The best deterrent to rogue traders in financial markets is the threat of jail, one of the Bank of England’s deputy governors said on Wednesday.
Nemat Shafik told MPs on the Treasury select committee that criminal sanctions would be more effective than fines in preventing individuals from breaching market rules.
“In some of the research that’s been done on deterrents, criminal sanctions are top of the list in terms of dissuading people from doing certain things .... Making them pay is further down the list in terms of impact,” she said.
She said she expected banks to axe their bonuses in the wake of last week’s £2.6bn penalties on six banks for manipulating the foreign exchange markets.
The Financial Conduct Authority, one of the regulators involved in levying last week’s fines, has passed information to the Serious Fraud Office which has the power to bring criminal charges against individuals.
“It’s a good thing that these cases [have been] passed to the SFO,” said Shafik.
She was asked by Andrew Tyrie, the conservative MP who chairs the committee, what assurance she could give that individuals involved in the rigging of the £3.5tn a day markets would be held responsible.
Part of this would be done through bonuses, said Shafik who said the Bank of England’s regulatory arm, the Prudential Regulation Authority, would review the pay policies of the banks involved. These include HSBC and bailed out Royal Bank of Scotland.
She said that it was up to the banks’ remuneration committees to make decisions on pay. But she expected banks to withhold bonuses that are yet to be paid and reclaim bonuses which have already been paid.
Shafik said banks should use those powers “in egregious cases and I think these are clearly egregious cases of misconduct.”
She would not disclose how many individuals – many of whom were not very senior – the Bank expected to be penalised but indicated that it expected to go beyond those who were found to have been involved in rigging the foreign exchange markets. The regulators published chats between traders in which they used phrases such as “dont want other numpty’s in mkt [market] to know” as they traded at crucial moments when benchmark rates are set.
Shafik, who was giving evidence because of her role in running the fair and effective markets review for Chancellor George Osborne, said these benchmarks would now be regulated. She said the review would look at whether the “spot” foreign exchange market – the minute by minute price of currencies – needed to be regulated.
Elizabeth Corley, who runs Allianz fund managers in London and is chairing one of the panels for the review, said that fines were borne by shareholders such as pension funds.
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