Banks in latest $2bn FOREX settlement

BY Richard Summerfield

Nine major world banks have agreed to pay a $2bn settlement to conclude a class action brought in a New York court over the recent foreign exchange rigging (FOREX) scandal.

For the banks involved, the ramifications of rigging the market in their favour continue to mount up, with fines already exceeding the $10bn mark. However, almost as harmful as the fines and settlements has been the damaging effect of the scandal on the reputations of the banks involved.

The firms involved in the FOREX fixing conspiracy, including HSBC, Barclays, BNP Paribas, Bank of America, JP Morgan, Citibank, Goldman Sachs, RBS and UBS, have been pilloried, and heavily sanctioned in recent years for their roles in the scheme. As a result of the FOREX controversy – amid other notable financial scandals – confidence in the wider financial services sector appears to be almost at rock bottom.

In May, five of the banks - Barclays, Citicorp, JPMorgan Chase, Royal Bank of Scotland and UBS - pleaded guilty to felony charges relating to rigging foreign exchange rates. In 2014, the Financial Conduct Authority in the UK fined four of the five firms a total of £1.1bn. The fifth bank, Barclays, is still under investigation.

According to Michael D. Hausfeld, chairman of Hausfeld, a global claims firm acting on behalf of US investors, the most recent settlements are a key victory for those wronged investors. “As a result of lengthy, hard-fought negotiations, we have obtained historic recoveries on behalf of US investors,” wrote Mr Hausfeld. “Apart from the monetary component, each defendant has agreed to provide substantial cooperation, which will assist investors in their continued litigation against the non-settling defendants. While the recoveries here are tremendous, they are just the beginning. Investors around the world should take note of the significant recoveries secured in the United States and recognise that these settlements cover a fraction of the world’s largest financial market," he added.

Furthermore, as part of the settlement, the rebuked firms have agreed to help investors continue their legal action against a further 12 banks - Credit Suisse Group AG, Credit Suisse AG, Credit Suisse Securities, Deutsche Bank AG, Deutsche Bank Securities Inc., Morgan Stanley, Morgan Stanley and Co, Morgan Stanley and Co. International, Bank of Tokyo-Mitsubishi, RBC Capital Markets, Société Générale, and Standard Chartered.

Undoubtedly, the increase in fines and settlements reflects the increasing regulatory scrutiny banking groups have found themselves subject to in recent years. For those targeted banks, the enforcement actions – and settlements - will likely continue for some time.

News: Currency rigging lawsuit settlements rise past $2bn - lawyer

FCA benchmarks review urges FI’s to better manage the risks they face

BY Fraser Tennant

Financial institutions must improve how they identify and manage their benchmark activities and associated risks, according to a new Financial Conduct Authority (FCA) review of oversight and control of financial benchmarks.

The FCA’s review discovered that although there had been some progress made in terms of improving the oversight and controls around benchmarks, the application of the lessons learned from the LIBOR, Forex and Gold cases to other benchmarks had been uneven across the industry and "often lacked the urgency" required given the extent of the failings.

"We have seen widespread historic misconduct in relation to benchmarks,” said Tracey McDermott, director of supervision – investment, wholesale and specialists at the FCA. “It is now critical that firms act to restore trust and confidence in the system. Firms should have in place systems to manage the risks posed by benchmark activities and to address the weaknesses that have previously been identified.”

Additionally, the FCA found that firms were failing to identify a wide enough scope of benchmark activities by interpreting the International Organization of Securities Commissions (IOSCO) definition too narrowly. 

Ms McDermott continued: “We recognise that this is a significant task and firms had made some improvements, but the consistency of implementation and speed at which these changes have been taking place is disappointing.  Firms should take our findings on board and consider further steps to improve their oversight."

Key FCA recommendations found in the review include the need for firms to: (i) continue to strengthen governance and oversight of benchmark activity; (ii) continue to identify and manage conflicts of interest; (iii) fully identify their benchmark activities across all business areas; (iv) establish oversight and controls for any in-house benchmarks where they have not done so; and (v) implement appropriate training programmes.

Responding to the FCA’s thematic review, PwC's UK banking and capital markets leader Simon Hunt said:  “The identification of a complete population of benchmarks subject to the IOSCO definition is a significant challenge that firms have been grappling with.

“Firms that have introduced centralised governance and an oversight body for these benchmarks have been able to strengthen significantly the control infrastructure and understand and manage the risks that they face as an organisation.”

As a follow-up, the FCA has confirmed that it will write to all of the firms involved in the review to offer individual feedback as part of its regular supervision program.

Report: Financial Benchmarks: Thematic review of oversight and controls

A Greek tragedy?

BY Richard Summerfield

It would appear that after much debate – and many billions of euros – the Greek debt crisis may finally be entering the end game.

On Tuesday 30 June, the International Monetary Fund (IMF) confirmed that Greece had failed to make its latest €1.5bn debt repayment, officially placing the country ‘in arrears’. Greece’s missed payment is the largest in the IMF's history and the country becomes the first ever ‘advanced economy’ to be placed in arrears. The ‘default’ by Greece also brings about the end of the country’s second bailout programme.

In a last gasp attempt to prevent default, the Greek government proposed a new two year bailout programme which would be supplied under the European Stability Mechanism, which provides Europe’s bailout fund. The proposal was made shortly before the IMF’s payment deadline.

In a letter sent to the European Commission, IMF and European Central Bank, incumbent Greek prime minister Alex Tspiras asked for a new loan of €29.1bn to cover debt maturing in 2017.

In order to secure the fund, Mr Tspiras claimed that he would accept all of the conditions put forward by the country’s creditors provided there were a few minor amendments. The Greek government is seeking, in terms of the country's value-added tax system, a special 30 percent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained. With regard to pension reforms, Mr Tsipras asked that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He has also requested a special ‘solidarity grant’ be awarded to the country’s poorer pensioners. This grant, Mr Tspiras notes, would be phased out by December 2019. “Our amendments are concrete and they fully respect the robustness and the credibility of the design of the overall programme,” said Mr Tsipras.

At the time of writing the approval of this third bailout seems highly unlikely. Many senior European figures, particularly those in Germany, appear unwilling to deal with Mr Tspiras and his finance minister Yanis Varoufakis. Mr Tspiras’ decision to call a referendum for Sunday 5 July, in which the country will decide whether it wants to accept creditors' bailout conditions, has proven to be a contentious one. German chancellor Angela Merkel noted that “the door to talks with the Greek government has always been, and remains, open", adding, however, that talks could not take place before Sunday’s poll.

With fierce criticism of the referendum ringing around Europe, a no vote appearing most likely, and a €3.5bn payment to the ECB due on 20 July, Greece’s time in the euro may be drawing to a close.

News: Greece debt crisis: IMF payment missed as bailout expires

A ‘climate of fear’ breeds unethical behaviour within financial institutions claims new research

BY Fraser Tennant

New research into the reasons why employees of financial institutions can become partial to unethical conduct has been published this week by PwC and the London Business School.

The research study, ‘Stand out for the right reasons: why you can’t scare bankers into doing the right thing’, was designed to investigate the role of emotions in determining when and why employees behave creatively as opposed to unethically when competing with colleagues.

The study is based on a survey of 2431 managers from UK financial services representing banking, insurance and wealth management.

The PwC/London Business School research reveals that when financial institutions take a ‘get tough’ approach to poor employee performance in terms of behaviour and reaching targets, they risk creating a climate of fear and breeding more unethical conduct in financial services – an outcome at odds with what regulators, businesses and the public actually want.

“We are not suggesting that rules and penalties for bad behaviour should be abandoned as it’s essential that people know what is acceptable and what isn’t, and criminal behaviour should be punished," said Duncan Wardley, people and change director and behavioural science specialist at PwC. “This is about the sorts of pressures that push ordinary, well-meaning people into behaving less ethically that they would want to by cutting corners and hiding mistakes.

As a counterpoint to this, the research also found that when managers were presented with situations where the positive outcomes of success were highlighted rather than the negative consequences or punishment for poor performance, they were more excited and much more likely to demonstrate innovative behaviour.

Mr Wardley continued: “Regulators and financial services leaders can change behaviour within companies by increasing emphasis on the positive outcomes of good performance, instead of solely focusing on the negative outcomes of the bad behaviour they want to stamp out.”

Additionally, whilst the study shows that the issue of monetary reward is still a contentious issue involving a public and regulatory desire for further sanction, it also recognises that too much pay regulation can ultimately be self-defeating.

“Tough medicine prescribed by regulators to curb conduct issues meets the public appetite for retribution," believes Tom Gosling, head of pay, performance and reward at PwC. “But pay regulation based purely on pay structures and penalties can unintentionally create the very conditions that make unethical behaviour more likely.

"An approach to pay regulation that focuses too much on pay instruments, deferral, and clawback can create the emotional states in which creativity is crowded out, focus on financial rewards is maximised and unethical behaviour is more likely.”

Report: Stand out for the right reasons - why you can’t scare bankers into doing the right thing

Greece defiant following collapse of eurozone debt deal talks

BY Fraser Tennant

Greek prime minister Alexis Tspiras has called for “realism” from international creditors following the collapse of the latest round of debt deal talks in Brussels on Sunday.

The talks between the Greek government and EU officials saw Greece reject demands to make €2bn (£1.44bn) worth of spending cuts in able to secure a deal to unlock bailout funds. Also at issue was the looming deadline for Greece to repay more than €1.5bn of loans to the International Monetary Fund (IMF) by the end of June.

Mr Tspiras also rejected an EU request to make substantial cuts to pensions by saying his country's dignity would not allow for such an eventuality.

“One can only suspect political motives behind the institutions insistence that new cuts be made to pensions despite five years of pillaging by the memoranda," said Mr Tspiras in an interview with the Greek newspaper Efimerida Ton Syntakton. “The Greek government is negotiating with a plan, and has presented nuanced counterproposals. We will patiently wait for the institutions adhere to realism.”

Mr Tspiras also commented that his stance was not “a matter of ideological stubbornness” but was “about democracy”. In response, a muted European Commission (EC) said that although some progress had been made during the talks, “significant gaps” remained and time was running out for Greece to unlock bailout funds from the EU and IMF.

The impasse between Mr Tspiras and EU officials has intensified concerns as to the prospect of a Greek default in two weeks’ time. Furthermore, many believe that this could ultimately lead to Greece withdrawing from the eurozone altogether – a ‘Grexit’, as it has become known.

On the prospect of a Grexit, French president Francois Hollande said there was “little time” to prevent Greece from leaving the eurozone and that “the ball was now firmly in Greece's court”.

Mr Hollande said: “It's not France's position to impose on Greece further cuts to smaller pensions, but rather to ask that they propose alternatives. We have to get to work... everything must be done in order that Greece remains in the eurozone."

Next up for Mr Tspiras and the Greek government is a European Central bank (ECB) reassessment of continuing support for Greek banks in case of default (17 June); a meeting of Eurozone ministers to hammer out a deal that Greece can ratify by the end of the month (18 June); and the end of the Eurozone bailout with Greece and the deadline for a Greek €1.5bn debt repayment to the IMF (30 June).

News: Morning Agenda: Greek Debt Talks Break Down Again