The Financial Conduct Authority (FCA) has imposed a financial penalty of £284,432,000 on Barclays for failing to control business practices in its foreign exchange (FX) business in London. This is the largest financial penalty ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA).
Barclays’ failure adequately to control its FX business is particularly serious in light of its potential impact on the systemically important spot FX market. The failings occurred throughout Barclays’ London voice trading FX business, extending beyond G10 spot FX trading into EM spot FX trading, options and sales, undermining confidence in the UK financial system and putting its integrity at risk.
Georgina Philippou, the FCA’s acting director of enforcement and market oversight said: “This is another example of a firm allowing unacceptable practices to flourish on the trading floor. Instead of addressing the obvious risks associated with its business Barclays allowed a culture to develop which put the firm’s interests ahead of those of its clients and which undermined the reputation and integrity of the UK financial system. Firms should scrutinise their own systems and cultures to ensure that they make good on their promises to deliver change.”
Between 1 January 2008 and 15 October 2013, Barclays’ systems and controls over its FX business were inadequate. These failings gave traders in those businesses the opportunity to engage in behaviours that put Barclays’ interests ahead of those of its clients, other market participants and the wider UK financial system. These behaviours included inappropriately sharing information about clients’ activities and attempting to manipulate spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.
Barclays and other firms are already participating in an industry-wide remediation programme to ensure that they address the root causes of the failings in their FX businesses and that they drive up standards. As part of the remediation programme, senior management at Barclays and the other firms must take responsibility for delivering the necessary changes.
Barclays’ controls over its FX business were inadequate and ineffective. It primarily relied on its front office FX business to identify, assess and manage the relevant risks – however the front office failed to pick up on obvious risks associated with confidentiality, conflicts of interest and trader conduct.
Some of those responsible for front office management were aware of and/or at times involved in this misconduct, reflecting a failure to embed the right values and culture in Barclays’ FX business. Barclays’ control and risk functions failed to challenge effectively the management of these risks in the FX business.
Barclays engaged in collusive behaviour in which traders from different banks, including Barclays, formed tight knit groups and communicated through electronic messaging systems including chat rooms. Certain groups described themselves or were described by others using phrases such as “the players” – one chat room participant referred to himself and others in the chat room as “the 3 musketeers” and commented “we all die together”.
The information obtained through these groups helped traders determine their trading strategies. They then attempted to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements).
This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate at which it had bought that currency in the market to ensure a profit for Barclays.
Barclays’ control failings also meant that traders had the opportunity to benefit Barclays’ trading positions in FX options by attempting to manipulate fix or spot FX market rates to prevent Barclays’ clients from receiving pay-outs from the options they had purchased from Barclays.
The FCA also found examples of inappropriate sharing of confidential information by spot FX traders and sales staff, including sharing client identities and information about client orders. Disclosing these details gave other market participants more information about the activity of Barclays’ clients than they would otherwise have had, creating significant potential for client detriment.
The failings in Barclays’ FX business persisted despite similar control failings in relation to Libor and the Gold fixing, which were the subject of previous FSA and FCA enforcement actions. Although Barclays made some improvements following these enforcement actions, it failed to take adequate steps to address the underlying root causes of the failings in its FX business.