They liked to refer to themselves as “the A-team”, “the players” and “the three musketeers”, regarding anyone outside their private group as “numpties”.
Congratulating each other on their prowess in the £3.5 trillion-a day foreign markets, they would use phrases such as “nice job gents”, “I don my hat” and “what a job”.
But last week these loose cannons in the world’s biggest financial markets were found out. Their exchanges in online chat rooms were published by regulators who fined six big banks £2.6bn for having such weak systems and controls that their traders were able to manipulate currency markets.
The Financial Conduct Authority and two US regulators, including the Commodity Futures and Trading Commissions, stunned observers with the revelation that such behaviour had gone on for five years until October 2013 – after the banks had pledged to clean up their trading floors in the wake of the Libor rigging scandal, and the public anger that such behaviour then had unleashed.
But the latest fines for banks including HSBC and the bailed-out Royal Bank of Scotland will not be the end of the penalities and legal costs piled on the sector since the banking crisis six years ago.
So far £150bn in fines and legal costs have already been incurred by big-name banks, according to analysts at Morgan Stanley, who reckon that in the next two years Britain’s big five will incur another £21bn – with other European banks and US firms taking that total to £45bn.
The UK banks have given an indication of the punishments they face:
■ Barclays still faces punishment for currency rigging after pulling out of last week’s settlement. It has admitted that the cost will be at least £500m.
■ Barclays is also fighting a £50m fine from the City regulator for “reckless” behaviour when it raised cash from Middle East investors in 2008 in order to avoid a taxpayer bailout. The Serious Fraud Office is investigating.
■ Barclays also faces allegations in the US of fraud in its “dark pool” trading system, which could result in further financial penalties. The bank has denied these charges.
■ RBS is set to be fined for its IT meltdown in 2012, which left customers unable to access their own cash. That penalty could be announced this week.
■ RBS also expects a fine from US housing agencies for mis-selling bonds before the financial crisis. It has set aside just under £2bn to cover this and litigation relating to the packaging up of the bonds, which later collapsed during the credit crunch.
■ Standard Chartered is facing a fresh investigation in the US for breaching sanctions to Iran. It had to pay out £400m of penalties two years ago in connection with these offences.
These charges are added to a wide range of other issues that loom over the industry, such as the ongoing cost of compensation for payment protection insurance mis-selling – which is already approaching £18bn – and payouts for the mis-selling of interest rate swaps to small businesses.
Last week’s revelations of the free-for-all culture in the dealing rooms of the City also look set to be repeated soon. Other regulators are still investigating the foreign exchange markets and US attorney general Eric Holder expects his department to finish the investigation “relatively soon” – a development that could lead to both civil and criminal charges. The banks which have already taken a hit could face fresh penalties.
Much of the focus will be on Barclays, which did not take part in last week’s co-ordinated “settlement” with the FCA and CFTC because of Benjamin Lawsky, the banking regulator at the New York Department of Financial Services. Lawksy is said to said to have considered the penalties too low.
While Barclays shares fell after its unexpected decision not to take the FCA deal – which came with a 30% co-operation discount – other banks shrugged off the cost and reputational hit. Shares in HSBC and RBS were largely unmoved.
This sparked a debate about whether fines really have any impact, and whether it would be more effective if bankers were jailed for their part in any wrongdoing.
Some investors admit that they have been put off by the scale of the bills. Neil Woodford, one of the City’s most prominent fund managers, sold all his stock in HSBC at the end of the summer, citing the risk of fine inflation.
Robert Talbut, chief investment officer at Royal London Asset Management, also has questions.
“The fundamental question which is yet unanswered is: how compatible are the requirements of regulators for financial stability, the needs of banks to achieve an acceptable return on capital, and the provision of finance which can help deliver growing economies? It appears to me that until we calibrate this equation that we will continue to struggle with achieving the right behaviours and having them acceptably rewarded.”
The level of fines – while too low for some – has also worried the deputy governor of the Bank of England, Andrew Bailey. The most senior banking regulator, Bailey has questioned whether such huge fines might have an impact on financial stability, by making it harder for banks to build up capital cushions if they have to dig deep to pay penalties.
This argument cuts little ice with those who are frustrated by the fact that no bankers have been put behind bars for their role in the financial crisis.
Roger McCormick, managing director of the CCP Research Foundation and a former visiting professor at the London School of Economics, pointed out that criminal investigations were under way. Some 13 individuals face charges linked to Libor rigging. The SFO’s investigation into the foreign exchange markets is in the early stages; and Chancellor George Osborne on Friday promised resources for action by the Serious Fraud Office.
McCormick, whose organisation keeps a running tally of the “conduct costs” of banks, said fines did matter, in part because of their shaming effect. But he thinks they work best in tandem with other methods of cleaning up City behaviour and wants to set up forums for top bankers to discuss the “grey areas” involved their in day-to-day business.
But former City minister Lord Myners insisted that fines did not work and that senior bank executives should be forced to take responsibility.
He said: “The only thing which will affect behaviour will be an absolute insistence from the top of the banks that behaviour must be exemplary and a zero tolerance of anything which falls short.”
He added: “It’s inconceivable that the odour of what was going on did not reach the noses of those at the top.”
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