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10 Jul 2014

David Corker published in Finance Monthly magazine commenting on market abuses

Foul! Showing market abuse the red card

“It’s clear that things in these markets are not going to continue as before but the question is whether changing anything will actually change anything significant. Will the going really get tougher for the few who exploit the many?”

Since the LIBOR scandal erupted in mid-2012 there has been a wave of allegations that many other financial markets have been rigged by banks to the detriment of their customers and the public. The eye of the storm has continued to hover over alleged systemic benchmark manipulation. Barclays was heavily fined last month in relation to manipulation of the benchmark which fixes the price of gold. In relation to the massive and unregulated FX market, the head of the FCA Martin Wheatley has warned that his organization’s investigation of traders’ activities here could uncover abuses “every bit as bad as LIBOR.”

Perhaps in reaction to pervasive disquiet about the integrity of these commodity price fixes, the London Metal Exchange just recently announced that it would preserve its open-outcry trading ring. Until recently it had planned to abolish it holding that it was an outdated regime for the setting of metals prices. Suddenly everything has changed.

The Government has also demonstrated its conversion to the view that there is a lot wrong with financial markets. Moreover, it appears to have decided that not to be seen to be doing something about repairing them will mean that, come next year’s election, it will be on the losing side of the argument as to whether the City is a friend or predator on the British public.  The Chancellor, in particular during last May and June, unveiled a large number of initiatives all predicated on the view that its problems are serious and structural rather than a few isolated ailments.

These are the initiatives which the Treasury has announced:

  • In May, a review of the FCA’s enforcement machinery was presented as a sign of the Government’s unwavering commitment to ensure that financial wrongdoers will be held to account. However, what is broken about the existing regime was not identified.
  • In his Mansion House speech in mid-June, Mr Osborne took this keynote opportunity to express stern words about the lack of standards in the financial industry. He then announced firstly that the bespoke criminal offence designed to criminalise tampering with LIBOR would be extended to cover similar conduct in relation to any financial benchmark. He promised a bill enabling this by the autumn. Secondly, the setting up of a Bank of England-led committee with the broadest of canvasses. To conduct a “fair and efficient markets review” with a mandate to make recommendations within twelve months. Thirdly, an extension of the criminal law to cover certain types of market abuse about which he gave scant detail.


Around the same time as Mr Osborne’s speech there was a slew of other related Government announcements.  Plainly midsummer was the moment not to merely cast some pebbles into the City’s pond but to lob in splashy rocks.

Taking the mantle from the Treasury, the Home Office kicked off with the introduction to Parliament of its Serious Crimes Bill, clause 41 of which is intended to incriminate professional advisors and intermediaries who provide assistance to an “organized crime gang”. Moving across Whitehall to the Ministry of Justice, Ken Clarke was revived and appointed to lead an impromptu review of enforcement of the Bribery Act.  From the Attorney General’s  Office came the news that active consideration was suddenly being given to the SFO Director’s long-ignored proposal that corporate criminal liability should be widened to include an new offence of failure to prevent fraud.

It’s clear that things in these markets are not going to continue as before but the question is whether changing anything will actually change anything significant. Will the going really get tougher for the few who exploit the many? Legislation and regulation of financial markets introduces complexity and just like tax legislation or codes this creates the opportunity for smart or adroit people to spot loopholes and to profit. Indeed experience especially from the US shows that sometimes it is well-intentioned new laws designed to protect customers that end up creating these opportunities.

If the allegations of malpractice concerning FX are credible, the Government will need to react by framing a yet another new criminal offence; this time in order to ban front-running. That will be a formidable task. Whilst all will agree that this is indefensible there will inevitably be intense lobbying around ensuring that pre-emptive risk-sharing or reinsurance is not caught. That well-informed and innovative activity is similarly not criminalized and above all that this definition, in order to avoid regulatory arbitrage, will be adopted internationally.

The prospects for real change are also not encouraging because recent events suggest that much of the problem may emanate from the regulators themselves. In LIBOR the forthcoming trials of the rate-setters will no doubt explore the acquiescence of the then deputy governor of the Bank of England to “low-balling”. Chummy exchanges between him and the then boss of Barclays makes for awkward reading. In FX, suspicion that the Bank condoned trader activities concerned with anticipating the WMR fix is deepened by the appointment of Lord Grabiner by the Bank to investigate what it knew and did. And in the next banking scandal yet to break, that concerned with High Frequency Trading, it is already apparent that some exchanges have been deriving substantial fees from allowing HFT companies privileged access to market information.

Finally, the Government’s pronouncements overlook that inconvenient detail, public spending. Criminal law concerned with financial fiddling is especially expensive to enforce and when Mr Osborne came into power, the budgets of entities like the SFO were slashed. So what’s intriguing is what will happen after the new offences reach the statue book after the political caravan has moved on.

The enterprise of making money out of money will always attract brilliant minds and when the potential to make vast profit appears available, the temptation to be ruthless and dishonest is constant. Responding to this challenge is an imperative for government and it must be hoped that its midsummer initiatives are a harbinger for effective regulation of the world of modern finance which yet permits free, fair and open markets to flourish.

David Corker, Partner, Corker Binning

The full article can also be found here.