European financial regulators may consider the global FX giant fully immune from any penalties whatsoever as a result of assistance with inquries into the FX rigging probe
The days when traditional banking practices in which customers paid for the service that they received on a per-transaction basis are a distant memory to most European corporate and retail clients.
Indeed the banking institutions in Europe during recent times have been so keen to gain as much current account business as possible on very favorable terms in order to utilize the capital for proprietary trading in very liquid markets such as FX, with risks having been taken in terms of commercial and private lending, as well as short-term trading of volatile markets which in part contributed to the demise of several banks in the UK and Europe during the 2008 financial crisis.
As a consequence of this, and with a substantial amount of banks having been nationalized following several bail outs, the regulatory authorities and government departments of Europe preside over their activities with an increasingly vice-like grip, the latest example of which is the high-profile ongoing investigation into the potential manipulation by large institutions of FX benchmarks during which rarely a day goes by without mainstream media coverage of the matter.
For this reason, especially when bearing in mind the countless penalties which have been administered to large banks which have simply been paid and considered small compared to the profits achieved, it is of particular interest that UBS, one of the most prominent banks implicated in the investigation, may quite legitimately avoid any form of penalty whatsoever as a result of the European financial markets regulators considering the bank’s cooperation in assisting with the investigation during its early stages until now to be a mitigating circumstance and demonstration of willingness toward proper conduct.
This raises the question as to why UBS would dedicate its time, effort and resources toward the highly expensive and lengthy process of assisting regulators with their detailed investigation across multiple jurisdictions as opposed to simply paying any fine that may surface in the possible event that the authorities have cause to find evidence of manipulation. Indeed, it is potentially an indicator that the consequences of such a censuring may be so grave as to harm the business of a great many financial institutions that UBS considers assistance with inquiries to be a better investment than potentially having crippling penalties that are unaffordable even to large banks levied upon their enterprise.
UBS is relatively adept at the avoidance of penalties, having ducked a 2.5 billion euro ($3.45 billion) penalty in the EU’s probe into manipulation of the yen London interbank offered rate (LIBOR) last year, as a result of having been the first to cooperate in the currency investigation, according to a report recently by Bloomberg.
With relation to the speculative opinion that UBS may get off relatively scot-free whether any malpractice has taken place or not, Bloomberg reported that an actual decision on whether the bank will receive full immunity won’t be made until the end of the investigation after regulators review the level of cooperation. EU leniency wouldn’t enable UBS to escape fines from the U.K. Financial Conduct Authority or some of the U.S. authorities that don’t grant immunity.
The EU’s current reliance on its leniency program to uncover cartels is “rather disappointing,” stated Andreas Schwab, the lawmaker leading the European Parliament’s work to encourage lawsuits over price-fixing in the Bloomberg report.
“The EU’s competition arm should have more staff to put it in a position to initiate its own probes with no immunity granted” he said.
“While immunity applicants might be spared fines, they can still be held to pay damages to injured parties” concluded Mr. Schwab.
Whilst the reputation of trading desks within some of the world’s largest FX dealers is at stake, it is not often the case that financial institutions invest in reputation over profitability. This moot point carefully considered with regard to UBS’s willingness to cooperate, it may well be that the FX rate rigging investigation could lead to an unprecedented outcome.