Could your business be affected by Forex mis-selling?
September 2015 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
With the widely publicised cases of mis-selling in relation to interest rate swaps drawing to a close, attention has now turned to other forms of financial mis-selling by the banks. These primarily relate to the LIBOR rigging scandal and increasingly to foreign exchange (Forex) products sold to SMEs. The increase in media attention on the behaviour of high street and investment banks, and the hangover from the financial crisis have increased customer fears regarding potential losses which may have flowed from the mis-selling of Forex products.
In many cases, UK companies that have interests abroad have foreign bank accounts to collect payments from their customer base in the local currency. When exchanging these funds to sterling, they often wish to protect themselves against currency fluctuations by hedging their risk using various types of derivative contracts offered by their bank. These could include forwards where a business buys or sells a foreign currency at today’s price, to more complex structured products which offer more rewarding payouts if certain factors are realised. Such structured products are, of course, more risky and have a significant potential downside when rates are more volatile.
Unfortunately for SMEs, in recent years the banks have become increasingly persuasive, pushing customers to purchase more complex options as these are far more lucrative than simple spot or forward Forex trades. In some cases, such structured products may have been entirely unsuitable for ordinary businesses due to their complexity.
Typically, customers were provided with a complicated presentation by the bank with a detailed disclaimer attached. This often included a clause to the effect that the bank was not providing any advice to the customer in relation to the specific products mentioned in the presentation. In many cases, customers who were tempted into buying these products did not obtain independent advice from their financial advisers or accountants in relation to the potential risks involved.
Instead of being protected by these products, businesses were exposed to unnecessary risks and significant financial liabilities. The recent volatility of the currency markets have had a grave effect on some customers who have been locked into these sophisticated products.
In cases currently being litigated by customers who allege they were mis-sold interest rate swaps, the banks have sought to rely on the ‘no advice’ disclaimers in the contracts as ‘basis’ clauses. The basis clause is described as the basis upon which the parties are said to have entered into the contract. The banks have asserted that the effect of these clauses is that it prevents the customer from raising the issue that the bank was advising them regardless of what the representative may have openly said to the customer. It is highly likely that faced with mis-selling claims from customers who purchased complex Forex products, the banks will put forward a similar argument. These swaps cases are currently being appealed, and will hopefully provide some judicial clarity on the subject of basis clauses.
Forex manipulation by the banks
In May 2015, the Financial Conduct Authority (FCA) fined Barclays over £284m for failing to control business practices in relation to its Forex business in London. This was the largest financial penalty ever imposed by the FCA or its predecessor, the Financial Services Authority (FSA). The FCA found that between 2008 and 2013 “Barclays’ systems and controls over its Forex 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 their clients’ activities and attempting to manipulate stock FX currency rates, including in collusion with traders and other firms, in a way that could disadvantage those clients and the market”.
Businesses may be able to add weight to a claim against their bank for mis-selling of Forex products in light of the allegations of rate manipulation by the banks.
It is fair to say that a bank represents to its customer that the rates upon which the payments for their products are based were properly and honestly calculated. If the customer had been aware that the bank had been tampering with the Forex rate for their own gain, in all likelihood they would not have entered into the contracts for the Forex hedging product in the first place.
In order to make a claim for misrepresentation, the customer will have to show that the bank made an untrue representation and the customer had been induced to enter into a contract based upon it. The customer will then be faced with a twofold test of establishing their level of loss caused by the manipulation and showing on the balance of probabilities that the bank’s actions caused the loss.
In view of the evidential hurdles that have to be overcome, coupled with the lack of legal authority on this topic, it is difficult for customers to decide what action to take at this stage. Terms and conditions of Forex products purchased by customers should be studied carefully and thereafter legal advice should be obtained to establish whether any losses were directly attributable to the Forex rates supplied by the bank during the relevant period when the losses occurred.
Ultimately, if it can be shown that the manipulation of the rates by the bank has caused losses, then the customer is entitled to be put back into the position it would have been in had it not purchased the products in the first place.
Finally, customers should also bear in mind the strict limitation rules which will govern any claim against their bank. Contractual limitation runs from the date the agreement was made; however, any claim in tort (such as misrepresentation) runs from the date of the breach. In both cases the applicable time limit is six years, but customers should seek legal advice in relation to the limitation and where necessary issue a claim protectively in order to stop the clock ticking.
Jonathan Dinsdale is a solicitor at Colemans-ctts. He can be contacted by email: firstname.lastname@example.org.
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