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Extra For Forex

4 March 2015

Plans for tighter restrictions on Forex mean that the value of compliance can only rise in this sector, argues Aziz Rahman.

Forex and Symbols

The Chancellor has been aware for some time that legislation was needed to curb some activities in the City.

Banking excesses led to calamity at the tail end of the last decade, which has since been followed by controversy over Libor and now Forex. The government has responded to this with legislation designed to prevent further Libor manipulation.

It is a sign of the times, however, that the government is now working to extend the scope of this legislation beyond Libor to cover seven further financial benchmarks. Anyone found guilty of manipulating these benchmarks could face up to seven years in prison. Unsurprisingly, one of these benchmarks is the WM/Reuter 4pm London Fix; which is the dominant foreign exchange benchmark.

The other benchmarks covered by the legislation are:

  • Sterling Overnight Index Average (SONIA) and the Repurchase Overnight Index Average (RONIA), which both serve as reference rates for overnight index swaps.
  • ISDAFix, which is the principal global benchmark for swap rates and spreads for interest rate swap transactions.
  • London Gold Fixing and the LMBA Silver Price, which determine the price of gold and silver in the London market.
  • ICE Brent index, which acts as the crude oil market’s principal financial benchmark.

The Chancellor George Osborne has made it clear that this step is about coming down hard on those who abuse the likes of Libor, Forex and the aforementioned other benchmarks.

He added: “The integrity of the City matters to the economy of Britain. Ensuring that the key rates that underpin financial markets here and around the world are robust, and that anyone who seeks to manipulate them is subject to the full force of the law, is an important part of our long-term economic plan.

“The government is determined to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them.’’

Strong words…and they appear to be backed up by the legislation. The legislation does not only extend the criminal offence of manipulating a ‘relevant benchmark’ beyond Libor to all these other benchmarks. It subjects anyone administrating - or subject to - these benchmarks to a number of specific rules. Authorised firms will face a range of sanctions, such as financial penalties and suspensions, if they breach any of the Financial Conduct Authority’s (FCA) rules and principles.

The FCA and Prudential Regulation Authority (PRA) have already fined five banks a total of more than £1 billion following attempts to manipulate Forex markets. The Serious Fraud Office (SFO) has also undertaken a number of criminal investigations in relation to Forex manipulation; which has also attracted close attention from US prosecutors. At the time of writing, it is difficult to ascertain how many people will face charges here or abroad in connection with Forex manipulation. But the government has announced that its legislation to prevent benchmark manipulation will come into effect on April 1 this year.

It would be easy to make an April Fools’ Day comment at this point but we’ll resist the temptation. What we cannot avoid saying, however, is that it would be a massive risk for any company or individual operating in the aforementioned financial sectors not to pay heed to this new legislation. The cost of compliance is time, money and genuine effort – costs that not everyone has always been prepared to pay. Those who have put the emphasis on compliance have seen it as a way of protecting themselves and their companies against prosecution for business crime. Those who did not, it would appear, often believed they did nothing wrong - or at least believed they would not be discovered to be doing anything wrong. It is a belief that is looking increasingly shaky with each new piece of legislation, each instance of investigating agencies teaming up to tackle business crime and each instance of an individual or company being brought before the courts for illegal behaviour dating back many months or years.

The Bribery Act has been in effect for four years, making companies responsible for the behaviour of anyone working for them in any capacity anywhere in the world. We are now seeing the first prosecutions under the Act coming to court while the Fraud Act has made it simpler for the authorities to prosecute individual traders, trusts and partnerships. Anti-competitive measures have been the subject of the Enterprise Act while regulations on money laundering have repeatedly become tighter in recent years. When you add the new legislation on benchmark manipulation, it becomes clear that the loopholes for financial abuse and the scope for avoiding detection are diminishing rapidly.

This article has already touched on enforcement by the FCA, PRA and SFO. What also needs to be highlighted is the degree of cooperation between not only these agencies but others such as HM Revenue and Customs (HMRC), City of London Police and their equivalent organisations in Europe, the United States and beyond. Stronger legislation, more cooperation and technological developments have made it easier for agencies here and abroad to suspect, detect and investigate business crime both here and around the world; no matter how complex it is. There is also a far greater amount of joint agency work going on between authorities such as the police, the SFO, HMRC, FCA and their foreign counterparts. In such cases, these bodies are not merely helping each other; they are actively working together as a team. It is also worth noting that advances in technology have made searches for wrongdoing and national and international anti-crime operations far simpler to conduct.

The result is that the legislation is now more comprehensive and the bodies that enforce it now have more power and capability. Which will make it harder for any company to escape detection if it is not following the law – wherever it is doing business. Around 1,200 UK directors are disqualified each year. That’s 100 a month, around 25 a week or, if you prefer, five a day. Due to the factors we have just outlined, there is little chance of that figure dropping unless a lot more companies and individuals pay more heed to compliance.

The new legislation being championed by George Osborne makes compliance an absolute must for anyone working in the financial sector. Since the Forex scandal came to light in June 2013, it has become apparent that the practice of colluding with counterparts to push through trades before and during the 60-second windows when the benchmarks were set went on for at least a decade. For thousands of trading days, the $5.3 trillion a day market in currency was being abused for illicit gain. It is clear from the authorities’ actions that those days are over.

We advise all manner of organisations and individuals on compliance. With each potential client, we stress that strong compliance procedures are essential: procedures created, implemented and publicised after a thorough review of all aspects of a company’s or individual’s activities. Any such approach has to be thorough. These procedures have to be enforced, monitored, reviewed and revised if necessary. If they are not, they are likely to be no more effective than having no compliance measures or procedures that have been cobbled together as a token gesture.

The financial sector has taken a battering in terms of publicity for almost a decade. Libor and Forex appear to have confirmed people’s suspicions rather than shocked them. But as the Chancellor’s comments in support of this new legislation make clear, the war being waged by the authorities on what they see as rogue elements of the financial sector is not a mere public relations exercise. It is an offensive that is being carried out with legislation and strong enforcement. In the face of such an onslaught it would be foolish and costly for those who could potentially be investigated not to make sure they had done everything possible to design out the possibility of wrongdoing in their workplace.

In an era in which compliance is increasingly becoming a necessity, there will be many in the financial sector who wish to devise an appropriate procedure. In the process of doing this, they may well find wrongdoing is being, or has been, carried out in the company’s name. If that is the case, they need expert legal advice on how to proceed.

But the ideal situation for anyone in the financial sector is to make sure compliance is a regular part of the workplace as early as possible. Only then can companies and individuals be confident that they will not be part of the next wave of financial crime prosecutions.


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