The Bank of England has warned of “deep-rooted problems” in the City that are undermining public trust in the financial system, as it launched a sweeping review intended to wipe out market manipulation.
In her first speech as deputy governor of the Bank of England, Nemat “Minouche” Shafik said the behaviour of traders in foreign exchange, currencies and bonds markets pointed to a pattern of behaviour that goes beyond a few rogue players.
Saying she had found the behaviour of Libor riggers outrageous, Shafik said that the ongoing fines for misconduct were “like salt rubbed into the wounds to public confidence in financial markets”.
About £4bn of fines have already been levied for manipulation of key benchmark rates such as Libor and the City is braced for fines for rigging the currency markets to be announced next month.
“Public outrage is based on the fact that rewards in finance are disproportionate and the system is rigged. When people read of malpractice in financial markets, of trading profits being claimed through manipulation, collusion or dishonesty, they naturally wonder if they are one of the people who have been wronged,” said Shafik.
She was speaking at the London School of Economics as she launched a much-anticipated consultation into the markets for fixed income, foreign exchange and commodities, which are collectively known as FICC and generated $117bn (£72bn) of revenues for the big investment banks in 2013. These are global markets and any cleanup efforts would need international cooperation.
George Osborne commissioned the review in his Mansion House speech in June and it is due to report next June, after the general election.
“The integrity of the City matters to the economy of Britain. Markets here set the interest rates for people’s mortgages, the exchange rates for our exports and holidays, and the commodity prices for the goods we buy,” the chancellor said on Monday.
Shafik said these markets affected everyone’s lives. They are huge, she said, describing how the global stock of bonds was worth about $100tn (£62tn) in 2013 – bigger than world GDP.
“The initial argument that it is just the case of a ‘few bad apples’ is not longer credible. Instead it seems that there were deep-rooted problems in the nature of the FICC markets that resulted in practices that would be unacceptable elsewhere,” said Shafik.
She said that changes already in train should help to address behaviour. She added: “But we need to make sure that taken together they add up to a comprehensive solution to fix the barrel and to get rid of the bad apples.”
The consultation paper could signal a sweeping review of the way the markets operate, from looking at competition between the big players to the way trades are handled by market makers and to the penalties that could be faced. It also left open the door for an industry-brokered solution to the problem rather than more regulation imposed from the outside.
“The review ... wants to consider whether more needs to be done to monitor for – and where it is found punish – misconduct,” she said.
Libor rigging has already become a criminal offence and the chancellor said last month that seven other offences, including manipulating gold and currency markets, would become criminal offences by the end of the year.
The review being led by Shafik asks whether there need to be stronger whistleblowing arrangements, tougher electronic surveillance and punishing of staff through penalties that could be made public.
She said that the ease with which traders change jobs demonstrated that they felt “greater loyalty to their desks or peers in the market than to their firm”.
“It is clear that in the runup to the financial crisis some firms active in FICC markets allowed the culture on their trading floors to get out of control, combining weak controls with incentives focused heavily on short-term revenue performance,” she said.
The review raises the prospect of forcing firms to check references of new hires for five years and requiring hedge funds, fund managers and stockbrokers to behave like banks and claw back bonuses when things go wrong.
There is also the possibility that firms facing conduct issues might be forced to hold more capital or have business withheld from them by other players.
Her remarks are the latest warning to the industry by a deputy governor of the Bank, after Sir Jon Cunliffesaid last week that bankers, particularly those who worked in FICC, should brace for a pay cut.
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