Bankers that manipulated foreign exchange markets have paid out $2bn in civil claims to aggrieved US clients. But in 2016 they will face still more claims in the UK courts. And the damages could be twice as large.
On 1 September 2014 the top fund manager Neil Woodford sold his remaining stake in the banking giant HSBC. The £65m sale was triggered by a new phenomenon that Mr Woodford had dubbed “fine inflation”: the relentless and rapidly rising toll of fines and penalties levied on banks.
Real inflation may be bumbling along at zero but fine inflation has soared as banks get hammered over everything from interest rate and currency rigging to money laundering and insurance mis-selling.
Anyone who thinks the spate of settlements over the past 18 months is the end of it should think again – a High Court battle in London is looming for scores of banks, which could see payouts of up to $4bn (£3bn) if litigators win their case.
Group-action lawsuits are due to land in the courts early next year against banks involved in the forex scandal. Investors such as pension funds, hedge funds and multinational corporations are set to back the action, which follows a similar case against 16 banks in the US.
The US law firm Scott and Scott, which previously represented victims of the BP Gulf of Mexico oil disaster, is the most prominent outfit leading the forex charge in London.
Lawyers from the company, which recently opened a London office, have been touring companies relentlessly, trying to convince them to come on board with the action.
“There’s been a tremendous amount of interest,” its managing partner David Scott said. “It makes sense given that all of the regulatory agencies who have looked into it have found the conduct we allege, and the conduct of the defendants pretty egregious. Multinationals, central banks, pension schemes all want to have information about it and have a discussion about what it can lead to.”
British banks implicated in the forex scandal, including Barclays, RBS and HSBC, settled civil cases in the US brought by the law firm in August. Barclays agreed to pay $384m, HSBC $285m and RBS $255m to settle a class action alongside BNP Paribas and Goldman Sachs. The total haul from the five was $1.2bn.
RBS and Barclays declined to comment on the prospect of UK court action yesterday, while HSBC did not respond to a request for comment.
The five banks’ August settlement followed another four – Citi, Bank of America Merrill Lynch, UBS and JP Morgan – who settled earlier in the year. The total forex settlements paid out by banks in US civil cases so far is $2bn.
But payouts from similar actions in UK courts could dwarf those seen in the US.
About 20 per cent of global forex trading each day takes place in New York, while in London the volume is almost double that at closer to 40 per cent, meaning the quantum of compensation could be double that seen in the US.
“The figure [of claim] will be on some level contingent on the number of claimants,” Mr Scott said. “We have quite a number of sophisticated investors who have asked us to represent them. For the last year I have been in Europe and the UK meeting with clients.”
One advantage to the lawsuit is a recent legislative change making it easier for investors to pursue US-style class-action charges in UK courts.
The Consumer Rights Act 2015, which came into force on 1 October, means the Competition Appeal Tribunal can now be used for private actions against companies accused of breaching competition law, alongside claims that can be filed in the High Court. It also introduced new rules to fuel more collective proceedings on behalf of claimant groups, putting it closer to the US model of class action lawsuits.
The new “opt-out” clause means investors no longer have to opt in to be part of an action, in effect meaning one party can bring a case and represent scores of investors.
The ruling could be used to bring a case against banks in the forex scandal, although no decision has yet been made by parties examining claims about where to file a claim, or under which legal precedent.
Despite the surge of interest in a lawsuit and a more positive regulatory environment, a number of hurdles still remain to bringing a forex case.
One is cultural: the reluctance of City investors to take on the banks because it looks too adversarial and “grubby”.
Class actions have featured heavily in the US justice systems but many in the City are wary of suing the banking fraternity, which could be a source of future funding or advice.
The traditional conviviality of the Square Mile, where pursuing actions in court often raises eyebrows among discreet money managers, could discourage firms from signing up.
Another dark cloud on the horizon is a long running investigation into the forex scandal by European regulators. The European Commission is investigating the scandal to see whether any of the banks broke EU competition law.
A case could be filed in the courts but is unlikely to be heard by a judge until the commission makes its ruling – which could take us well into 2017, dragging out the misery for banks.
The foreign exchange rate rigging scandal came to the world’s attention in 2013 and eventually triggered multi-million pound fines and criminal actions against individuals and banks around the world.
The investigation into the $5.3 trillion-a-day forex market came hot on the heels of the more high-profile Libor scandal, which shone a light into some of the darker recesses of the banking world. Both involved the manipulation of benchmarks by individual traders, in the forex case fiddling the price of currency pairing trades made in dollars, euros, yen, sterling, Swiss francs, Australian dollars, New Zealand dollars, Canadian dollars, Norwegian krone and Swedish krona.
Benchmark foreign exchange rates, known as the WM/Reuters benchmark, were set every day at 4pm in London. Between 2008 and 2013 traders tried to manipulate the 4pm “fix” by colluding with each other to achieve a certain price.
The UK Financial Conduct Authority (FCA), a host of US financial regulators and the Swiss Financial Market Supervisory Authority (Finma) all launched investigations into the issue and turned up a treasure trove of bad behaviour. Online chatrooms used by the traders to communicate were given racy names such as The Players, The A-Team and The Mafia. Traders peppered their chats with colourful language.
Last November the FCA concluded its investigation and hit five banks – Citi, HSBC, JPMorgan, RBS and UBS – with $1.7bn of fines. The US Commodity Futures Trading Commission fined the same banks $1.4bn. In May, the five plus Barclays paid a further $5.7bn after pleading guilty in a case brought by the US Department of Justice.
In July 2014 the Serious Fraud Office opened a criminal investigation into allegations of fraud in connection with the currency manipulation scandal. One man has been arrested so far and further interviews are scheduled with others.