In a highly-anticipated series of settlements, regulators from the United Kingdom, United States, and Switzerland this week slapped six banks with a total of $4.3 billion in fines to resolve charges that they manipulated the foreign exchange currency-trading market.
The total amount of fines imposed against each bank is:
$1 billion against JP Morgan;
$1 billion against Citibank;
$800 million against UBS;
$618 million against HSBC;
$634 million against Royal Bank of Scotland; and
$250 million against Bank of America.
According to the regulators, foreign exchange traders at the banks colluded with traders at other banks through the use of private Internet chat rooms in their attempts to manipulate the benchmark exchange rates. In these chat rooms, the traders disclosed confidential customer order information and trading positions, altered trading positions to accommodate the interests of the collective group, and agreed on trading strategies as part of a collusive effort to manipulate the benchmark exchange rates.
Regulators also found that the banks failed to adequately assess the risks associated with their traders and lacked adequate internal controls to prevent improper communications. Additionally, the banks lacked sufficient policies, procedures, and training specifically governing participation in trading on the foreign exchange benchmarks rates.
“Using the ultimate club and threatening criminal indictments, the regulators are treading new waters,” says John Alan James, a professor at Pace University’s Lubin School of Business and chairman emeritus of its Center for Global Governance, Reporting and Regulation. “One might question if this is just another move to totally regulate the financial sector.”
The Financial Conduct Authority (FCA) imposed fines totaling $1.7 billion. These fines include $358 million against Citibank; $343 million against HSBC; $352 million against JP Morgan; $371 million against UBS; and $344 million against RBS.
These combined fines represent the largest ever imposed by the FCA or its predecessor the Financial Services Authority (FSA). The FCA noted that the settlement also marks the first time it has pursued a settlement with a group of banks in this way, working in close collaboration with other regulators in the U.K., Europe, and the United States.
In a statement, FCA Chief Executive Martin Wheatley said the record settlement marks the gravity of the banks’ failings. “They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about,” he said. “Senior management commitments to change need to become a reality in every area of their business.”
Wheatley added that the settlement is also intended to improve market standards across the industry. “All firms need to work with us to deliver real and lasting change to the culture of the trading floor,” he said.
In addition to the enforcement action against the banks, the FCA said it’s also launching an industry-wide remediation program “to ensure firms address the root causes of these failings and drive up standards across the market,” the FCA stated. “We will require senior management at firms to take responsibility for delivering the necessary changes and attest that this work has been completed.”
The FCA added that the establishment of the remediation program complements its “ongoing supervisory work and the wider reforms to the fixed income, commodity and currency markets, which are the subject of the U.K. Fair and Effective Markets Review.”
In addition, the Commodity Futures Trading Commission imposed more than $1.4 billion in penalties against these five banks. Citibank and JPMorgan were each fined $310 million; RBS and UBS, $290 million; and HSBC, $275 million.
The CFTC orders also require the banks to cease and desist from further violations, and take specified steps to implement and strengthen their internal controls and procedures, including the supervision of their FX traders, to ensure the integrity of their participation in the fixing of foreign exchange benchmark rates and internal and external communications by traders.
In announcing the settlement, the CFTC recognized the “significant cooperation” of Citibank, HSBC, JP Morgan, RBS, and UBS during the investigation. The CFTC also recognized UBS for being the first bank to report the misconduct.
The Swiss Financial Market Supervisory Authority (FINMA) ordered UBS to pay $139 million, and further initiated enforcement proceedings against eleven former and current employees involved in the case. According to FINMA, the bank’s employees in Zurich attempted to manipulate foreign exchange benchmarks, and acted against the interests of their clients.
“Risk management, controls and compliance in foreign exchange trading were insufficient,” FINMA stated. “By breaching control requirements and owing to the misconduct of its employees, UBS severely violated the requirements for proper business conduct.”
According to FINMA, the following compliance failures in foreign exchange trading at UBS facilitated those violations:
Insufficient risk assessment: Conducting proprietary and client trading simultaneously and managing the information obtained from clients can lead to conflicts of interest. These risks were heightened by the incentive system in which variable compensation was on average triple the basic salary. Compliance was of little relevance to performance evaluation. Neither conflicts of interest, specific incidents such as the LIBOR case, nor notifications from whistleblowers resulted in the introduction of appropriate measures to capture or limit these risks.
Insufficient controls: The bank did not have adequate control instruments in place to identify violations of market conduct rules, manipulative conduct or breaches of the bank's duty to act in the interest of its clients. Desk supervisors ignored their monitoring functions.
Insufficient compliance within the Foreign Exchange division: Compliance issues were not stressed enough in internal training or the evaluation of staff, and compliance controls were not in place at the trading desk.
As part of the settlement, UBS must also take the following corrective measures: Disgorge illegally generated profits and avoided costs; automate at least 95% of its global foreign exchange trading; and separate client and proprietary trading to manage conflicts of interest.
UBS must also continue to enhance its compliance program; implement monitoring and analysis tools; limiting the utilization of certain communication media; prohibit certain employee transactions; and strengthen its whistleblower program. FINMA will appoint a third party to monitor implementation of these measures.
A similar investigation against Barclays, which withdrew from the settlement talks, remains pending. “We will progress our investigation into that firm,” FCA said.
The Office of the Comptroller of the Currency (OCC) assessed $950 million in additional fines against Bank of America ($250 million); Citibank ($350 million); and JPMorgan ($350 million).
In a statement, Comptroller of the Currency Thomas Curry said the enforcement actions “make clear that the OCC will take forceful action, not only when the institutions we supervise engage in wrongdoing, but when management fails to exercise the oversight necessary to ensure that employees follow laws and regulations intended to protect customers and maintain the integrity of markets.”