On Thursday, I wrote about two developments in the Bank of England Internal Forex Inquiry story, and one of them is “growing legs”.

Some of Thursday’s UK newspapers reported that the US Department of Justice was so concerned about the thoroughness and handling of the Bank of England’s Internal For Inquiry, that it had started its own investigation. Since then, the Bank has sought to defend its position by repeating the comments made by Mark Carney, the Bank’s governor, to the UK’s Treasury Select Committee (TSC) on 3 March 2015, that: “In my judgment, the original Grabiner report was thorough and comprehensive … He had free reign to investigate absolutely anything he needed to, and he had unlimited resources to do this”. 

The Bank probably hopes this will be an end to the matter:

  1. When the Oversight Committee of the Court of the Bank of England appointed Lord Grabiner QC to investigate what had happened, it used narrow terms of reference: “…the investigation … will focus on … whether any Bank official … was involved in … or … aware of manipulation of the foreign exchange market …; … the sharing of confidential information …; or … any other unlawful or improper behaviour…” between July 2005 and December 2013″. These terms of reference have been criticised as too narrow because they don’t also ask whether any official ought to have known about any of these things – the standard that ordinary professional people are held to in a Court of law; and
  2. The Bank’s response – effectively that, notwithstanding his terms of reference, LordGrabiner QC was free to investigate as he saw fit, and that’s what he did – has some merit. For example:
  • In the first paragraph of the Conclusions to his report, Lord Grabiner explains that: “I have found no evidence to suggest that any Bank official was involved in any unlawful or improper behaviour [And] I have found no evidence that any Bank official was aware or should have been aware of any unlawful or improper behaviour” either (*); and
  • In his letter to the TSC of 17 March 2015, Anthony Habgood, Chairman of the Court of the Bank, explains that “…the Oversight Committee expected that Lord Grabiner would judge the conduct of Bank officials against a standard equivalent to an objective test of what they should have known and done. … I had no doubt that Lord Grabiner saw it that way and … in my view, his report made it clear. I have since personally spoken to him and he has confirmed that my view of his understanding … was correct“.

However, if these things are enough to resolve the “ought to be” issue, they are unlikely to be enough to resolve the wider “Bank marks its own home work” issues as well. For example:

The TSC’s end of Parliament “wash-up document” raises a number of unanswered questions, including:

  1. Were the Bank’s processes for setting up the inquiry appropriate? What can be improved?
  2. What view should be reached about the quality and completeness of Lord Grabiner’s report and conclusions?
  3. Was Lord Grabiner’s oral and written testimony to the TSC adequate and appropriate? (The relevant session was tense, to say the least – especially towards the end, when Lord Grabiner was being questioned by Jesse Norman MP); and
  4. Has the Bank’s response to Lord Grabiner’s report fully addressed the issues he raised, including the detection of improper behaviour?

Charles Bear QC has also raised a number of unanswered questions:

  1. If a concern is reported to a Bank official from the market, in what circumstances will that official have a duty to act? (In this case, Lord Grabiner found that a market participant had raised concerns with a Bank official, and that the official did not escalate his concerns, or follow-up with the reporting market participant);
  2. If such a duty exists:
  • What follow-up action would be appropriate? and
  • What steps should the Bank take, to ensure the duty is properly understood and enforced?

(It’s clear from Lord Grabiner’s Report that the Bank (a) did not have a relevant escalation policy until 1 August 2012; and (b) that that policy had to updated on 17 December 2013.)

There is also at least one other set of questions that ought to be asked and answered if we want to be sure that the Bank, and its senior managers, are being held to the same standards as PRA and FCA authorised firms, and their senior managers. In his report, Lord Grabiner explains that: “I have carefully considered whether [the relevant official’s] superiors should … be criticised [but] I do not think they should be”. However, this is because, I have seen no evidence that they were aware that banks were having open discussions about aggregate fix positions … Nor do I think that they should have been aware of this issue as it was neither escalated to them nor raised in market intelligence reports…” But: if the Bank had been authorised and regulated by the PRA and/or FCA, it seems very likely that they would have expected rather more. The question is not so much, were the managers made aware of something they ought to have acted upon; and, if so, did they fail to act? It is: were they were sufficiently pro-active, when they managed their officials, and when they created and maintained the Bank’s managerial and other systems and controls, so as to ensure that all relevant and material matters would be identified and escalated to them, or not?

If these questions had been investigated by the PRA / FCA, it is at least possible that they would have gone on to criticise the managers of the relevant Bank officials for their failure to ensure that the Bank had, and that it properly enforced, an adequate escalation procedure; and (these failures aside) for their failures to uncover these issues in their regular “bi-lateral” and other discussions with the relevant officials. In other words, the potential senior management / systems and controls failures at the Bank are not so much about whether the Bank’s senior managers failed to act on something they were told about, but whether they failed to create an environment in which the relevant issues would be identified and escalated to them for action. The apparent absence of an escalation procedure is a material part of these potential failures, but it’s unlikely to represent the whole of them.

If this is right, it creates a significant problem for the Bank, because the Bank official who was most heavily criticised by Lord Grabiner was already very senior. So, if there were senior management failures, they may well have been very senior management failures indeed. And if that’s right, it may just be enough to ensure that this story runs and runs.

(* This has been criticised too. This may be because (a) Lord Grabiner’s terms of reference were focussed on whether a Bank official “was involved in … or … aware of” certain things; (b) the main body of Lord Grabiner’s report seems to focus on the same issues; (c) the only reference to whether a Bank official should or ought to have been aware of anything appears in Lord Grabiner’s Conclusions; and (d) unlike many of his other Conclusions, this one is not cross-referenced to facts or matters referred to in the body of his report, or elsewhere. Perhaps to some commentators this suggests that, when Lord Grabiner asked himself whether a Bank official ought to have been aware of something, he did so as an afterthought, and rather more was required than that. If that is the basis for these criticisms, it’s not yet clear whether it’s merited, or not.)