Time Stamps (Foreign Exchange)

Austin Mitchell Excerpts

Tuesday 3rd February 2015 Westminster Hall

[Austin Mitchell (Great Grimsby) (Lab)]

I am most grateful for the extra three minutes, Ms Dorries.

I am grateful for the opportunity to raise the important issue of the time-stamping of all customer transactions in the foreign exchange markets. Time-stamping would prevent points from being skimmed off for the profit of the bank or the dealers, which is robbing customers of millions of pounds every year. In other words, it is facilitating theft. We must time-stamp foreign exchange transactions so that the rate at which the contract was made can be authenticated.

I first came across this issue a quarter of a century ago—it seems a long time ago—when a young trader came to me and said that dealers at the bank he worked for were skimming off points on trades on his account for their own profit. That, he thought, was a disastrous, dangerous practice, and amounted to theft from his clients’ accounts. He raised the issue as a whistleblower, and was fired in consequence. He first took the issue to the Securities and Futures Authority—a precursor to the FCA in the alphabet soup of authorities that regulate the financial industry in this country. In a letter to him on 4 September 1991, it said:

“Our own enquiries have confirmed the correctness of the view expressed by Mr Souliotis”—

that is the dealer—

“that although the opportunities for such malpractice appear to be many, the way in which the market operates and the audit trails…make the detection of such abuses altogether more difficult. Our enquiries continue however…To this end, we remain in discussion with the Bank of England.”

The buck passed to the Bank of England, and there it stopped and has remained stopped for 25 years. All attempts to end point skimming by imposing date stamps have been stopped by the Bank of England. Why? What it is doing I do not know, but it has effectively been facilitating theft and creating an atmosphere in which theft is easy and possible, and appears to be sanctioned.

I took the dealer, Mr Souliotis, to see Eddie George, who was then the deputy governor of the Bank of England. Mr George said several things. First, he said that the Bank had conducted a full inquiry. Secondly, he said that point skimming was not happening and the Bank could not find evidence of it. Thirdly, he said that banks as a whole would be too anxious to preserve their reputations to allow such a practice to go on—they are their own best guardians, in other words. Eddie George was wrong on all three counts.

When I took up the issue again under the previous Government, I looked into the inquiry done by Eddie George. The then Governor, Mervyn King, wrote to me on 26 August 2012 to say that the Bank’s investigation into the allegations had not taken place. He said that all the Bank did was ask the American Express bank—for it was they—to investigate itself, which it had. Not surprisingly, the American Express bank came up smelling of roses. Its reply to its self-investigation was, “No such thing has happened. What a terrible thought!” Mervyn King told me that the Bank had not conducted any interviews with any traders from the American Express bank.

After my meeting with Eddie George, I raised the issue in an Adjournment debate in the House. The then Economic Secretary to the Treasury, Anthony Nelson, while denying the accusations, told me after the debate that the Treasury knew the practice went on, but could not produce any evidence on the scale of it or who was doing it. I want to help them produce that evidence of point skimming off clients’ accounts by making date stamps a requirement.

That was where the matter rested, 25 years ago; the bank denied the thefts, the Treasury could not find evidence and the practice was apparently condoned. It has certainly continued since that time; it has come to the surface in the United States. The practices in America are much the same as ours. The two markets are similar and the traders are behaving in the same kind of fashion. The same practices go on in both foreign exchange markets.

The first piece of evidence from the United States is that in 2002, the Federal Bureau of Investigation conducted an undercover operation—a sting, in other words—called “Wooden Nickel”. The US attorney for Manhattan, James Comey, who is now the head of the FBI, uncovered in that investigation rigged currency trades in some of the best of the Wall street banks—the biggest banks. The operation led to 47 indictments, most of which led to convictions. Mr Comey said that

“a troubling thing was that similar rigged trading had been defrauding banks for as long as 20 years.”

I could have told him that.

The second piece of evidence from the States came in 2011, when the state employees’ pension fund in Virginia began a billion-dollar lawsuit against the Bank of New York Mellon, alleging overcharging on foreign exchange transactions for the pension funds. That overcharging included a charge of $135,000 on a $12.5 million trade. The proper rate would have been $6,250. They were given a fake rate and there was no possibility of chasing that up, because there were no time stamps on the transaction. The lawsuit went on.

With that evidence, I thought it necessary to raise the matter again in this country. I went back to what is now the FCA and spoke to Clive Adamson, the director of supervision. As a man from a banking background, he should well know what was going on; he was accustomed to doing banks’ public relations. The FCA told me:

“We are not aware of any evidence to suggest that mispricing of non-negotiated FX transactions is taking place in the UK.”

That was after the American evidence and despite the fact that foreign exchange trading works exactly the same way in the UK and the US. It is a huge market in the United States, with $5 trillion of exchange transactions daily, but the FCA denied the possibility that the same practices could occur here. On 18 March 2014, I took the issue again to the FCA, and Adamson’s view that it was not going on here was unchanged.

On 18 June 2014, with my hon. Friend the Member for Leeds East (Mr Mudie), I met Paul Fisher, the Bank of England’s executive director of markets and co-chair of the sub-group of the G20’s Financial Stability Board, which is looking at structural reform of the foreign exchange markets. We were told that time stamps are not a priority for the Bank of England or market participants. Presumably, the market participants that were consulted and said that time stamps are not a priority were the banks that have been so busy rigging foreign exchange rates that they have been fined more than £2 billion for rigging processes. The banks are obviously trustworthy witnesses on this account when they say, “No, this is not going on. Time-stamping is not necessary.” Those who were not consulted were the pensioners whose funds have been ripped off by this practice of skimming off points on trades that cannot be audited, because no one knows what time they took place. The Bank of England did not speak to pensioners or anyone else who had been ripped off. It seems to have no concern to protect pensioners either. The statement that this practice was not happening in the UK and was not a priority for the Bank of England is total rubbish and untrue.

Time stamps on trades allow auditors to compare the prevailing prices to the price in the trade when it was made. Time stamps allow the customer to know that he is getting the proper rate, because he can check the prevailing rate at the time. A time stamp allows someone to know whether a fair price has been applied to a specific trade and whether it has been done properly for the customer. It is an important and easy reform. It is easy to introduce; there is no difficulty about it. When banks trade foreign currencies among themselves—they are called interbank transactions—they use time stamps. They do not trust themselves, so they use time stamps, but they do not use time stamps when they are trading for customers, so they can rip the customers off. That is what this debate is about.

When shares are bought and sold, the transaction is time-stamped. In the United States, as a result of an amendment to the Government Securities Act in 1993, a time stamp must be used when Government securities are bought and sold. I do not know what the case is with gilts here, but trades in gilts should certainly be time-stamped. When someone buys a Starbucks coffee, it is time-stamped, yet they cannot time-stamp foreign exchange transactions for the benefit and protection of the customer.

Why is the financial industry exempt from time stamps on its foreign currency transactions for clients and why is the Bank of England supporting it? The practice is bad and disastrous. Why are customers left exposed to what amounts to the virtually invisible mispricing of trades that allows points to be skimmed off and makes thefts so easy? Why, when it is so easy to impose time stamps and therefore to know what is happening? It mystifies me. I cannot see the motive behind it and I cannot see the reason for resisting time-stamping for the two decades for which people have been making the argument for it.

Interestingly, Liam Vaughan, a Bloomberg journalist, has shown how things operate without time stamps. He was told by two former employees of Goldman Sachs who were on its foreign exchange alpha team in New York that when a salesman receives an order from a customer, often by e-mail, he executes it and waits to see whether the market changes. If the market goes up, he charges at the higher rate and keeps the difference between the price that was actually paid and the rate charged to the customer; in other words, he skims off. The former employees said that that can make as much as 30 pips on a €10 million trade into dollars—that is, 0.3% of $13.6 million goes to the traders in points skimmed off, unless there are time stamps to show at what time the trade was done.

One can imagine the consequences of very few points—just a few pips—being skimmed off on lots of trade in a market worth $5 trillion a day in the United States. It is no wonder that the dealers do not want to time-stamp the transactions, but it is annoying that the Bank of England—the guardian of probity and regulator of markets—is stalling on the issue and talking of “ongoing reviews” that have been ongoing for 20 years and achieved nothing. Why is the Bank of England doing nothing? It is negligent and shameful that it should behave in this fashion.

I am not interested in prosecuting the lovely banks; I love the banks. I am not proposing that they should be prosecuted for past crimes, because official inaction has given them the green light to commit this kind of theft. However, I want time stamps so that we will have an audit trail and point skimming will be so risky that they will stop doing it. We are now considering, nationally and internationally, reforms of the foreign exchange markets, and the G20 Financial Stability Board is considering the issue. It is essential that, as part of that consideration, we put time stamps at the head of the agenda and stir the Bank of England out of its lethargy. I hope that the Minister will not ask us to wait and see, because my plea is that we should get on with it immediately.

On 8 September 1991, Clifford Smout, who was head of banking supervision policy for the Bank of England, wrote of foreign exchange skimming:

“The existence of such abuses is difficult to prove in a fast moving area such as the foreign exchange market”.

But I am providing a way in which they can prevent it and get convictions; why are they taking so long to do it? My plea is for us to get on with it: let us have time-stamping on all foreign exchange transactions for clients of the banks.

[The Economic Secretary to the Treasury (Andrea Leadsom)]

It is a pleasure to serve under your chairmanship, Ms Dorries. I congratulate the hon. Member for Great Grimsby (Austin Mitchell) on securing this debate on the incredibly important subject of foreign exchange manipulation. He will have been as disgusted as I was to learn about the benchmark rigging that has gone on in financial markets and the various tales of banking misconduct that have shocked and disgusted everyone. I assure him that I do not think that the Treasury or the Bank of England are naive in their determination to weed out bad practice.

By way of background, the foreign exchange market underpins the global financial system. It enables international trade in goods and services, cross-border investment and monetary policy, so it is critical to ensure that it is well functioning and fair for the benefit of countries, businesses and consumers. As the hon. Gentleman pointed out, the UK is the largest single market for foreign exchange trading. In 2013, more than 40% of global foreign exchange trading took place in the UK, supporting an enormous number of jobs and enormous investment in this country.

The foreign exchange market is one of the most deep and liquid markets. It has contributed to efficient wholesale markets in which the turnover can be as high as $2 trillion a day in the UK alone. However, it is vital that all end users can benefit from the market, so we welcome the growth of specialist foreign exchange providers that compete with existing banks for the foreign exchange business of smaller businesses and retail consumers.

On tackling market misconduct, we expect firms operating in foreign exchange markets to adhere to the highest standards of conduct. Where they do not do so, we will take action to prevent and punish bad behaviour, as shown by the recent enforcement actions taken by the Financial Conduct Authority against five banks. The attempts by some banks to manipulate certain foreign exchange benchmarks were totally unacceptable and disgraceful. The Government and the regulators have taken tough action to punish such behaviour and prevent such scandals from happening in the future. The hon. Gentleman will know that the Serious Fraud Office has opened criminal investigations into certain types of market misconduct, and those investigations are ongoing.

First, the Government established the FCA with a specific remit of focusing on the conduct of our financial sector. Secondly, we have laid before Parliament a statutory instrument to extend regulation to the key foreign exchange benchmark: the WM/Reuters London 4 pm closing spot rate. The manipulation of that and six further financial benchmarks will be a criminal offence from 1 April 2015. Thirdly, we have established the fair and effective markets review to conduct a comprehensive and forward-looking assessment of how wholesale financial markets operate, to help to restore trust in those markets in the wake of a number of recent high-profile abuses, and to influence the international debate on trading practices. The review will examine in particular how the wholesale fixed-income, currency and commodity financial markets operate. It will provide recommendations on how the fairness and effectiveness of such markets can be improved.

The Government recognise that market structure and transparency play an important role in making markets more effective. Although the foreign exchange market is predominately an over-the-counter market in which transactions occur bilaterally between market participants, over the past 10 years it has been at the forefront of the electronic trading revolution. The electronic trading side now accounts for more than 60% of foreign exchange trading in spot markets, which has brought significant improvements in efficiency and transparency to market participants.

The use of electronic trading is most prevalent in the wholesale market, however, so it is right for us to consider whether the process of technological development has gone far enough to improve the fairness and effectiveness of markets, or whether we need to take further steps. The principle that how a transaction will be priced should be understood by market participants at the time when they enter into the transaction should always apply.

To deal specifically with time-stamping, the hon. Gentleman argued that if firms were required to provide time stamps for foreign exchange transactions that do not occur at the time of any agreement to enter into such a transaction, it could bring additional transparency to the market. He is of course right that time-stamping would prove the point at which the trade was done. High-quality record keeping is integral to how all financial services firms, including foreign exchange dealers, should organise themselves and operate, so I agree that it is important for firms to keep appropriate records of transactions with clients.

Time-stamping, however, presents some practical challenges. First, the key one is that market participants can use the time stamp only if they have access to a data feed of foreign exchange market prices, but such reference data are not publicly available other than at significant cost. Furthermore, as transactions are undertaken bilaterally, there is no central market for all foreign exchange transactions, so any consolidated tape of transactions would capture only a part of the market. The price of such transactions would also not necessarily be directly comparable. In foreign exchange, the price of each transaction may take into account a range of factors specific to that transaction, such as assessments of creditworthiness.

Secondly, when the foreign exchange dealer acted as agent, market participants would need to understand how the transaction had been priced to understand whether they were charged accurately. The interbank rate cannot be expected to be available to all market participants, for example.

Thirdly, when the foreign exchange dealer acts as principal, it could be argued that what is more important than a time stamp is access to a range of competitive quotes, which indicates that the issue of time-stamping transactions needs to be considered in the wider context of market structure and competition.

Clearly, the main purpose of a time stamp would be to create an audit trail for a market participant to detect mispricing of foreign exchange transactions. We should be clear, however, that if clients were misled about the pricing of foreign exchange transactions, such an act would be fraudulent.

I will talk a bit more about the fair and effective markets review, which I hope will give the hon. Gentleman some comfort.

[Austin Mitchell]

I am grateful to the Minister for her reply, but the difficulties that she has posed are not insuperable—they can be overcome. A time stamp is easier with electronic trading than with other forms of trading, but it should be used in all kinds of trades, because if there is a time stamp the client has the ability to look at the price range that day. The client might not know the total trading, but he can look at the price range and see what time the transaction was made, so he will know whether he was getting a fair deal and a proper price. That is the important thing—to put the knowledge in the hands of the consumer. The difficulties can easily be got around with a will to do so. The question is, why has the Bank of England been allowed to drag its feet on the issue for so long? Why not put that in straight away?

[Andrea Leadsom]

All I can do is repeat what I said, which is that the interbank price is one price, but that will not be the price for a retail investor, such as someone going on holiday or a small business. If we time-stamp a transaction, we will have to have the specific price of that transaction at a given time, and that information is simply not available. For the time stamp to be useful, we would have to know what the market was at that precise time. As the hon. Gentleman pointed out himself, a few basis points make a world of difference to the profits for the trader, so if one were minded to rig the price for a consumer or a business, even a sizeable one, and to commit fraud, even a time stamp need not prevent the fraudulent activity, simply because it would be difficult to pin down what the actual price should have been.

The Government established the fair and effective markets review so that careful analysis of the fixed-income, currency and commodity markets could be undertaken. Part of the review will be to consider whether there should be further regulatory tools available in foreign exchange markets, including whether there is a need for further criminal sanctions. The review will also consider the market structure and whether it can be improved through regulatory intervention or market-led action. Obviously the Government cannot prejudge the outcome of the review, but those conducting it will be well aware of the issues raised by the hon. Gentleman and will be taking his views into account. The Government will consider the recommendations of the review once it reports in June and will provide a response.

In conclusion, the time-stamping of transactions needs to be considered in the context of improving the overall fairness and effectiveness of the foreign exchange market. Foreign exchange markets are by their nature the most global of all the financial markets, so a consistent international approach to their regulation is essential. Where action is warranted, the UK should definitely lead the way in calling for and delivering it. I hope that I have reassured the hon. Gentleman of our commitment to ensure a fair and effective foreign exchange market—one that protects the customer while keeping the UK’s leading position internationally.

Question put and agreed to.