Forex trading cases are back in the headlines after record settlements by a group of banks with UK and U.S. authorities. The best coverage is in the FT (subscription required).

We commented in a briefing a few months ago on the approach of the authorities, especially the FCA, to allegations of benchmark manipulation. The trends identified there seem to be playing out: very large penalties based on what were, in essence, failures of supervision and, sometimes, of ethics.

A feature of the cases is that it’s very difficult to identify concrete losses to customers, and the settlement agreements don’t really try. The banks may have felt they had little choice but to plead guilty and sign up to yet further compliance work, as well as a period of probation. The fines have been seen as a success for the FCA, DOJ and other regulators. Martin Wheatley, the head of the FCA, has said that the heavy fines have had a positive impact on conduct within the financial services industry.

There has been plenty of commentary in the UK media of the ‘why is no-one going to jail’ variety. However, in the UK at least, the legal position of individuals is somewhat different from that of the banks. It’s worth remembering a few key points:

There is no law against attempting to profit from movements in financial markets. Moreover, if someone wants to add some margin to the price he quotes, he is entitled do so, unless he has previously made a clear promise not to or is under some other sort of fiduciary obligation. The spot forex markets, especially euro/dollar, are the largest and most liquid in the world. They are not regulated. A trader’s counterparty (who will almost always be a very sophisticated entity) will generally know if a quote is out of sync with the market and can very easily go elsewhere.

To bring any charges against individuals, the UK authorities must rely on general criminal law. There are a few possibilities here, the most likely being:

  • The cartel offence under S.188 of the Enterprise Act 2002;
  • A fraud offence under S.1 of the Fraud Act 2006;
  • The common-law offence of conspiracy to defraud (which has been beset by problems in recent years).

Without expanding this into a detailed treatise, and without commenting on any individual case, prosecutors may well encounter some conceptual problems in adapting these offences to the practices of spot forex markets. The mental element is essential. Selective quotation from trader-talk in the media is all very well, but these snippets may tell only a part of the story of any individual’s state of knowledge, belief or intention about a specific market, trade or customer. There is a rather depressing tendency for politicians and others to assume that regulatory findings of misconduct must translate through to individual criminality. That’s not necessarily the case. Everyone is entitled to due process and the presumption of innocence, even those who work in finance.