South African FX settlement portends more to come

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By:
Paul Golden
Published on:

A recent settlement between Citibank and the South African Competition Commission relating to FX manipulation could portend further lawsuits in several other jurisdictions, including the US and UK, but the prospects for potential claimants rely heavily on the outcome of the European Commission’s own investigation.

On February 15, the South African Competition Commission referred a collusion case to the Competition Tribunal for prosecution.

It found that from at least 2007 more than a dozen banks had a general agreement to collude on prices for bids, offers and bid-offer spreads for spot trades in relation to currency trading involving the US dollar/rand.

The Competition Commission also found that the banks had manipulated the price of bids and offers through agreements to refrain from trading and by creating fictitious bids and offers at particular times.

Within five days, the independent competition regulatory authority revealed it had reached a settlement with Citibank for being part of the FX trading cartel. As well as paying a fine, Citibank undertook to cooperate with the commission and avail witnesses to assist the prosecution of the other banks.

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Lambros Kilaniotis,
RPC

A similar settlement with an individual bank might be in the offing in the US, suggests Lambros Kilaniotis, a partner at professional services firm RPC.

When a class action is settled in the US, there is a window during which potential claimants are allowed to opt out in favour of bringing their own individual actions, among other things. The provisional opt-out closing date was set for June 29, 2017, but if the new settlement referred to by Kilaniotis comes to pass, a revised date would have to be set.

Kilaniotis declined to elaborate on the potential case.

“Once that date is set, what normally happens is that some of the more sophisticated claimants try to reach a negotiated settlement on an individual basis in order to get more money,” he says.

“This may create opportunities for claimants to discuss global settlements. We know that some of the firms that have run such litigation in the US are looking to generate similar business in the UK and are likely to look at where else claimants have been trading, for example Asia.”

Influencing prospects

The prospects for cartel-based claims on this side of the Atlantic will clearly be heavily influenced by the findings of the European Commission’s investigation into FX rates manipulation.

As well as manipulation of FX rates, there is a suggestion that bid/ask spreads might also be found to have been fixed, says Stephen Elam, a partner at Cooke, Young & Keidan (CYK).

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Stephen Elam, CYK

“The findings should determine the scope of future competition-only group claims and identify the actions that would most effectively be brought separately with wider causes of action in the High Court – perhaps in relation to targeted misconduct, specific currencies and markets, and claims against individual banks,” he says.

Lawyers have previously referred to limitations in the UK’s regime for competition litigation under the Consumer Rights Act (CRA), pointing out that contingency fees, which are only paid if the case is won, are prohibited for opt-out collective proceedings.

In the absence of a sufficient number of financial services-related cases to test the robustness of the regime, there remains a lack of clarity around whether the CRA could be used as the basis for bringing FX mis-selling claims.

However, RPC’s Kilaniotis agrees that evidence of spread fixing would boost the position of potential claimants in the UK.

“One of the challenges claimants have previously faced is that even if there was a competition infringement by their bank in terms of trying to manipulate the close, they would have to show evidentially that they suffered a loss as a consequence,” he says.

“If there were a competition finding that spreads were fixed, it would be easier to prove that the claimant was not getting the right price for each transaction. There would be still be an argument as to what the ‘right price’ was, but at least the causation argument would be easier to make.”

Elam at CYK describes evidence gathering and access to information as an ongoing challenge, and says banks will defend their position vigorously, although the recent decision on legal privilege in the RBS rights issue litigation – in which the High Court held that notes of interviews with bank employees in the context of an investigation by in-house and external lawyers were not legally privileged – is of note.

“That decision is a useful one for claimants to deploy in seeking disclosure from banks,” he adds. “Disclosure of sensitive notes from the early stages of banks’ investigations can be significant. In the FX context, they could help focus targeted requests for trade data and other bank records.”

The European Commission had asked banks to gather sales data by the end of July 2016. However, it has not clarified when it expects to reveal the findings of its investigations, a situation that Kilaniotis says might have been exacerbated by banks making immunity and leniency applications.

“The more information these banks provide, the longer the European Commission will take to decide how to proceed,” he concludes. “In addition, it will be anxious to handle cases where the bank has not admitted any fault carefully.

“The last thing it wants is for sizeable fines to be [successfully] appealed.”