Earlier today, the Financial Conduct Authority announced it had imposed fines totalling £1.1bn on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations.
The action was taken in concert with regulators in the US and Switzerland, and excludes Barclays Bank, which is subject to negotiations with regulators but is pushing for separate settlement.
According to Simon Hart, banking litigation partner at City law firm RPC, the fines and the evidence published could trigger a flood of civil litigation from pension funds and fund managers that lost money because of forex manipulation moving prices against them.
“We anticipate a much larger number of high value disputes against the banks because of forex manipulation than we saw over Libor rigging because it should be much easier for market participants to prove that they lost money.”
He added that the firm has already been speaking with a number of market participants who have been awaiting today’s outcome.
“Many funds will be in the same position and we can see a situation in which funds feel compelled to pursue claims for potential losses on behalf of investors if they see other market participants doing so. It is not going to happen overnight but the potential for industry wide litigation is real.”
Andy McGregor, another banking litigation partner at RPC, noted that it is already known that the regulators are looking at the gold fix and International Swaps and Derivatives Association fix benchmarks.
“Given these widespread investigations, market participants should now actively consider the extent to which banks may have been manipulating other indices, from equities through to commodities.”
Andrew Tyrie, the former Parliamentary Commission on Banking Standards chairman, said that senior leadership at the banks were clearly not living up to promises made to that commission that this time they really were tackling poor behaviour.
“The spirit may being willing – particularly at the top – but the flesh remains weak. This settlement is yet more evidence that some banks may be too big to manage,” he stated, adding that it is evidence of the need to fully implement the reforms proposed by the banking standards commission.
“The banks appear not to have redressed the lamentably weak internal controls that the multiple investigations into Libor rigging, including those of both the Treasury Committee and the banking commission, exposed.”
Mr Tyrie said that evidence of chat room conversations between traders revealed “shocking” attempts to rig markets at the expense of clients and tarnishing the UK’s reputation as a home for global financial markets.
“The direct cost to the firms and the reputational damage accompanying this misconduct will once again fall on bank customers and shareholders. But, in cases such as these, it is those committing the misconduct that should lose the most,” he argued, suggesting that all forex and Libor traders should be subject to certification.
“The withdrawal of a certificate should be notified to the regulators, who should in turn alert other regulators – particularly in the US – to ensure these people cannot take their poor conduct to other markets.”
Mr Tyrie added that the Treasury Committee will start to take evidence on the “clean-up operation” which includes the Fair and Effective Markets Review during a session with Nemat Shafik, deputy governor of the Bank of England next week.
Simon Hunt, financial services risk and regulation partner at PricewaterhouseCoopers, argued that more work needs to be done to ensure that sustainable changes to business practices, behaviours and controls are embedded at the major banks.
“The topics relating to FX that require consideration and review are wide ranging and include pricing, disclosure of information to clients, practices relating to sharing of information, communication controls and surveillance, as well as the obvious improvement of controls over the WM Reuters and European Central Bank fix processes.”
He added that while the industry has invested heavily in more effective supervision over the past two years, particularly to respond to previous unauthorised trading incidents, ensuring the broader conduct agenda is effectively embedded into supervisory mechanisms remains a work in progress.
peter.walker@ft.com
