In early 2014, the Bank of England was alerted to the possibility that Bank officials had been involved in the attempted manipulation of the foreign exchange markets, and may have facilitated collusion between market participants.

On 11 March 2014, Mark Carney, the Governor of the Bank of England, told the UK’s Treasury Select Committee (TSC) that the Bank had a “responsibility to complete a thorough, comprehensive investigation” of these issues.  That was “incredibly important for the foreign exchange market“. It was also “fundamentally important to the integrity of the Bank of England“.

These sentiments were echoed by Anthony Habgood, the then incoming chair of the Court of the Bank of England, who told the TSC on 25 June 2014 that the Bank’s reputation depended on an investigation that examined whether its officials knew about, or had information that should have alerted them to, the possibility of attempted manipulation and collusion.

On 12 March 2014, the Bank announced that it had appointed Lord Grabiner QC to investigate whether the Bank had, to paraphrase, done something it shouldn’t have done. Lord Grabiner’s Report was published in November 2014 and, in the Opinion of Charles Bear QC, it validly discharges the terms of reference Lord Grabiner was given. However, that doesn’t mean the Bank has met the objectives described by Mark Carney and Anthony Hopgood. In fact, the terms of reference Lord Grabiner was given were, in the Opinion of Charles Bear QC, so narrow that “the performance of the bank’s officials … has not be subjected to scrutiny in the way in which professional people are normally assessed when a serious problem comes to light“.

In this case the chief dealer of the foreign exchange desk … had a market participant report something to him. That report was introduced by a colleague who expressed serious concern. The participant used the language of manipulation and said banks wanted to “bully the fix” … These expressions of concern did not come in a vacuum but in circumstances where the chief dealer had already concluded that behaviour was going on which would be difficult to justify to a regulator. The chief dealer did nothing other than ask the trader to keep in touch. He took no steps either to report the matter to anyone else or actively to follow up with the trader … Assessing [as Lord Grabiner QC has done] what if any precise meaning it is possible to attribute to the statements in [that] conversation does not answer the questions (1) in what circumstances it should be the duty of a Bank official to take some further action when a concern is reported to him from the market…, (2) what further action would be appropriate …, and (3) what steps should be taken by senior officials to ensure that the duty, assuming there is one, is properly understood and enforced … At present the review process has only dealt with part of the general questions raised. It has not addressed all the broader issues which … the Chairman of the Bank’s Court … appeared to agree … were part of what ought to be investigated. The broader question of serious professional misconduct which would be a standard part of an equivalent investigation in other spheres of life was not part of the reference” (*).

If Charles Bear QC is right, and the Bank set the terms of reference for Lord Grabiner’s inquiry too narrowly, that wouldn’t be unusual. Narrow terms of reference can be proper and reasonable. But they can also be used to mitigate the risk that an investigation will find a serious problem, or a problem that stops at the door of a senior manager. If that is what happened in this case (and there’s no current reason to suppose that it is), the Bank may have a risk or issue to address.  Even if that isn’t what happened in this case, the Bank may still have a risk or issue to address, if such narrow terms of reference create the impression that this is – or might be – the case. This  generates a second set of potential issues, but this time for the TSC. The TSC intervened when the FCA’s board decided to appoint a senior lawyer to carry out an inquiry into the handling of the FCA’s announcement that it was proposing to investigate the fair treatment of long-standing life insurance customers, because the TSC wanted to be sure that the scope of the inquiry, and the response to it, would be handled appropriately. So responsibility for these matters was shifted from the whole of the FCA’s board, to its non-executive directors (only). There is therefore perhaps a question about why the TSC didn’t intervene in this case, in a similar way – assuming, of course, it didn’t. If, in fact, the TSC did intervene, or it was aware of the terms of reference but said nothing, that might generate a different set of issues altogether.

At this stage, one thing is clear: although the Bank may have been allowed to mark its own homework on these issues; and the TSC may have allowed it to do so, Jesse Norman MP, the member of the TSC who instructed Charles Bear QC to advise on the scope of Lord Grabiner’s inquiry, is unwilling to allow the TSC to mark its own homework as well.

(* see paragraphs 34 to 36 of the Opinion of Charles Bear QC, which is available here.)