foreign exchange trust

The foreign exchange (forex/FX) sector within banks has unfortunately been portrayed in the media as having high-flying traders and extreme wink-and-nod culture of questionable dealings. Due to the misdeeds of a few FX currency traders, the reputation of several major banks have been put on the line as they now face regulatory fines.

During the spring of 2013, a foreign exchange insider contacted the UK financial regulator, the Financial Conduct Authority (FCA), to report suspicions of exchange rate manipulation. As result, the FCA announced in June 2013 that it was probing the conduct of several banks based on allegations that it had received. This was soon followed a few months later by Switzerland, as its regulator began its own series of investigations. In late November 2014, regulators in the UK, the U.S., and Switzerland imposed a total of $4.3 billion in fines against six major banks as a result of being charged with manipulating the foreign exchange market.

How have regulatory actions impacted the forex industry?

The disciplinary action by the regulators has resulted in a very cautious response by the banks. Banks have banned the use of online chat rooms for currency traders. Dozens of bank employees working with foreign exchange subsequently lost their jobs based on suspicions of misconduct. Compliance staff have been assigned to trading desks.

Bank staff are not the only ones that have been affected. Customers have diversified where they choose to do their business. Rather than consolidating their foreign currency exchange transactions with a select few institutions, they have started to spread themselves out more thinly by dealing with a wider range of banks than before. The public’s level of trust in banks has taken a hit.

In this new age of heightened scrutiny and increased transparency, what can the foreign exchange industry do to regain people’s trust and confidence?

Increased Automation
Banks have reassessed processes and are now moving to automated systems to process currency exchange transactions. By removing people from foreign exchange processing, it is hoped that there will be greater fairness and objectivity, since individual gain will no longer be a factor.

Greater Oversight and Enforcement
However, even with complex computer algorithms managing currency trading, there is still room for manipulation. Late last year, the New York State Department of Financial Services began investigations at two major banks to determine if their algorithms were used to intentionally rig exchange rates. Continued strict regulatory oversight and tougher enforcement by the banks’ own compliance officers are needed to mitigate the risk from faulty algorithms or rogue traders modifying them.

Increase Compliance Capacity
Whereas banks have been reducing head count in foreign exchange, they have conversely been increasing staffing levels within their compliance departments. For example, UBS Group is planning to grow its compliance team by 350 employees. This is a trend that is most likely to continue as banks find themselves overwhelmed by regulatory requirements and unable to adequately keep up the pace with their existing staffing numbers.

Rather than reacting in response to regulatory fines, banks should take a greater leadership role by being more proactive in their compliance activities. Perhaps banks can take a page out of the play book of foreign exchange companies. These companies clearly state on their websites how they adhere to all applicable rules, including anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. Then banks can rebuild their reputations in currency exchange by providing clear statements about their compliance measures and to follow through with adequate internal supervision to maintain the standards of integrity that customers expect from financial institutions.

Do you think regulatory fines are enough to deter banks from forex manipulation? Should we tackle misconduct at an international level and develop a system of accountability and standards?