The forex scandal has prompted calls for change. It should also be seen as a call for compliance.
It’s taken a while and it was probably inevitable. But now, at least, it has been said. Things need to change when it comes to forex.
The Financial Conduct Authority (FCA) has declared that trading LONDONpractices in currency markets must be altered. It has also indicated that it will be possible to achieve a "sensible" set of reforms as the industry seems to share the FCA’s belief in the need for change.
The industry could hardly say anything else. It was, after all, only last November that saw the FCA fining five banks a total of £1.1 billion for seeking to manipulate foreign currency benchmarks. These fines were the biggest ever imposed by either the FCA or its predecessor, the Financial Services Authority (FSA). The fines were accompanied by what the FCA termed a "remediation" programme that aimed to ensure an industry-wide approach to tackling the root causes of the control failings that had become so apparent.
FCA Chief Executive Martin Wheatley has said it would not be easy to achieve local solutions for forex on the grounds that it is a global market. But he has also made it clear that the status quo is not a viable option. The future of forex, he believes, should be based on "agreed, sensible conclusions on how we move things forward". Senior bank figures who have been in discussion with FCA top brass appear to be in agreement. One cause for concern, however, is the acknowledgement of some grey areas where the FCA would prefer a more black and white approach. According to Wheatley, banks have said that profiting from moving the market was prudent hedging rather than out-and-out manipulation. This is not the FCA interpretation of events and it is doubtful whether those opposing views will ever be reconciled
But the FCA has to be careful not to alienate the banks. There would be nothing stopping them from running forex books from outside Europe if they felt that would give them greater freedom. Currency benchmarks will be directly regulated by the FCA from April and Wheatley has said that an ongoing review of the markets will look to impose more stringent requirements on the way forex functions. But at the same time, the FCA is at pains to point out that it isn’t trying to make the City a hostile place to do business. Wheatley has admitted that he would like to see the currency markets enjoy the benefits of the freedoms they have had in the last 20 years or so – only without the abuses that seem to have accompanied them.
If anything, such a wish from the FCA places greater emphasis on compliance when it comes to the banks and all other parties involved in forex. There are probably many who trade in the currency markets who regarded compliance as an issue that took time, effort and money that could best be spent elsewhere. We may never know if that was the view of the banks who were fined £1.1 billion by the FCA. It would appear that compliance was not top of their list of priorities. They may now feel slightly more respectful of the need for it. Perhaps, like Rolls-Royce, GSK or any other number of companies punished for wrongdoing, they have learnt its value the hard way.
Now would be an appropriate time for those involved in forex to pay some serious attention to compliance. As we mentioned earlier in this article, the FCA is currently reviewing the way the markets work. Its findings are due in June. While we do not know what recommendations it is likely to make, any arguments on behalf of those who will be subject to the regulation would be bolstered if they could produce evidence of their efforts to be compliant. Anything that proves to the FCA that those it is looking to regulate can self-police will help those working in forex. It will show the authorities that they are making efforts to prevent wrongdoing in their name and will boost their arguments against strict rules being imposed on them.
As a firm that advises on compliance, we appreciate that it is not always straightforward. Obeying the law as it applies to your area of business is not always simple. Making sure you are following the relevant law at any given time, in any particular place, is not always obvious. Obtaining guarantees that your staff, agents and representatives are acting legally at all times can be equally difficult. Companies need strong compliance procedures in place. Companies involved with forex arguably need them more than other organisations. The next few months are likely to see their conduct come under scrutiny and the amounts of freedom that they have become subject to questioning.
Compliance procedures need to be devised and implemented only after a detailed examination of the company and all individuals or organisations working with it or for it. Any compliance procedures introduced following this must be carefully drafted and publicised, as well as regularly monitored, reviewed and revised if and when it is necessary to do so. The currency markets place great demands on those working in them and finding the time and willpower to ensure legal compliance can seem daunting. But the currency markets are under very close scrutiny and those working in them cannot afford to take chances or cut corners.
Over the years, we have helped a wide variety of organisations introduce strong, appropriate compliance procedures. And we firmly believe that informed legal advice regarding compliance can prevent problems further down the line. There is no doubt that anyone working in forex has a pedigree and a business expertise. But such attributes will do little to prevent them facing prosecution unless they are working to compliance procedures designed and introduced specifically to prevent any legal difficulties arising.
When the FCA completes its review into forex it will be justifying whatever course of action it recommends on the grounds that it is necessary to ensure all involved follow the law to the letter. If those who are the subject of the review can show that they have taken their own steps to prevent any repeat of previous scandals it will stand both them and the currency sector as a whole in good stead.
Compliance comes at a cost. But it is far less costly than failing to implement it. Just ask the five banks who had to pay more than a billion pounds for such a failure. The currency markets are all about the value of a deal. Investment in compliance can ensure that those deals remain legal and above board – and retain their value