On 12 November 2014, six of the world’s largest banks reached settlements with five different regulatory bodies and were fined a total of US$4.3bn for their attempted manipulation of a key foreign exchange (“forex”) benchmark, the WM Reuters (“WMR”) fix. Each of the five UK Financial Conduct Authority fines surpassed the previous record of £160m levied upon UBS for its role in the LIBOR manipulation scandal. There are indicators that these early settlements and fines represent only the tip of the iceberg for the forex market, as banks and their traders may be exposed to further fines, costs, damages and possibly even criminal sanction.

The WMR fix is a benchmark rate set according to actual forex trades transacted on various electronic trading platforms within a one-minute window at certain times of the day. WMR rates, which are available for several currency pairs, are widely used for trades by a variety of forex market participants for many reasons, including their perceived fairness when compared to prices quoted by forex dealers on an ad hoc basis.

Ironically, however, regulators have uncovered collusion by bank traders designed to control the flow and pricing of trading during the relevant time periods, so as to manipulate WMR rates to their advantage, but at their clients’ direct expense. The evidence acquired by the regulators includes transcripts from Reuters instant message chatrooms participated in by some of the most senior forex traders in the market, many of whom have now left their posts as a result of the revelations. These chatrooms were given suggestive names, such as “The Cartel” and “The Bandits Club”. The transcripts record the sharing of client orders, planned co-ordination of trades designed to move the market and subsequent praise of successful attempts to do so.

The regulatory findings range from a lack of proper supervision that would have prevented the misconduct, to attempted manipulation. However, no findings of actual manipulation have yet been reached. This may reflect evidential difficulties, or a desire to achieve swift settlements with the banks concerned in return for their acknowledged co-operation.

It is clear that further regulatory findings will emerge. Some banks who have admitted being under investigation (including Barclays) have yet to reach settlements with regulators. Barclays has publicly admitted withdrawing from the recent settlements at the eleventh hour in pursuit of a more “general” settlement, by which it meant one that will involve other regulators who did not participate in those settlements. The New York Department of Financial Services may well be at the top of that list, as under its current head Benjamin Lawsky, it has acquired a reputation for levying heavier fines than other US authorities, federal institutions included. The US SEC is said to be another investigating the misconduct.

Criminal investigations in both the US and the UK have also been opened, but are in their early stages. It is rumoured that the US Department of Justice will level charges at one bank before the end of 2014, although there is only speculation over who that bank might be. Individual traders may not find themselves immune from prosecution, either and, in fact, the DOJ has already begun interviewing individual traders in London.

Thus far, civil courts have been relatively untroubled by the issues. The only proceedings reported to have been filed are two antitrust class actions brought by various pension and investment funds in the US (In Re Foreign Exchange Benchmark Antitrust Litigation and Simmtech Co. Ltd v Barclays et al.). Similar actions brought in relation to LIBOR manipulation were summarily dismissed earlier this year, but certain differences in the way LIBOR and the WMR fix are set may make these latest cases distinguishable.

One key difference between the LIBOR and forex manipulation scandals is that the latter involved direct customer trading. This would make it easier for those customers seeking damages to establish that the banks’ actions were in breach of contractual and/or tortious duties owed to them. On the other hand, it could be hard to quantify losses given the difficulties of proving the counterfactual, i.e., what the WMR fix would have been were it not for the manipulation. Having said that, sophisticated economic models may fill the void.

Mis-selling claims may also result, given that currency derivative contracts are often linked to the WMR fix. Disgruntled investors may seek to have these contracts declared void on the basis that they would never have entered into them had they known that the reference exchange rates were being manipulated. Such a claim was made in the context of LIBOR manipulation and interest rate derivative contracts in the well-publicised Guardian Care Homes case against Barclays Bank, but as that case was settled there is no court precedent.

Interestingly, the press reports suggest that the forex market may be plagued by other abuses, also, including the unauthorised taking of profits. We would certainly not be surprised if this were to be revealed as a widespread practice, as we acted for an investor who successfully clawed back some US$3m of unauthorised and undisclosed profit from its broker. Such claims would be much easier to establish. (See previous client alert).

It is perhaps not surprising to some that the forex market, being as it is largely unregulated, should have fallen subject to abuse. In fact, there have already been suggestions, including from the UK government, that regulation will be introduced. One thing that remains certain is that the recent regulatory fines do not signal the end of the story.