Don’t bank on it: A foreign exchange scandal the City could do without

 

Editorial
Friday 26 September 2014 14:51 EDT
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The attraction of a mass settlement of its foreign exchange trading investigation is easy to understand from the perspective of the Financial Conduct Authority.

Under pressure from the Treasury, which would like to sell down further the state’s interests in the banking sector, such a move would neatly draw a line under a major source of uncertainty that has cast a pall over the City for many months – a source of uncertainty that is starving the banking sector of investment.

A mass settlement also deals with the problem of “first mover disadvantage” that had such a devastating impact on Barclays as a result of the Libor-fixing scandal even though it was by no means the worst offender and played an important part in bringing the affair to light. Furthermore, there would be none of the drip feed of ugly news which, with every Libor settlement, has helped to stifle any recovery in public confidence towards the sector.

However, without the involvement of the US, the plan is fatally flawed. If, as expected, the UK levels record fines, it will only stoke damaging speculation about what the Americans would do in the wake of the recent round of multibillion-dollar penalties imposed upon banks on both sides of the Atlantic, albeit for different reasons.

In attempting to allay uncertainty, a group settlement may actually end up contributing to it. If there is any synchronisation to be done, it would be better for all concerned to follow the example of the Libor scandal and ensure that regulators are lined up together rather than banks. Once one bank had been dealt with, it would be relatively simple to gauge the impact upon others and the market could adjust itself.

As for the uncertainty plaguing the industry now, the FCA may want to reflect on the secrecy with which it has conducted this process.

While it faces considerable legal issues, it has a duty to consider whether it could have done more to keep the market better informed. This might help to prevent a similar set of circumstances arising in future.

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