By Nathan Lynch, Thomson Reuters

SYDNEY - 10 April 2014: The benchmark rigging spot-fires have spread further across the Asia-Pacific region this week, with the New Zealand competition regulator revealing it has begun an investigation into potential cartel activity. The Commerce Commission said a financial institution had sought "conditional immunity" in return for self-reporting misconduct and providing evidence against its alleged co-conspirators. The investigation represents an escalation of the crisis in the region, with penalties for cartel offences dwarfing those for market conduct offences — including potential jail sentences if the investigation spreads to Australia.

Industry officials said the case had added weight to speculation that the Australian Competition and Consumer Commission (ACCC) may have also opened a cartel investigation into forex benchmark rigging. Under Australian law, cartel activity is a criminal offence. The maximum penalties include jail sentences of up to ten years for individuals and fines of AU$10 million, or three times the benefit gained, for companies.

The revelation that New Zealand competition regulators have begun on this investigative path has raised the stakes significantly across the Asia-Pacific region, according to industry experts.

The Commerce Commission confirmed that the investigation began as a result of a leniency application under the Commission's cartel leniency policy. Under the policy a company or an individual can apply for conditional immunity — or formal cooperation if immunity is not offered — in relation to cartel conduct.

According to the Commission, leniency is a key tool in detecting and deterring cartels in New Zealand. "It is widely used around the world to tackle cartels. Cartels are difficult to detect and can damage the economy by removing the benefits of competition leading to higher prices and less choice for customers," the Commerce Commission said.

First-mover advantage

To assist with prosecuting cartels, conditional immunity from prosecution is offered to the first member of a cartel who self-reports any misconduct and provides evidence to assist with any prosecutions. This has created a type of "prisoner's dilemma" in other markets, with banks in Europe and the United Kingdom rushing to be the first to self-report to competition regulators in relation to benchmark rigging, including Barclays and UBS.

Professor Justin O'Brien, head of the Centre for Law, Markets and Regulation at UNSW, said the Commerce Commission had raised the stakes significantly in the benchmark-rigging saga in the Asia-Pacific region. Until now only two banks — UBS and BNP Paribas — have admitted to Libor rigging in Australia. Both banks resolved the matter with an enforceable undertaking and agreed to make an A$1 million donation to the financial literacy fund administered by the Australian Securities and Investments Commission (ASIC).

Professor O'Brien said that while many in the community felt that these penalties were inadequate, the involvement of competition regulators could now change the stakes significantly. He said the revelation that a financial institution had already sought immunity in New Zealand was an indicator that significant misconduct may be uncovered during the course of the investigation.

"This is the latest in a series of global investigations. What's interesting here though is the fact that the Commission confirmed that the investigation was commenced as a result of the leniency application. In other words, one major international player is providing the information to the Commission to allow it to continue that investigation," he noted.

Professor O'Brien said a similar set of events had been seen in Europe late last year when the European Commission began investigating yen-Libor manipulation and Euribor rigging. In the Euribor case, Barclays was the bank that first turned state witness and sought prosecutorial immunity. In relation to yen-Libor trading it was UBS that first yielded to the prisoner's dilemma.

The events in New Zealand have triggered speculation that the big four Australian banks could now get tainted by the benchmark rigging scandal. The big four dominate the New Zealand banking landscape via their ownership of subsidiaries across the Tasman. Industry figures stressed, however, that the NZ dollar is a widely traded currency and there is no evidence at this stage of misconduct involving the Australian banks.

Professor O'Brien said this had also added further weight to speculation in Australia that the ACCC may be running its own investigation.

"Given the close relationship between the commerce commission and the ACCC it is inconceivable that they wouldn't at least be looking at this in Australia. AIC has already announced that it is conducting a review of possible manipulation of financial benchmarks and currency regulation," he said.

Taking action

Within Australia, the ACCC has declined to comment on whether it is engaged in an investigation into potential cartel behaviour as a result of benchmark rigging. On the market conduct side, however, action is already being taken.

Greg Medcraft, chairman of ASIC, said his agency had already put the industry on notice that it was looking into potential forex benchmark rigging. He said this review was likely to run for at least 12 months before any outcomes would emerge. In the meantime, the regulator urged market participants to take advantage of the window of opportunity to self-report — and potentially minimise their penalties.

Medcraft also revealed that ASIC was working closely with other overseas regulators, though he did not specifically identify New Zealand as a partner agency in this matter.

"We're working closely with overseas regulators identifying who is involved in it and how it's being done. Clearly that intelligence will inform the way in which we undertake the review. The review will probably take around 12 months and I can't really say any more than that. Obviously I won't comment on any particular investigations that we have underway. This is a review we are looking at the moment," Medcraft told the CLMR forum.

Significant disincentives

In Australia, senior executives take cartel behaviour extremely seriously as a result of the potentially huge penalties that apply — including jail sentences. Australia's largest cartel investigation involved packaging magnate Richard Pratt, whose company Visy was ordered to pay A$95 million in penalties. Pratt also faced criminal charges and these were only dropped a day before he died in 2009.

John Morgan, partner at Allens Linklaters, said it was highly likely that this issue would spread to Australia in view of developments overseas. He said the cartel investigations would run for some time until an outcome was achieved — one way or another. He said there was little doubt that this would be occupying the minds of senior executives at some of the region's major financial institutions.

"The cartel legislation which, for the first time introduced jail sentences for price-fixing and the like has focused the minds of a lot of financial institutions. I think as you delve into arrangements in the financial sector more and more you find things that start to look like price-fixing arrangements. I think that's a story that got a long way to go in terms of being told what will really happen," he said.

Professor Eric Talley, from the University of California (BerkeleyLaw), said similar cases had been mounted in the United States in relation to benchmark rigging. He noted that while the federal class actions had been unsuccessful, smaller claims were being mounted under state law on a case-by-case basis.

"Most of those claims have fallen off the radar ... largely because of the substantial dismissal of an anti-trust class-action about eight months ago," Professor Talley said. Even so, he observed that the introduction of an anti-trust dimension had heightened the seriousness of the benchmark rigging scandal globally.

In his capacity as chairman of the International Organisation of Securities Commissions (IOSCO), Medcraft said the benchmark rigging scandal was a watershed moment in the regulation of financial markets. Medcraft said the issue had cut to the core of whether individuals could place their trust in financial market participants. He added that undermining this trust could prove catastrophic for the industry as a whole.

"If end-users can't be confident in markets then basically markets — or a particular market — may no longer exist," the IOSCO chairman said.

Medcraft also said the benchmark rigging had raised broader questions about whether there was excessive rent seeking, in the form of trading and speculation, on the global financial markets more generally. He said this had been widely criticised in terms of the 'financialisation' of markets — and indeed entire economies in some cases.

"I do think there's an issue with the 'financialisation' of markets, which we do need to be concerned about, where markets become nothing more than casinos. They defeat the purpose of supporting and funding the real economy. I think there's a bigger issue there, in terms of markets. Trading is a good and complimentary part of markets but I think in some markets you need to be careful that it doesn't become an end in itself and then subjugate the whole purpose of why a market existed in the first place," Medcraft said.

Open secrets

Professor Talley said the damage to consumer confidence had been heightened by the perception that benchmark rigging was an "open secret" among market participants and regulators for many years.

"If this were a 'secretive cartel' then it remains one of the most poorly kept secrets one could imagine — for over four years until the Barclays settlement. It was a sort of an open secret and widely acknowledged problem with benchmark rates that was allowed to fester for a long time," Professor Talley said.

Speaking in an Australasian context, Professor O'Brien said the developments in New Zealand had raised questions about the enforcement powers of financial regulators to rein in misconduct. He said the public may take the view that regulators such as ASIC and the Financial Markets Authority (FMA) lacked the enforcement powers that were necessary to discourage market participants from engaging in this type of blatant misconduct.

"ASIC has very recently released a report on penalties and noted that there needs to be a significant strengthening of the penalty regime. The penalties are so low and, therefore, the incentives to actually engage in misconduct and write it off as a cost of doing business are so high. That's very problematic," he said.

Professor O'Brien said this contrasted starkly with the powers that competition regulators have to impose much more significant penalties, including to seek jail sentences for individuals. Regulators such as the ACCC have demonstrated in the past that they are willing to pursue individuals with criminal charges regardless of how high-profile or well-connected they might be.

Ultimately, Professor O'Brien said competition regulation could be much more effective than financial conduct regulators in driving a cultural change agenda in the financial markets.

"When you have this real possibility that the cartel provisions can be used to jail people, all of a sudden one sees that the financial cost of the Libor and wider currency manipulation scandals are much more substantive. As a consequence, competition regulators are arguably much more likely to effect cultural change in the banking industry than conduct regulators," he said.

In the case of the European Union, the competition commissioner has made it clear that his goal is to force cultural change upon the financial sector. Professor O'Brien said it would be interesting to see whether competition regulators could also succeed in Europe where financial conduct regulators had failed.

"[The commissioner] has said that the time has come to push for real cultural change in the banking industry. It would appear to me that this strategy is much more likely to be effective if accompanied by the much more enhanced penalties that are available to competition regulators," he said.

"The financial sector is on notice that the stakes in this game are going to be raised — and be raised dramatically," Professor O'Brien said.

This article was first published by the Regulatory Intelligence service of Thomson Reuters Accelus. Regulatory Intelligence (http://accelus.thomsonreuters.com) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.