UK banks hit with huge fines over corruption

In the latest of many scandals to damage British banking’s reputation, six banks have been fined £2.6bn for fixing the currency exchange market. Can they ever regain the public’s trust?

They gave themselves nicknames like ‘the A team’, ‘the players’ and ‘the 3 musketeers’ and talked on chat rooms as if they were playing computer games. ‘I’d prefer we join forces.’ said one, ‘perfick,’ replied the other, ‘let's double team then’. These weren’t casual gamers, however, but bankers working together to fix the global currency exchange market for their own profit.

Their online exchanges became evidence in an investigation into how employees at six major banks, including HSBC and RBS, had been illegally manipulating the foreign exchange (forex) market over six years. The UK’s Financial Conduct Authority (FCA) and its American counterpart have just collectively fined the banks £2.6bn.

The global economy relies on the buying and selling of goods and services that are paid for in various currencies, such as dollars and euros. An incredible £3.3 trillion of currencies is traded daily and every day their relative values are minutely adjusted. The greedy bankers made bets on what these adjustments would be while rigging the result so that they were always right.

The forex scandal is another blow to banking’s already tarnished reputation. The damage began with the Payment Protection Insurance (PPI) scandal in the mid 2000s. PPI was marketed as a safety net in case a borrower could not make the payments on a loan, perhaps through illness or job loss. Yet it emerged PPI was largely a scam and its protection mostly worthless. Banks were ordered to return around £16bn to customers.

Then in 2008, the collapse of Lehman Brothers, a sprawling global bank, almost brought down the world’s financial system. UK taxpayers had to bail out the irresponsibly over-extended British banks with an £850bn loan. Even so, the ensuing chaos created the worst recession in 80 years.

Just as this forex scandal hits, some banks are only now reaching settlements over Libor rigging, in which insiders also conspired to game the financial system.

Out of credit

Chancellor George Osborne says that this £2.6bn fine shows the government is taking 'tough action’ to ‘clean up corruption in the City‘. While these scandal stories anger the public, the fines prove that the UK is a trustworthy place for international businesses to trade currency and that wrongdoing will be exposed.

Yet even the FCA's report acknowledges this news ‘undermines confidence in the UK financial system’. The public has long lost trust in the ethics of banking, where bankers receive excessively high salaries and bonuses. Fines are not enough. Until guilty bankers are treated like any other criminal and face prison, the reputation of British banking will remain in tatters.

You Decide

  1. Is this £2.6bn fine sufficient punishment for the banks or are they getting off too lightly?
  2. Are the corrupt forex traders as bad as any other kind of criminal? Do they deserve to face jail sentences?

Activities

  1. Form a group. Imagine you work in a bank, and you are given the opportunity to make a lot of money by cheating the system. List what would tempt you and what would hold you back, and decide if you would be more likely to break the rules.
  2. Using the links in ‘Become an expert’, research this and five other banking scandals from history. Write the content for a webpage that gives a short paragraph or two about each one.

Some People Say...

“We would all cheat if we thought we could get away with it.”

What do you think?

Q & A

Why should I care what bankers are up to?
Because if they are fixing the market, they are cheating millions of other people out of their money. We would expect someone who cheated in sport to be brought to justice, so why should it be different for bankers?
Bankers are always up to no good. Can’t we do without them?
While banks always seem to be in the news for the wrong reasons, they have a vital role in making the economy work. Aside from their obvious role in providing a safe place for people to keep their money, banks provide loans to start businesses, facilitate payments between industries and invest in industry. They organise the entire movement of capital throughout the economy.

Word Watch

Currencies
The US dollar is the most traded currency in the world and many things, like oil, are priced in dollars outside of the US. The second biggest is the Euro, then the Japanese Yen.
Customers
A survey found that around 40% of customers were not even aware they had been sold PPI because it had been bundled in with other services.
Collapse
US banks had started offering mortgages — loans on houses — to people who were highly unlikely to be able to repay them. Banks then sold these loans onto other banks packaged as seemingly safe investments. When people couldn’t repay their mortgages, the banks ran into trouble.
Loan
The banks were bailed out because they were seen as ‘too big to fail’. Their size, complexity and interconnectedness were such that the rest of the financial system and the economy would have faced severe consequences, if they had collapsed.
Libor
This is the London Interbank Offered Rate which is set daily. It is shows the rate at which banks can borrow from each other and is used as a benchmark for many financial instruments, like mortgages.
City
The name given to London’s financial centre.

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