After an intense investigation that lasted thirteen months, six banks were fined a sum of £2.6 billion by UK and US financial watchdogs. According to a BBC news report, traders affiliated with the banks were found to have “attempted manipulation of foreign exchange rates” The companies were HSBC, Royal Bank of Scotland, US’ Bank of America, Citibank and JP Morgan Chase, and Switzerland’s UBS.
The report further said that the Financial Conduct Authority (FCA) penalised five banks £1.1 billion, save for UBS, which was fined 134 million Swiss francs by its Swiss regulator FINMA. Meanwhile, US issued $1.4 billion fines to five banks through the Commodity Futures Trading Commission (CFTC); and another $950 million to three lenders through the Office of the Comptroller of the Currency (OCC).
The probe concluded that traders had set up a scheme to rig the foreign exchange (forex) market’s benchmark rates. As of 2013, much of the marketplace’s transactions passed through London’s trading rooms (41%).
Based on accounts from the FCA and CFTC, a number of forex traders from the abovementioned banks communicated their transactions among themselves for a period. Teams were formed; chat messages were exchanged. One of the objectives was to make sure that the currency would be sold by a bank to clients at a much higher rate than what it had bought the currency for.
This was unsettling because the forex market is larger than the stocks and bonds markets. All over the world, businesses involved in and out of the financial markets are relying on benchmark rates for asset valuation and currency risk management. There was so much at stake if such misconduct would continue to proliferate in the industry.
The regulatory fines were just the beginning. The regulators promised to go after the individuals who participated in the attempt. They must make good of that promise, allowing for transparency to address any form of distress this incident has brought to forex traders.
As for FCA, the £1.1 billion was the highest fine it had issued so far in its history and that of its predecessor, the Financial Services Authority (FSA). It was a big catch, but it also took time. The regulators put the timeline for the forex failings between January 1, 2008 and October 15, 2013. The misconduct occurred between 2009 and 2012, said CFTC.
There should be an even tighter allegiance among the financial watchdogs to revamp their principles concerning the forex market, so that they will be able to catch such misbehaviour at its early stages. It is better to do so than watch the damage leak into the financial services industry. Integrity is an asset that is hard to lose. The financial crisis of 2008 is a perfect reminder against that kind of collapse.
FCA’s Tracy McDermott, the director of financial crime and enforcement, did not mince words at FX Week Europe when she said that the agency will be relentless in watching the banks closely if they not do something to prevent misconduct in the future. Indeed, what these firms need is more than just encouragement, but tough love.
FCA Chief Executive Martin Wheatley said in another event that there is a moral focus on the issue that some members of the legal sector are failing to see or are overlooking. He wanted lawyers to participate in the moral debate over performing a trade earlier than a client order. He argued that having clear rules can only do so much if the moral dilemma regarding the deed is not addressed.
The International Financial Law Review quoted him saying, “More problematic from my perspective is when lawyers appeal for rules to cover all possible scenarios. It suggests they are more interested to see [if the activity] is doable than in discussing whether it is principled and the right thing to do.”
Starting April, FCA has been in direct supervision of forex market benchmarks. But it needs to be pushing for more and more time to discuss with banks and lawyers alike, and fall in agreement with them regarding the issue of the misconduct.
Lessons from the past
Indeed, there is the heavy burden of accountability on the regulator’s side to keep the failure from happening again. To see a repeat would mean its failure from learning the lessons brought about by past mistakes. But it should not bear the cross alone.
“These repeated failures undermine the reputations of both the regulated and regulator,” McDermott said at the FCA’s Enforcement Conference in early 2014.
McDermott was on point when she said that the individuals involved in the forex fiasco might have thought that their misconduct would be justified by the results they would bring to their respective firms — higher profits.
FCA has to keep on encouraging firms to uphold their standards, alongside using the proper approach. It will not be able to do its job if the regulated parties will not do their part, which is to help in the creation of principles and guidelines that put the benefits and protection of consumer above profits.
Consumers, after all, have become so much more intelligent these days. They have stepped up with their demands and in letting these demands be known. The financial services industry must also maintain its standards; even raise the bar, to keep the public from losing trust in the system.
Learn the lessons of the past and take action, according to McDermott.
“It has to be clear to all of us that if we are to move on, we need to re-evaluate not just the actions of the past but the cultures that underpinned them and the controls that failed to identify or manage the risks they created,” she said.
No side must succeed at the expense of the other stakeholders. Wheatley was right on insisting to wrap around the moral angle on the issue because clearly, it is in knowing what is right and wrong that all healthy and functioning societies are based. Businesses, especially those that directly trade monies, must not be exempt from this basic principle.