The UK’s press is reporting two potentially significant developments in the Bank of England Internal Forex Investigation story. If they are true, they could have a material adverse effect on the reputation of the Bank of England and its governor, Mark Carney.

In early 2014,  the Bank became aware that its officials might have been involved in the attempted manipulation of the foreign exchange markets, and they might have facilitated collusion between market participants.

In March 2014, Mark Carney told the UK’s Treasury Select Committee (TSC) that the Bank was “acutely aware of [its] responsibility to complete a thorough, comprehensive investigation of all aspects related to this issue” – an investigation that was “incredibly important for the foreign exchange market and … fundamentally important to the integrity of the Bank”. Shortly afterwards, Lord Grabiner QC was appointed to carry out a detailed investigation.

Lord Grabiner’s report was published in November 2014, and it’s been heavily criticized since. These criticisms have not generally been about what Lord Grabiner did or did not do. Instead, they’ve been about the scope of Lord Grabiner’s inquiry, which – it is said – was set so narrowly by the Bank that its internal systems and controls, and some of its most senior officials, have avoided the public scrutiny and potential criticism that would have followed, if that scope had been more appropriately set.

The Bank’s most prominent critics have included:

  • Jesse Norman MP, a member of the TSC in the UK’s last Parliament, and the person who instructed Charles Bear QC to advise him about these issues – see our earlier blog, which is here; and
  • The then retiring TSC, which published an end of Parliament “wash-up document”, raising a number of questions about the scope of Lord Grabiner’s inquiry, before inviting the TSC that will be formed at the beginning of this Parliament to investigate – see our “washing-up” blog, which is here.

In the last few days, there have been two more significant developments.

First: it’s been widely reported that Jesse Norman MP will seek election as the chair of the new Parliament’s TSC. Although he has denied this, if Jesse Norman MP is elected as the chair of the new TSC, a TSC Bank Forex inquiry is much more likely to occur than would otherwise have been the case.

Second: today’s Financial Times is reporting that the US Department of Justice is apparently so concerned about the thoroughness and handling of Lord Grabiner’s inquiry and report, that it’s “secretly” asked to interview a senior UK-bank forex trader, as part of its own investigation, without informing the UK authorities that that’s what it’s decided to do. (There is no suggestion that the interviewee has done anything wrong, or that he is under suspicion in any way.)

Those who follow these stories will recognize an immediate irony in all of this. There is, for example, a high probability that the PRA (a subsidiary of the Bank) would almost certainly have insisted that a regulated firm in the same position as the Bank had set the scope of its “skilled persons appointment, investigation and report” much more broadly than the Bank was willing to contemplate for Lord Grabiner. There is also the fact that if the allegations (*) leveled at the Bank turn out to be true, the PRA would almost certainly have imposed a heavy fine and public censure on the Bank, if it had been a PRA regulated firm. (Sadly, of course, it’s not.)

In March 2014, Mark Carney told the TSC that “We cannot come out of this at the back end with a shadow of doubt about the integrity of the Bank …“. But that shadow clearly exists for now. The question is what, if anything, the Bank can do to remove it, if it wants to be regarded as the open and transparent organisation it so clearly aspires to be?

(* That the Bank’s internal systems and controls did not require relevant facts and matters to be escalated and/or that senior Bank officials failed to escalate them,)