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Foreign Exchange Market Rigging – One Step Forward, Two Steps Backward

Posted on May 25, 2015 by Liina Tulk  | Tags: forex, foreign exchange markets rigging, RBS, Barclays, FCA, misselling, compensation, banks  | 0 Comments

ANOTHER SCANDAL

Barclays and RBS were among the six major banks to be fined a total of $5.7 billion by British and US regulators over foreign exchange market rigging. Barclays was fined the largest amount at £1.53 billion, which included the FCA's largest ever financial penalty of £284.4 million.

Foreign Exchange (forex) traders were said to have come together in chatrooms to organise methods to influence the value of major currencies in the hope of inflating their profits.

The range of clients affected by the forex manipulation is wide. It extends from pension funds and investment managers who had regular currency dealings with banks in large volumes to UK businesses who were missold highly complicated forex derivatives by banks in order to manage their exposure to foreign currency. This means that not only large companies lost out but also individuals with their money in investment and pension funds.

As the London Evening Standard correctly pointed out, the affair follows a series of scandals, including the fixing of benchmark interest rate Libor, that have severely damaged the public's perception of the banking industry.

 SURPRISING?

Over the last three years we have represented clients with claims against the major UK banks for the misselling of interest rate hedging products and embedded swaps, and so this latest scandal against the banks almost ceases to surprise us. It does, however, raise the question of how exactly are the banks dealing with the scandals at a time when the banks’ publicly stated aim is rehabilitation in the public’s eyes.

It is one thing for the banks to be fined by the FCA but another for them to actually compensate the customers who suffered losses due to the banks’ actions. While record breaking FCA fines make the headlines in newspapers, they do not necessarily guarantee fair and just compensation for the customers affected by the swap or forex misselling. The fines charged by the regulatory are not ingathered in a “compensation box” that will thereafter be distributed between the missold customers. Instead, each missold customer will need to bring their own claim against the bank, be that through a complaints review scheme set up by the banks or through the courts.

 PUBLIC PERCEPTION

The Banks have over the recent years invested a lot of time and effort into improving their public perception – proving that they are no longer the banks that they used to be and that they no longer engage in misselling or market manipulation. Slogans like “fairer banking” and “with you all the way” tend to crop up in the banks’ advertisements.  

However, major scandals, of which the forex manipulation is just the latest in a series of many, obviously do not help with the banks’ attempt to improve their public perception. That said it is not the scandals themselves that necessary impede on the banks’ attempt to change their image – after all the misselling and market manipulation took place several years ago. Instead, it is how the banks now deal with the aftermath of scandals that really determines how the banks come across to their customers and the wider public.

 FAILINGS IN THE SWAP MISSELLING REVIEW SCHEME 

As I discussed in one of my previous blogs, the banks have not covered themselves in glory with the way they have conducted the review of the swap misselling claims under the review scheme set up by the FCA. The failings have been such that judicial review proceedings have been brought against one of the Independent Reviewers, KPMG, and judicial review proceedings are also being considered by the lobbying group Bully Banks against the FCA.

It is understandable that the banks wanted to limit their financial exposure to payouts under misselling claims. For one, it is reasonable not to hold the banks liable to customers under loss of profits claims that may have been based on very profitable estimations for a time when most businesses were struggling even without missold interest hedging products. However, the banks have gone in the other extreme and often refused to compensate customers outright on the grounds that although they were missold, the banks did not expect them to have acted any differently even if they had been made aware of the astronomical breakage charges.

 FOREX MANIPULATION COMPENSATION

While it may seem astonishing to members of the public that the banks refuse to compensate customers they have missold, there is often very little those customers can do. Unless an automatic compensation scheme is set in place, as was done with PPI misselling, customers who suffered losses will still need to prove the exact extent of their losses and that but for the manipulation they would not have proceeded with those transactions. It is to be seen how big of a fight the banks put up to counter those losses claims. With the time, money and effort the banks put into revamping their public image, one would hope that they realise at some point that refusing to deal with compensation claims fairly only damages the public’s perception of them further.

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 If you have any queries arising from this article, please contact our Dispute Resolution team on 0131 226 8200.

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