FCA Enforcement Performance: Part 2 – The Forex Effect

Only a couple of weeks ago I was commenting on a NERA report that had found that in the period between April 2012 and October 2014 the FCA had imposed fines of over £1bn, in sharp contrast to the preceding decade during which a paltry £320m had been levied.

Now, on 12 November 2014, the FCA has set another UK record: in one day it has exceeded the previous 30 month record, by fining 5 banks, Citibank, HSBC, JPMorgan Chase, RBS and UBS for gross and persistent misconduct in their Forex trading rooms more than £200m each, totaling £1,114,918,000. Other banks, including Lloyds and Barclays, have yet to reach a settlement of the FCA claims, and therefore the final tally is likely to exceed £1.5bn. While this pales into insignificance compared with the $56.5bn penalties imposed by US regulators, it marks a step change in attitude.

Citibank, JPMC and UBS have also faced huge fines from their home regulators, including the CFTC and Finma. Other regulators, including the infamous Department of Financial Services and the EU, are carving out their own settlements, and there is much more pain to come.

The FCA's current slice of the action is, nevertheless, sizeable, and since the fines go to the Exchequer, the Chancellor may be thinking that the recent surprise £1.7bn levy from Brussels is not looking quite so problematic, but that ignoble thought apart, what is the point of such massive fines?

Fines imposed by the financial regulator on firms are designed to punish, to deter, and to express public outrage. The size of the fines perhaps reflects a need to punish more harshly than before, because it is clear that the banks were not deterred from continuing the kind of bad behavior they had indulged in over Libor. Knowing that such misconduct had been uncovered and was in the process of being punished, some major banks continued with Forex mismanagement for many months, only finally stopping in October 2013.

The concept of punishing a business is slightly artificial, and the problem with imposing a fine is that those who feel the effects may include the shareholders and the employees, who are innocent of wrong-doing. As it happens, the banks' share prices were not greatly affected by the news of the fines, but the impact may be longer term, perpetuating the losses made since the global financial crisis and leading to further shareholder pain. Shareholders can, of course, seek to ensure that the firm is deterred from misbehaving again by exerting...