The Daily Telegraph
US lawyers are coming to the UK to launch competition suits in London after a series of successes in New York
The firefighters of Oklahoma had a lot to celebrate this month. So did public sector employees in the City of Philadelphia, who found themselves cheering in unison with financiers at the Syena Global Emerging Markets Fund. They and their pension funds are among the joint claimants in a class action against a score of banks, battling in a New York courtroom for damages, claiming the banks ran an anti-competitive cartel, manipulating exchange rates to rip off customers.
A clutch of investment banks agreed to pay up to settle the case, bringing the total shelled out by a dozen banks to date to just over $2bn .
“Anyone who traded FX from 2003 to 2013 had exposure to manipulation” David Scott, lawyer
More than 3,000 miles away in London, businesses, investors and public bodies are watching with rapt attention, as they plot to follow the suit with claims of their own.
“It is fair to say the losses in the UK will exceed those in the US market. The US market is about 20pc of the foreign exchange market, while the UK is generally seen as about 40pc of the market,” said David Scott, managing partner at law firm Scott and Scott who has made his name with the successful US cases so far.
“Anyone who traded FX from 2003 to 2013 had exposure to manipulation, just from the way the market is made up.”
Mr Scott has been working on the cases for more than two years in the States, and is still fighting another seven banks in New York. The complainants hope they could get another $2bn or more if their remaining claims are successful.
It is not difficult to infer a potential claim size from those back of the envelope numbers, which come in at around an additional $8bn (£5bn). However, this does depend on a large range of variables, including the number of claimants who come forward, a more accurate estimate of their actual losses from the forex manipulation, and the outcome of any legal battles.
That compares with regulatory fines over foreign exchange and Libor benchmark manipulation of £2.2bn in the UK so far, meaning the vast majority of forex-related legal bills could still be to come for banks.
The claimants are expected to range far beyond the financial services sector, with multinational firms from all sectors potentially affected as they traded in foreign currencies or repatriated foreign profits into their home market.
As a result, individual claims could rise into the high tens of millions of pounds.
“This is money that has been taken from banks’ customers, through conspiratorial conduct and ultimately going into the pockets of the banks,” said Mr Scott, keen to emphasise the effect on the so-called real economy beyond finance.
Mr Scott said he expects Royal Bank of Scotland, Barclays and HSBC to be among those named in the lawsuits. All three banks declined to comment.
British and European institutions were not able to join the US lawsuit, as under American competition laws the claims were limited to transactions in the country itself.
A key hurdle for clients which traded foreign exchange with the banks is proving exactly how much they lost through the manipulation.
Scott and Scott argues it has a crucial advantage from its US cases, as the banks which settled the claims agreed not just to hand over cash to the claimants, but also to co-operate with the lawyers.
That information shed more light on the type of manipulation, as well as its scale and regularity. For instance, the lawyers began their cases in the US by looking at the 4pc WM Reuters Fix – known by the banks’ British traders by the term “Pick ‘n”, as shorthand for the rhyming slang “Pick ‘n’ Mix”.
Although that was the benchmark on which regulators focused, the lawyers say the evidence from the co-operation in the US points to manipulation of the spread on currency trades through the rest of the day, expanding the scope of the claims by investors.
The bid-offer spread – that is, the gap between the price offered to the buyer and the seller of any particular currency, which represents the bank’s profit margin – varied hugely by currency.
The smallest manipulation occurred on the most common trades, such as a euro-to-dollar transaction where the currency flows are too large to influence rates in any large way.
However, given the currency markets are enormous – with volumes work $5.3 trillion per day – any tiny shift in spreads can, over time, amount to very serious sums of money.
“There is so much commerce going on that the conspirators don’t need to bludgeon you over the head and steal your money, they can just simply paper cut you to death and pick up the small change on every trade. But because there is so much being traded every day, there is a large amount of money there,” said Mr Scott.
“That is what is fascinating in this case – you see oftentimes in conspiracies in your generic cartel cases where they fix the price on a commodity, because there is not so much commerce at play, the effect of the price fix has to be much greater on any individual item in order for the cartel to make economic sense to the conspirators. Here it can be miniscule.”
By contrast trades in less commonly exchanged currencies, such as the Thai baht, were open to higher levels of manipulation.
The new legal argument that spreads on trades through the day were manipulated is also of vital importance to the scale of the claims.
When regulators fined banks for manipulating benchmarks, they only looked at a small part of the trading day, and a small part of trading volumes.
In addition, that narrow focus made it hard to tell exactly how much clients may have lost from the banks’ market abuse.
If it is only the benchmark which is manipulated, the argument went, then some clients will lose and some will win.
But if it is the spread on trades which is pushed wider, then clients on both sides of the trade lose, and the bank, sitting in the middle, wins.
Furthermore, when the benchmark was pushed up or down depending on the banks’ preferences that day, it could easily be that a client’s losses from manipulation on one day are wiped out by them gaining from the manipulation on the next day.
By contrast, if the spread has been artificially widened, then the bank wins every time, and the client loses out on each occasion.
Banks are expected to fight hard against the claims, and one key area of argument will be around the damages suffered.
It will be hard to prove whether losses were incurred and on what scale, particularly when the claims are expected to date as far back as 2003.
Scott and Scott has put together a model based on information it has seen from banks, the cases put together by regulators and the trading data provided by the claimants.
Any losses on any given trade will depend on factors including the currencies involved, the size of the trade, the banks executing the trade, whether the trade was placed by phone or electronically, and even the time of day.
The lawyers are naturally keen to keep the exact details under wraps, to hold back their ammunition as they continue their suits in the US and prepare cases in the UK, but the expectation is that some of the individual firms’ claims could amount to the high tens of millions.
Thanks to an upcoming legal change, the case could even make litigation history.
The new Consumer Rights Act will allow customers who believe they have been wronged to group together, in something of a quasi-class action.
Until now, class actions were typically an American phenomenon, but this rule could open the way for similar cases in the UK, where legal bills may be too high to justify an individual launching a suit.
As a result, this could potentially act as a test case for the new Act.
Complex cases, and particularly ones testing out a new legal framework, can only drag on for years.
Banks may have hoped their legal woes were showing signs of ending as PPI compensation payouts at last started drifting downwards, but these accusations could stretch out the threat of hefty costs for years to come.