A tidal wave of civil litigation is in prospect after City watchdog the Financial Conduct Authority today fined five banks a total of £1.1bn for rigging the £3.4trn-a-day foreign exchange market (forex).
The five - Citibank, HSBC, JP Morgan Chase, Royal Bank of Scotland and UBS - can all expect to be hit by claims from clients including pension funds, foreign property owners and other foreign exchange houses, according to solicitors who have been quietly lining up litigants for the last two years.
Banking and financial dispute specialist Kalvin Chapman (pictured), of Manchester-based law firm Berg, told the Gazette: ‘We were first contacted by a property owner with a foreign exchange mortgage in December 2012. I think everybody has taken the sensible decision to wait until the final notice was published, but I would expect to see the first pleadings being issued within six months.’
Berg expects the final notices to play a key role in future litigation, because a vital component of any successful action will be proving that a bank behaved in such a way that it profited at the expense of its customers.
The FCA statement said: ‘It is completely unacceptable for firms to engage in attempts at manipulation for their own benefit and to the potential detriment of certain clients and other market participants. Our final notices include examples where each bank’s trading made a significant profit.’
The final notices also all contain references to collusion between traders at different banks using online messaging and chatrooms. The FCA cites one example of such chatroom manipulation which netted Citibank a profit of £62,581 and another in which HSBC banked £102,425.
The notices could prove a boon for those bringing cases because they also contain examples of traders congratulating themselves after successfully manipulating forex rates. This, from one UBS trader, is typical: ‘The best fix of my UBS career’ – after he used a chatroom to move rates to produce a profit for £328,100 for UBS.
Simon Hart, banking litigation partner at City firm RPC, expects the size of claims to be significantly higher than those under previous ‘benchmark’ rigging cases such as Libor.
He said: ‘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.’
Berg’s Chapman believes that in addition to clients bringing claims, bank shareholder groups could also pursue actions. ’The decisions today cover the period January 2008 to October 2013. The first questions about the FX markets were in 2012, but you have bank boards who have sat through PPI, Swaps and Libor, so you have to ask ”what where they doing”?’
Chapman believes the Treasury should use the £1.1bn in forex fines to compensate past financial scandals. Many small and medium-sized businesses who were victims of interest rate swaps mis-selling have yet to receive any financial redress.
He said: ‘We still have clients who have not compensated for SWAPs, so why is this money going to the Treasury and not these SMEs?’
Chancellor George Osborne has said a share of the fines will be taken by the Treasury and ’used for the wider public good’.
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.’
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