Foreign Exchange (FX) Claims

Regulators on both sides of the Atlantic have levied huge fines on banks for manipulating Foreign Exchange (FX) benchmarks, but how do those businesses affected by bank misconduct recover their losses?

There have been many banking scandals in recent years. One of the most substantial, yet least written about, is manipulation of FX benchmarks. The numbers involved are staggering. In November 2014, six banks (HSBC, RBS, JP Morgan, Citigroup, UBS and Bank of America) were fined a total of $4.3 billion for manipulation of key benchmark FX rates. Further regulatory fines, this time for JP Morgan, Barclays, Citigroup, RBS and UBS, were announced on 20 May 2015; these amounted to $5.6 billion. FX litigation costs for major European Banks alone, have, from the start of 2009 to the mid-point of 2015, totalled just under $10bn. Commentators predict that litigation costs are about to increase sharply as the trickle of claims is set to become a flood.

Businesses that purchased FX derivatives in the period 2008 to 2013 may have suffered significant losses as a result of bank manipulation of FX benchmarks. Even where manipulation itself was not a cause of loss, it may be that claims can be brought where the products purchased did not operate in the way in which the bank represented that they would.

Businesses that purchased FX derivatives in the period 2008 to 2013 may have suffered significant losses as a result of bank manipulation of FX benchmarks. Even where manipulation itself was not a cause of loss, it may be that claims can be brought where the products purchased did not operate in the way in which the bank represented that they would.

What is FX Manipulation?

Regulators have discovered that confidential customer trading positions and order information was systematically shared between traders across various banks. In doing so, the banks’ traders were able to alter their trading positions to suit the interests of the banks. The banks also agreed certain trading strategies to attempt to manipulate FX benchmark rates for their own gain and at their customer’s expense. These findings will prove useful for any business affected by FX manipulation seeking to bring a claim in the courts.

Potential Claims

Businesses that purchased derivative products (for example, vanilla FX futures and forwards, or more complex products such as target redemption forwards) referring to an FX benchmark (such as the 4pm WM Reuters fix) may be able to bring claims if they are able to show that when entering into the derivative transaction they relied upon the representation that the relevant benchmark rate was what it was supposed to be, and would not be manipulated. The highest profile case in relation to manipulation of underlying benchmark rates is Graiseley Properties and others v Barclays, though it related to interest rate hedging products based on LIBOR. Graiseley 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. That is 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.

Businesses that sought to hedge their FX exposure through the purchase of derivatives may also have claims arising from the way in which these products were sold to them. FX hedging products can be complex, and there is evidence that many have been sold to businesses without adequate explanation as to their pertinent features, including their related costs and liabilities. In many respects, parallels can be found with the interest rate hedging product (“IRHP”) mis-selling scandal, which has left thousands of businesses unjustly out of pocket.

Unlike with IRHPs however, the FCA has been silent about how businesses affected can recover losses. They have not ordered the banks to carry out past business reviews and reimburse all those businesses that suffered losses. The only option open to victims of the mis-sale of FX hedging products appears therefore to be litigation.

Any business considering litigation against a bank for damages caused by FX manipulation and or FX derivative mis-selling has a range of options open to them in terms of grounding their claim. Below is just a sample:

• i. Breach of contract, whether in relation to express or implied terms.
• ii. Both fraudulent and negligent misrepresentation, in particular in relation to the representation that the relevant FX benchmark rate was a true and fair representation of what it was held out to be, and not the product of manipulation.
• iii. Unjust enrichment.
• iv. Private competition law based claims, grounded on ‘cartelist’ activity by the banks. There is currently a class action being pursued in the US which relates to a claim against banks for FX manipulation grounded in their breach of competition/antitrust law. Interestingly, the European Commission and the UK government have been seen to encourage private competition actions over the last few years, so this may be a fruitful area for claimants going forward.
• v. Breach of confidence, in relation to the unlawful sharing with other banks of confidential customer trading positions and order information.
• vi. Unlawful means conspiracy.
• vii. Tortious claims for loss caused by unlawful means.

What should affected businesses do?

Any business that considers it may have been affected by FX manipulation and/or considers it was mis-sold FX derivatives and suffered loss as a result, should consider instructing specialist solicitors at the earliest opportunity, bearing in mind that in general under English law a claim will be barred by statute six years after the original sale of the product.

Greg Johnson Solicitors works regularly with the top derivatives experts in the country (companies with the expertise and tools to undertake the necessary financial analysis). The firm has been instructed on several £100m plus claims and has a wealth of experience of securing successful settlements against banks.

For further information, please contact Adam Tudor.