Rate Rigging Penalties For Big Banks Will Be So Big They Threaten The Stability Of The Financial System

Rate Rigging Penalties For Big Banks Will Be So Big They Threaten The Stability Of The Financial System

The most internationally recognized banking institutions in the world face a wave of lawsuits in the UK this autumn to compensate for billions of dollars of losses incurred as a result of their traders rigging foreign exchange rates.

Five international banking organizations including HSBC, Royal Bank of Scotland and Barclays agreed to pay off some affected investors this week in New York, foreshadowing costly settlements elsewhere in the world.

They joined four other multinational banking organizations that settled in the U.S. earlier this year. The total payment pledged to the aggrieved investors, most of which are pension and hedge funds, has now hit the $2 billion mark, according to Hausfeld, a law firm which presented the case on behalf of investors.

According to the law firm, the huge U.S. compensations are “just the beginning”. Michael Hausfeld, the firm’s head, said that Hausfeld had received queries about raising legal action in Britain, and that a formal statement could be reached as soon as October.

Others have proposed that the American legal system, which accommodates class action cases, is better when it comes to handling suits of this nature. Expressing his confidence about success in London, Mr. Hausfeld said, “This is a very strong case on its merits. I think we have clear ‘intent’ in UK law.”

Hausfeld argued that since the London forex market was bigger than that of the U.S. , the compensation was likely to be bigger as well. He added, “Anyone who traded in the market at any time in this period [2007 to 2013] was at risk.”

Rigging of forex trading was the latest in a row of rate-rigging disgraces to affect the financial sector.  

Traders at large banking organization, shamelessly using terms such as “The Bandits Club”, “The Cartel” and “The Mafia”, plotted over online chat platforms and email to harmonize foreign exchange trades in the $5.4 trillion-a-day market, allowing them to generate revenue at the cost of their customers – often investors and corporations.

Four multinational banking organizations – Citigroup, RBS, Barclays and JP Morgan – accepted the charges in May in the U.S. for plotting to influence forex rates between 2007 and 2013. These, together with Bank of America and UBS, were fined $6 billion from UK and U.S. regulators.

The possibility of further huge forex-related lawsuit costs for large UK banks will be a huge concern for regulators. The Financial Policy Committee of the Bank of England identified misdemeanor costs as one of the major threats affecting the stability of the financial system.

The banking organizations participating in the settlement in New York this week were not willing to comment on the particulars, but The Wall Street Journal reported in June that Barclays will pay $375 million and HSBC $285 million to resolve U.S. litigation.  

The other banking organizations involved in the litigation include Citibank, RBS, UBS, BNP, JP Morgan, Goldman Sachs, Paribas and Bank of America.  Seven others are being pursued by Hausfeld.