The massive forex fines recently levied against a number of major UK and US banks are projected to have new ramifications for banking regulation and for litigation related to the fallout. Big European banking names like HSBC, Royal Bank of Scotland, UBS as well as American banks like JP Morgan Chase, Citibank and Bank of America, have been fined by the regulators, thereby adding a huge further blemish upon to public image of the banking sector.
The latest fine of £2.6 billion was collectively issued by UK’s Financial Conduct Authority (FCA) along with two regulators of USA namely, Commodity Futures Trading Commission (CFTC) and Office of the Comptroller of the Currency (OCC). Further financial damage may be incurred if third parties that suffered losses due to rigged trades seek to make civil litigation claims against the banks involved.
What were Forex traders accused of?
Deconstructing the scandal in simplified terms, the forex traders manipulated the forex market by working around the ‘fix’ to make extensive profits. The foreign exchange market or forex, is a virtual platform for buying and selling of currencies wherein, the price is determined by the fluctuation in demand and supply. The ‘fix’ is the price at which the daily exchange rate is determined pre and post 1600 hours London time, as a benchmark for concomitant financial activities.
The creation of any peak or pit in the pegging cannot be made by individual orders. However, the traders adopted stealthy methods to collude and make bulk orders at the same time in order to achieve their ends. This clandestine approach entailed use of private chatrooms and employing the use of confidential client information and market players. This occurrence was not the result of an overnight trickery but a continual process between 1 January 2008 uptil 15 October 2013. Hence, it has attracted widespread reproach for the marring of banks fiduciary obligations vis-à-vis customer service and drawn further attention to the failings of banking regulators.
What are the wider repercussions?
The latest fines are unlikely to be the end of the story for the banks and their employees. They have been accompanied by further probe at the hands of Serious Frauds Office and consideration of criminal charges with respect to individual responsibility.
However, the impact may go even further than that if additional regulation hits the already beleaguered banking sector and the long term affliction can be gauged by the drop in the overall financial market in Europe. The United Kingdom comprises of the largest global share in the forex market, at 49 per cent in 2013.
Comment
The fiduciary chasm created by forex rigging has once again shaken confidence in the banking system. The latest banking scandal has also raised further questions about the regulator’s competence although the newly created FCA has done much to improve bank supervision in the last couple of years. The result is likely to be further calls for even greater regulation and supervision of banks over the coming months which has the potential to hit profitability in this sector further.
In addition to the wider issues for banking, the latest scandal is likely to lead to a slew of civil litigation against the banks by investors such as fund managers and pension funds who may have suffered losses due to the manipulation. Individual traders may also be subjected to civil claims against them for their part in the scandal, evidenced by recorded chat room conversations.
For specialist advice about making or defending civil claims contact contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.
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