With about 43% of the $6.6 trillion-a-day foreign exchange market traded in London, the stakes are high in a case highlighting how close UK banks often sail to the wind. We talked with one man who is taking them on.
Two foreign exchange, aka "forex" or "FX" cartels run by traders working for five of the world's largest banks may have lost consumers millions of pounds, adding to a wave of bad news for western banks. That's the view of former chair of the UK's Pensions Regulator, Michael O'Higgins.
So confident is he of his case, that in July Michael O'Higgins FX Class Representative Limited filed a lawsuit against the five banks, all of which had already been fined €1.087 billion ($1.2 billion) earlier this year by the European Commission for forex rigging and over $8.5 billion by eleven global regulators.
The legal action was launched to return hundreds of millions of pounds to pension funds, asset managers, hedge funds and others affected by the cartels between 2007 and 2013. It is the first foreign exchange class action suit brought in the UK against banks involved in a forex cartel and was given the green light to proceed in November after the Competition Appeal Tribunal (CAT) approved the timetable of hearings. A first hearing is due to start in mid-February .
You've been LIBOR'd
London's currency trading desks first hit the headlines with the London Interbank Offered Rate (LIBOR) scandal in 2012. In 2013 the European Commission opened an investigation into banks' activities. It soon found that two cartels had been operating between 2007-2013. Those involved in the so-called ‘Banana Split' cartel were revealed to have communicated with each other in chat rooms, one called "Two and a Half Men," another "Only Marge" and another "Essex Express 'n the Jimmy," because all the traders except for 'Jimmy' lived in Essex, a county to the east of London, and met on a train to work in The City.
The Commission said the banks — Barclays, the Royal Bank of Scotland (RBS), Citigroup, JPMorgan, UBS and MUFG Bank — had colluded over 11 currencies, including sterling, the euro, the US dollar and the Japanese yen and imposed a fine of €811.2 million on Barclays, RBS, Citigroup and JP Morgan in relation to a case referred to as the "Forex – Three Way Banana Split" cartel. The second decision related to the so-called "Forex – Essex Express" cartel and resulted in a total fine of €257.7 million for Barclays, RBS and Bank of Tokyo-Mitsubishi (now MUFG Bank).
We spoke with Michael O'Higgins.
DW: What inspired you personally to take up this case?
MOH: I believe in free markets I also believe in fair markets. What inspired me was to help make right the wrongdoing by these banks and my experience lends itself well to this. I am also outraged that these offences occurred when the UK Treasury (when I was a board member there) was committing massive resources of people and money to support and stabilize the banking system. Whilst the EU and other regulators around the world have levied over €10 billion of fines on the defendant banks, none of this money has made its way to the institutions or companies affected by the cartels, and going through the courts and taking legal action to seek compensation is the only means available to seek financial redress for losses that were suffered.
DW: What is the percentage of non-UK registered/UK-registered companies and investors who could receive compensation? How many of them are German?
MOH: Any entity that engaged in FX spot and forward transactions with the defendant banks during the specified period will be eligible for compensation. Over half of the value of FX trading in London is carried out by non UK-domiciled entities who choose to trade through London because it is the global center for FX trading due to its greater liquidity. It is difficult to estimate the number of German entities that are eligible, but we will expect the number to be very large, and they will form a large part of the claimant group given that Germany is a major European financial center. Furthermore, Germany is the heartland of global car manufacturing with a huge export market which requires large volumes of currency trading.
UK-domiciled entities are automatically opted-in, which is why it is so important that we reach out to non-UK entities, so that they opt in and get benefits of the way this case is being brought, including no exposure to costs and no information requirements at this stage of proceedings.
The more companies and financial institutions including pension funds that opt in, the greater the claim will be, and the more likely it will help to change the culture at these banks. We have set up a website, www.ukfxcartelclaim.com, which provides information about the claim and allows any company or institution that may have traded FX with these banks to register their interest in the claim. Our goal is to help raise awareness of this claim and make it as simple and easy for non UK entities to opt in so that they too can be compensated.
DW: What does this case tell us about how UK banks operate and could there be similar cases waiting to happen?
MOH: This case involves non-UK banks as well, so this is not just a UK banking issue. The dark side of banking culture is a global problem that regulators, law makers and the banks need to address. We are waiting for the publication of a third decision by the EU in relation to FX rigging by a third cartel which is expected to name additional banks.
DW: Could a positive result for you destabilize one or more of the banks involved?
MOH: We can only hope that a positive result will have a positive effect on culture and behavior, particularly in respect to trading. Banks need to institute better checks and processes to detect illegal behavior and traders themselves may as a result be deterred from engaging in illegal behavior or else face dire consequences.
Financially, the banks will need to make provisions as their profits will take a hit if the claim goes against them. However, we can’t comment on whether the value of the compensation will destabilize the banks, even though we anticipate the value of the claim to exceed €1 billion. It will however negatively their reputations, which have continued to come under fire since the financial crisis. Therefore, the sooner these banks compensate the affected companies and investors, the faster the banks can start the process of trying to restore their reputations.