FX derivatives losses: What you need to know to help clients
This article by Stevie Loughrey was first published in the Accountancy Age on 11 February 2015
You've read about the huge fines the regulators have levied on banks for manipulating forex benchmarks, but how do those businesses affected by bank misconduct recover their losses?
When companies have incurred significant financial loss as a result of mis-sold products their accountant is often the first port of call. It is therefore important to know the options available for those businesses seeking redress.
In recent weeks, the FCA hit five banks with fines totalling over £1.1bn (split between: Citibank (£226m), HSBC (£216m), JPMorgan Chase (£222m), RBS (£217m) and UBS (£234m). The fines were for allowing "FX traders to put their banks' interests ahead of those of their clients, other market participants and the wider UK financial system". The FCA's investigation into Barclays' FX trading business continues.
While these fines have been successful in grabbing headlines and appear to suggest that "light touch regulation" is now a thing of the past, what they fail to do is provide any comfort at all to the businesses affected.
It was open to the FCA to order the banks to carry out a Past Business Review and compensate all those businesses who had suffered loss as a result of this market manipulation. However it chose not to do so.
This leaves the businesses affected with two options. The first is to pursue a complaint via the Financial Ombudsman Service (an option only open to micro-enterprises and only appropriate where the loss incurred is relatively small - less than £150,000.) The second is legal action (or at least the threat of it). Given that the vast majority of businesses engaged in FX transactions tend to be larger companies, their choice will be a starker one; either let sleeping dogs lie and move on, or, consider bringing a legal claim.
Businesses that engaged in regular and substantial FX transactions where the relevant benchmark rate has been found to have been affected by manipulation are likely to have a legal claim if it can be shown that the market manipulation caused financial detriment.
The leading case in relation to manipulation of underlying benchmark rates is Guardian Care Homes (Graiseley Properties and others) against Barclays, though that related to LIBOR rather than an FX benchmark.
Guardian contended that there was an implied representation that LIBOR was true LIBOR, as opposed to manipulated LIBOR, and because the Bank's regulator had subsequently found that Barclays had colluded to manipulate LIBOR, the various interest rate hedging products it had entered into with Barclays should be rescinded. Unfortunately there is no judgment and therefore no binding precedent, because Barclays settled the case in April 2014, just a few weeks before the trial was due to take place. The settlement is subject to a confidentially agreement but is reported to have been worth circa £40m. This case is a good example of how the findings of the FCA and other international regulators can be used to support claims against banks.
Claims are likely to include the following causes of action:
a) breach of contract, by reference to express or implied terms;
b) misrepresentation (both negligent and fraudulent);
c) tortious claims for loss caused by unlawful means; and
d) unjust enrichment.
If businesses entered into FX transactions with one of the implicated banks on the dates on which manipulation took place (2008-2013), then advisers may be in a positionto carry out an analysis of their client's trading history to calculate the scale of possible losses.
In addition to those businesses who may have suffered loss as a result of manipulation of the underlying benchmark rates, there are also a large number of businesses that have been sold exotic forms of FX derivatives (for example Target Redemption Forwards) who may be able to bring claims - particularly if it can be shown that the nature and risks of these products were not properly explained to the business prior to entry.
Businesses that wish to complain should consult a specialist solicitor at the earliest opportunity because, under English law, there is ordinarily a six-year year window within which to issue proceedings (businesses that entered into FX transactions during the course of 2009 will need to move particularly quickly if they wish to seek redress.)
Businesses bringing claims should not expect banks to simply roll over upon receipt of a Letter of Claim. They will not. They will employ top solicitors and will fight the claim aggressively. Settlement will only be likely if the bank considers itself at risk of significant litigation, reputational damage, or commercial peril. It is unusual to bring a case of this nature to trial in less than 18 months so businesses should apply as much pressure as possible at the outset in order to try and secure a pre-action commercial settlement.
The path ahead is far from certain. However what is clear is that if those businesses affected do not make a complaint, they will have no prospect of recovering any of their losses.