors in the US. More claims are likely to follow. Yet, despite all this money being paid out, the question remains: will it change the way banks behave?
Recent history suggests not. After all, the rigging of the foreign exchange markets was going on while the banks were being caught and fined for manipulating Libor. You also need to put this into perspective in terms of the depth of the pockets of these huge banks. For example, UBS was fined US$1.5bn (£979m) for its part in rigging Libor, but this was less than half the amount it paid out in bonuses in one year (2014) alone. All a bit embarrassing really, and it is difficult to see how these fines, massive as they are, will produce the shift in culture that is needed in financial services.
It is sad, but it does not seem that we can trust those in charge of the banks to change that culture. Repeated attempts to draw a line under the litany of scandals have failed, and public trust in the banking industry has been badly damaged.
Tougher regulations have already been implemented in the UK and the EU, with a further seven Fixed Income Clearing Corporation (Ficc) benchmarks – the ICE Swap Rate (formally ISDAFIX), WM/Reuters London 4pm ClosingSpot Rates, Sonia, Ronia, the LBMA Gold Price (formerly the London Gold Fixing), the LMBA Silver Price, and the ICE Brent Index – brought under UK regulation, and the Market Abuse and European Market Infrastructure Regulations will make benchmark manipulation a civil offence from 2016 throughout the EU.
But so-called Ficc markets (fixed income being bonds, currencies and commodities), such as the US$5trn (£3.26trn)-a-day FX market, are global in their nature, and that presents another problem.
We have to move traders and banks back towards a sense of duty, to re-affirm their responsible role in the economy and society. We need them to realise that this is not about their wallet, but about a sense of duty, because people’s livelihoods and pensions are in their hands.
I was part of the Advisory Group for the Bank of England’s Fair and Effective Markets Review (FEMR). Set up in June 2014, it studied nearly 1,000 pages of submissions and spoke to nearly 800 people involved in financial markets around the world.
It is disappointing that no senior managers or chief executives have faced criminal proceedingsIt became clear that changing the culture among banks would involve more than creating new regulations, it would also need education alongside the threat of stiffer sanctions and a tightening up in the way many of the Ficc benchmarks are calculated. FEMR will seek to reverse the ethical drift that has been going on for many years in the Ficc markets by taking this three-pronged attack. But the three-pronged attack must take place on a global scale.
We have seen the first trader jailed for manipulating Libor, with more facing charges, but it is disappointing that no senior managers or chief executives have faced criminal proceedings, and that is something that has to change.
We have seen some high-profile resignations, but after overseeing more than a decade of serious fraud that has seen billions of pounds taken out of people’s pension funds, it is scandalous that the people who allowed their banks’ culture to drift so far away from standards that many of us would deem fair and honest will not be held to account.
FEMR has recommended increasing jail sentences for market abuse from seven to 10 years, and this has been extended to a host of Ficc markets. Managers will be guided by the new Senior Managers’ Regime, and if they have been found to step out of line they will be fined and lose their job, without being able simply to move to another company.
Senior managers need to take this on board as well as the new Market Standards Board. Tougher regulation has been implemented as well but, crucially, the way many of these benchmarks are calculated is being modernised.
I hope that following FEMR, regulators will now have real teeth with which to threaten not only those traders misbehaving but also the senior managers who at best are turning a blind eye or at worst encouraging a ruthless, cut-throat culture that puts bonuses and profits ahead of looking after the investors they serve.
The scandals have come thick and fast since the financial crisis, and trust in banks is at an all-time low. We need to have confidence that regulators are able to oversee everything that goes on in these markets. More transparency in banks’ practices has also been called for by FEMR, and this is partly due to technology, something that regulators have got to keep up with. This will need serious funding – governments have to back the regulators to make sure the markets are indeed fair and effective.
But most importantly, these regulations need to be held on a global scale. BoE governor Mark Carney sits on the Basel-based Financial Stability Board, which hopefully will mean London and FEMR will lead the world in cleaning up the financial system. It has to get all the major markets to agree on global regulations. Tough regulation, oversight and sanctions have to be introduced globally or the fear is that the dishonest practices will continue, just in another timezone.
FEMR is a start, but there are still signs of more scandals to come. In June, 36 financial institutions were charged in the US over bond market violations. At least we are finding out about these bent practices, but unless senior managers are paying huge fines out of their own pocket or going to jail, I fear the culture at banks will not change.
Until a chief executive is standing in court facing charges of fraud, you get the sense that many in banking will try to get away with whatever they can, because the rewards are simply so big.
What has not changed throughout all this is that there are still huge financial incentives for bankers and traders. Bankers’ bonuses and chief executives’ remuneration has long been an issue for the public and governments.
The European Banking Authority has tried to tackle this with the bonus cap, but the UK has been fighting this cap, and, once again, until a global solution is realised we will see the self-interest of cities and countries fearful of losing top talent to the lure of higher wages and bonuses elsewhere override the need to reduce such an incentive to make profit at any cost.
FEMR recommendations are only the start of changing banks’ culture. More needs to be done on a global scale before we can truly say the age of irresponsibility is over.
Professor Mark Taylor is dean of Warwick Business School
Key points
The rigging of the foreign exchange markets was going on while the banks were being caught and fined for manipulating Libor
The scandals have come thick and fast since the financial crisis and trust in banks is at an all-time low
One thing that has not changed throughout all this is the huge incentives for bankers and traders
