At the same time that the Swiss authorities concluded their case against UBS for rate manipulation, censuring several employees and ordering disgorgement of profits gained from improper practice within its FX desks, the Financial Conduct Authority (FCA) in Britain has issued a stratospheric fine to five banks as the large scale investigation into alleged rate rigging appears to be unanimously falling on the side of the regulator.
Taking a somewhat international view, despite being a national regulator, the FCA stated that the G10 spot FX market is a systemically important financial market, and that the mainstay of today’s action against the banks cited by the regulator is its finding that the failings at these banks undermine confidence in the UK financial system and put its integrity at risk.
On this basis, the FCA’s total of £1,114,918,000 (approximately $1.7 billion) consists of the following fines with the respective recipient bank along side the figure, for failings in managing their FX operations. They are: Citibank N.A. £225,575,000 ($358 million), HSBC Bank Plc £216,363,000 ($343 million), JPMorgan Chase Bank N.A. £222,166,000 ($352 million), The Royal Bank of Scotland Plc £217,000,000 ($344 million) and UBS AG £233,814,000 ($371 million).
In relation to Barclays Bank Plc, the FCA will progress its investigation into that firm which will cover its G10 spot FX trading business and also wider FX business areas.
In addition to taking enforcement action against and investigating the six firms where the FCA found the worst misconduct, the regulator is launching an industry-wide remediation programme to ensure firms address the root causes of these failings and drive up standards across the market. The FCA will require senior management at firms to take responsibility for delivering the necessary changes and attest that this work has been completed.
This complements the British regulator’s ongoing supervisory work and the wider reforms to the fixed income, commodity and currency markets which are the subject of the UK Fair and Effective Markets Review.
Concluding the investigation, the FCA has found that between 1 January 2008 and 15 October 2013, ineffective controls at the Banks allowed G10 spot FX traders to put their Banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.
Furthermore, the FCA asserts that these failings allowed traders at those banks to behave unacceptably. They shared information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate G10 spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.
Today’s fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks in this way. The FCA, which often takes the course of asking for financial settlement in advance of any potential litigation against market paritcipants, this time has worked closely with other regulators in the UK, Europe and the US. As mentioned before, the Swiss regulator, FINMA, has today disgorged CHF 134 million ($138 million) from UBS AG; and, in the US, the Commodity Futures Trading Commission (‘the CFTC’) has imposed a total financial penalty of over $1.4 billion on the Banks.
Since LIBOR general improvements have been made across the financial services industry, and some remedial action was taken by the Banks fined today. However, despite the FCA’s well-publicised action in relation to LIBOR and the systemic importance of the G10 spot FX market, the banks failed to take adequate action to address the underlying root causes of the failings in that business.
Martin Wheatley, chief executive of the FCA, said: “The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system. Today’s record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.
“But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor. This is essential to restoring the public’s trust in financial services and London maintaining its position as a strong and competitive financial centre” concluded Mr. Wheatley.
Tracey McDermott, the FCA’s director of enforcement and financial crime, said: “Firms could have been in no doubt, especially after Libor, that failing to take steps to tackle the consequences of a free for all culture on their trading floors was unacceptable. This is not about having armies of compliance staff ticking boxes. It is about firms understanding, and managing, the risks their conduct might pose to markets. Where problems are identified we expect firms to deal with those quickly, decisively and effectively and to make sure they apply the lessons across their business. If they fail to do so they will continue to face significant regulatory and reputational costs.”
Clive Adamson, the FCA’s director of supervision, said: “The supervisory measures that we are announcing today will help make sure that real cultural change is delivered across the industry, and that senior management take responsibility for ensuring that the highest standards of integrity operate across all of their trading businesses.”
With 40% of all FX order flow taking place in London, and the nature of the the spot FX market being a wholesale financial market, spot FX benchmarks (also known as “fixes”) are used to establish the relative value of two currencies. Fixes are used by a wide range of financial and non-financial companies, for example to help value assets or manage currency risk. The FCA’s investigation focused on the G10 currencies, which are the most widely-used and systemically important, and on the 4pm WM Reuters and 1:15pm European Central Bank fixes.
As far as payment of these fines is concerned, all of the banks have accepted their penalties and have agreed to settle at an early stage and therefore qualify for a 30% discount under the FCA’s settlement discount scheme. Without the discount the total fine would have amounted to £1,592,740,000 ($2.5 billion): Citibank N.A. £322,250,000 ($511 million), HSBC Bank Plc £309,090,000 ($490 million), JPMorgan Chase Bank N.A. £317,380,000 ($503 million), The Royal Bank of Scotland Plc £310,000,000 ($492 million) and UBS AG £334,020,000 ($530 million).
This was indeed an extensive and resource-hungry investigation which lasted 13 months, involving over 70 enforcement staff and unprecedented cooperation with domestic and international regulators.
A remediation program has been effected, and will require firms to review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of a sufficiently high standard to effectively manage the risks faced by the business. The work at each firm will depend on a number of factors, for example, the size of the firm and its market share and impact, the remedial work already undertaken, and the role the firm plays in the market.
In some cases, the reviews will extend beyond G10 spot FX, and the FCA will require firms to explore any read across into FX Emerging Markets, FX Sales, derivatives and structured products referencing FX rates and precious metals.
Senior management will be asked to attest that action has been taken and that firms’ systems and controls are adequate to manage these risks. This will ensure that there is clear accountability and senior management focus on the specific issues at each firm where the FCA expects to see change.
The FCA has played a key role in developing internationally agreed regulatory standards on benchmarks including work by the International Organisation of Securities Regulators (IOSCO) and Financial Stability Board. The regulator is actively engaged in developing EU regulation on benchmarks and co-chair the UK Fair and Effective Markets Review which is considering wider reforms to the fixed income, commodity and currency markets.
For the full announcement, click here.