Treasury Committee
Oral evidence: The Foreign Exchange Market Review, HC 1147
Tuesday 11 March 2014
Ordered by the House of Commons to be published on 11 March 2014.
Members present: Mr Andrew Tyrie (Chair), Mark Garnier, Stewart Hosie, Andrea Leadsom, Mr Andrew Love, John Mann, Mr Pat McFadden, Mr George Mudie, Mr Brooks Newmark, Jesse Norman, Teresa Pearce, Mr David Ruffley, John Thurso
Questions 1-109
Witnesses: Dr Mark Carney, Governor, and Paul Fisher, Executive Director, Markets, Bank of England, gave evidence.
Q1 Chair: Thank you very much for coming back for this third session. We do not normally run three sessions but the alternative, Governor, would have been that we would have had to hold something this afternoon or tomorrow morning. I hope you understand. The first question I want to ask is: why did you release the name of the man that you suspended?
Dr Carney: We did not release the name of the individual.
Q2 Chair: How did it come into the public domain?
Dr Carney: I have no idea.
Q3 Chair: Is it not in one of the minutes somewhere?
Dr Carney: No, it is not.
Q4 Chair: So this was a leak?
Dr Carney: As you are no doubt aware, Chair, there is very active press in this country—a sign of a healthy democracy—and a wide range of participants in financial markets. People can speculate on the issue. I am not, by the way, confirming the identity of anyone who has been reported in the press.
Q5 Chair: I think it is very unfortunate for the individual who may, for all we know—the investigation is taking place—have done nothing wrong.
Dr Carney: I agree with that. I would take the opportunity to stress that suspension is not a disciplinary action. It is an action taken to further the investigation that has now been taken over by the Oversight Committee.
Q6 Chair: We will come on to that in a minute. Mr Fisher, did you consider suspending his boss?
Paul Fisher: No.
Q7 Chair: Why not?
Paul Fisher: It is difficult to get into that without discussing—
Dr Carney: May I speak to that since the decision of the governors—
Q8 Chair: I think it would be based—if I may say so, Governor—on advice from the man who has overall charge of that area, I would have thought. I would like to see initially what Mr Fisher says: by all means come in afterwards.
Paul Fisher: I have no reason to consider suspending the manager of anybody. I have to be careful as if I say too much I will identify the name of the individual, but I have no reason to take any further action on this at the moment.
Dr Carney: The decision to suspend was taken by governors on the basis of the investigation evidence that became apparent during the investigation, and the motivation for that included the fact that we hold our employees to a very high standard. I would say that our employees meet that standard 99.99% of the time, but we expect that our standards, particularly with respect to rigorous internal control procedures, records keeping, escalation policies, are there for a reason and the reason is to be followed. So we have to make determinations based on that. I would suggest that if one of the issues might be around escalation there are steps that we need to take, and we are taking—we can come to those—to ensure that those policies are followed. But if something is not escalated, we have to make a judgment about where that responsibility lies. We have made that judgment and we stand by it.
Q9 Chair: We are going to come on to the role of the Court in more detail in this hearing but just one initial question—it may have a supplementary—have any Court minutes been redacted in any way with respect to this issue and if so, why?
Dr Carney: Very briefly on the sequence here and I will start with the Court minutes. A member of the Bank first became aware of allegations related to the issue we are discussing on 16 October. I was informed then. I informed the chair of Court that day. We convened governors, we decided to launch an investigation. Within 48 hours we had retained external counsel and they began a very thorough, systematic and relentless investigation.
At the subsequent meeting of Court in November, I briefed Court on the status. The advice of counsel was that we would keep, at that stage, the investigation secret so as not to prejudice the investigation. We followed that advice and by necessity there was redaction of those minutes. We can unredact those minutes now, given events that have transpired. Subsequent minutes contain reference to this as it came out into the public domain, including through testimony of Mr Bailey.
Q10 Chair: That is helpful. Court apparently, I have read in the newspapers, is considering appointing some further external scrutineer of all this. Is that correct?
Dr Carney: It is not Court, it is the Oversight Committee.
Q11 Chair: Sorry, the Oversight Committee of Court, which is for those who do not understand, a byzantine structure that has been created in response to a Treasury Select Committee proposal. That is the non-executive subcommittee of Court, which has limited oversight of the Bank’s activities and is a long way away from being what most people consider to be a normal board. I am sorry to interrupt you.
Dr Carney: That is helpful. A few things: first, obviously as an executive I am not a member of the Oversight Committee, nor should I be a member. So the decisions of the Oversight Committee are theirs. How they choose to conduct this investigation, what they have said publicly, is that they have retained external counsel—the external counsel who has been building up the evidence over the course of the last several months. I too have read in the press what you refer to. I have not been told that that is the case. In any event, it is the responsibility of the chair and members of the Oversight Commitee to communicate that when they see fit.
Q12 Chair: This may be a leak from the Oversight Committee or it may be a completely erroneous set of news stories?
Dr Carney: I do not know. I think that it is not my place to say, but I would say that best practice, to discharge this type of role, would be to have external expertise, not just legal expertise, but an external person to run these types of reviews, and also to run the reviews of the Bank’s policy functions that are conducted from time to time by the Oversight Committee. So the Stockton, Plenderleith, Winters reviews, which preceded the Oversight Committee, were far more effective because they were run by high quality informed external individuals: that would also apply here. My personal opinion, as a matter of best practice governance, would be that a committee such as the Oversight Committee would follow that.
Q13 Chair: We extracted agreement that there should be such reviews with some difficulty in the space of two years of discussions. I think “negotiations” would be a fairer word, but that is all before your time.
Dr Carney: If it is of any comfort—
Chair: I am very interested to hear what you have said.
Dr Carney: —we have benefited tremendously from the output of those reviews.
Q14 Chair: I would like to be clear about the status of the external reviewer. Is he independent as well as external? Is he offering an independent view?
Dr Carney: I am sorry, which external reviewer?
Q15 Chair: The external assistance that you have brought in is looking at and investigating and reviewing the evidence, is he not?
Dr Carney: Again, I am not a member of the Oversight Committee.
Q16 Chair: No, I am talking about this Travers Smith operation that has been going on.
Dr Carney: Yes, it is an external law firm.
Q17 Chair: So this law firm, which is conducting an investigation or review—call it what you like—is that independent?
Dr Carney: Absolutely. I personally have been impressed by the thoroughness of their work—because this has taken a comprehensive, consistent, relentless approach to evidence, both obvious and non-obvious—and my view is that it is only because of that that we are in the situation that we are today. You have every right to expect that we would be in the situation—that we would have relentlessly followed up these allegations—but we have done so and will continue to.
Q18 Chair: I just want to be clear. This group of people—the Travers Smith operation—is wholly independent, and they are going to produce an independent report to you and they can say exactly what they like in that?
Dr Carney: That is true, with the sole exception they will not produce a report to me, they will produce a report to the Oversight Committee.
Q19 Chair: To the Oversight Committee of the Bank?
Dr Carney: Yes.
Q20 Chair: I understand. Therefore, just to be clear, all this talk about there being someone else doing this job as well on top would seem to be otiose in that case, would it not?
Dr Carney: Would seem to be, I am sorry?
Chair: Redundant, unnecessary.
Dr Carney: Again, not my decision—
Q21 Chair: That would be reviewing the reviewer, would it not?
Dr Carney: There is finishing off the gathering of evidence, there are legal questions around compliance with Bank procedures, bigger legal questions that the FCA is looking into and obviously everything we are doing we are sharing—in this regard and far beyond—with the FCA to support their efforts. Including the experience that has been catalysed by this Committee of having external reviewers who are supported by legal advice but to look into matters, including matters of governance, so they could supplement—again, I am hesitating a bit because we are talking about the possibility of the Oversight Committee doing something and I am not a member of the Oversight Committee.
Q22 Chair: But you are struggling to think of what it is going to do, if I may say so. You have managed to put together a few thoughts.
Dr Carney: No, I would say, speaking conceptually, I do not struggle necessarily because there are the facts, there are judgments in law, then there would be judgments about policies and procedures that could be made, and which would extend beyond that.
Q23 Chair: Which of those do you think Travers Smith would be inappropriate to handle?
Dr Carney: “Inappropriate” is a strong word. It would not necessarily have a comparative advantage in the last aspect.
Q24 Chair: The Bank of England has had evidence of attempted fixing for eight years, has it not, Mr Fisher?
Paul Fisher: No.
Q25 Chair: It has not?
Paul Fisher: No. I can see why people think that, reading the minutes, but I would very much like the chance to explain what is recorded in the minutes.
The allegation of the dealers colluding to fix rates, which is an extremely disturbing allegation, is one that has come up very recently. What is recorded in the minutes is something slightly different. It will just take me a few minutes to set out some of the background.
I think there are three points you would need to know. The first is that FX fixes are largely transactional space, they are not made-up quotes like LIBOR. The second is that the way the dealers have to act in this market is their clients insist they deliver foreign exchange orders at the price determined in the “4 o’clock fix”. This is the client’s insistence. What the banks then have to do is try to manage the purchase of that currency in the market typically in the run up to the fix not knowing what the final rates are going to be, so they are at risk during that period. They might get a better rate and make money, they might get a worse rate and lose money.
During this period, in the middle of that decade, there was a growing influence on the market from other types of traders beyond the banks and the asset managers involved in that relationship. The algorithmic traders were coming in—leave those on one side for a moment—the other group that is relevant here are the large hedge funds, particularly those taking macroeconomic views, and they may go into the market at any time they choose and put on quite large foreign exchange positions. They may naturally want to do that in around fixed times when they could see the market at its best.
So you put this together and what you have is the banks trying to carefully manage a position to do the best they can in relation to the fixed price, and along comes a large hedge fund and does a transaction in that period of time. That can shape volatility in market prices, which can knock the banks about in terms of their own risk positions. What you see recorded in the 2006 minutes is this concern by the dealers that it is becoming increasingly difficult to manage their positions because of the activities of—as they see it—these third parties moving rates around.
Q26 Chair: Why did you not make that clear when you published the minutes?
Paul Fisher: We did not have an opportunity to do that. We just had to put out the information that we had. We knew we were coming here and we would get a chance to explain in due course.
Chair: Very interesting and helpful.
Q27 Mr McFadden: Can I just follow on from that, Mr Fisher? Just to be clear: you were saying to the Committee that no one should read any of the minutes that were published last week by the Bank as being reports by any of the dealers involved in the subgroup of possible manipulation of the market? If we had all those dealers in here and we asked them that, they would say, “We were not reporting any manipulation”.
Paul Fisher: I have never come across myself in any of these meetings or discussions specific allegations of people rigging the market until we heard this news that started to come through last year. In particular, the allegation is about the dealers themselves colluding to rig markets. It will be very odd for them to have come to one of these meetings and said, “We have been rigging the markets, what do you think?” That is not going to happen.
So what they are complaining about here is the activities of other people who are stopping them doing what they want. Basically you can think of this as a lot of traders whinging about how difficult their life is, and we are not going to have much sympathy with that.
The later minutes, around 2008, get into more technical discussions of exactly that, how the fixes are constructed. So what we did there was brought the market and the fix makers together so that there was improved understanding of how the market worked on both sides.
Q28 Mr McFadden: I want to ask you about that meeting involving the WM company, and so on, in a second, but can I just get the reporting line of this correct? We have this dealers subgroup, which is chaired by an official from the Bank. To whom does that Bank official report?
Paul Fisher: The head of Foreign Exchange.
Q29 Mr McFadden: To whom does that person report?
Paul Fisher: The Director of Markets. So I was the head of Foreign Exchange until January 2009.
Q30 Mr McFadden: Ultimately that person reports to you?
Paul Fisher: Yes, up until the end of that period.
Q31 Mr McFadden: These minutes that were published by you last week from 2006 going over several years, were any of those escalated or drawn to the attention of anyone more senior in the Bank during any of that period?
Paul Fisher: Certainly not in the context of concerns about people rigging markets.
Q32 Mr McFadden: By the same token, I assume that none of them would therefore have been reported to either the FSA or its successor body, the FCA?
Paul Fisher: Not as far as I know. If I had seen such evidence, of course that is what I would have done.
Q33 Mr McFadden: So your contention here is that which has been reported to you in October is a completely different thing from anything mentioned in the earlier minutes?
Paul Fisher: Yes.
Q34 Mr McFadden: On the escalation policy, you have changed that in recent years. It says, “Staff should escalate any allegations that market structure is leading to inappropriate behaviour. Particular attention should be paid to information about price setting in and around fixes”. That last part has been added in the last year or two, can you tell us why?
Paul Fisher: Because of the LIBOR scandal.
Q35 Mr McFadden: So that is purely a consequence of LIBOR?
Paul Fisher: It had always been our policy that things should be escalated. In the light of the LIBOR scandal the staff were getting worried about more precise instructions so we wrote down a clear policy, and then we tidied it up again at the end of last year on further reflection.
Q36 Mr McFadden: Can you tell us, finally, a bit more about the relationship between the Bank and the regulator on this? Mr Wheatley, when he gave evidence to us a few weeks ago, confirmed that the FCA were conducting an investigation into this, but he cannot investigate you, can he?
Paul Fisher: He can.
Dr Carney: Yes, he can.
Q37 Mr McFadden: He can?
Dr Carney: Absolutely. The FCA can and will investigate individuals for any of these aspects, yes.
Q38 Mr McFadden: So despite what the legislation says about the Bank of England being an exempt person, as far as you are concerned he can treat the Bank in the same way as he could any high street bank or other organisation in terms of his powers to investigate?
Dr Carney: Investigate the individuals: can and does, yes. The exemption of the Bank of England under legislation relates to our activities so, for example, on behalf of the Government, for the foreign exchange reserves of the Government, we will be active in the market, we will transact on behalf of Government agencies. Obviously, in terms of the interest rate market we will take actions, and have taken actions, not just for bank rate but through quantitative easing and other things that influence those markets. So it is those aspects of our activity that make us exempt.
But the individuals at this institution are subject to the same responsibilities as individuals at any institution or private individuals and the FCA will, I am highly confident, and they demonstrate it, discharge the responsibilities according.
I would say as well, though, we hold our individuals to a higher standard than in the market and in the specific instance, as we sit here today, we have no information that suggests that anyone at the Bank of England condoned manipulation of the market, facilitated or participated in market manipulation, but that is a pretty low bar. Obviously the bar that my colleagues at the Bank of England hold themselves to is much higher than that and in review of these situations we had cause to further the investigation and in order to do so suspended an employee.
Q39 Mr McFadden: The allegation may not be about condoning, it may also be about awareness.
Dr Carney: This is one of the fundamental issues. There are questions of what happened in an unacceptable series of circumstances. We will make final determinations about that; the Oversight Committee through the investigation. So one of the questions—it is not the only one—is what are we going to do about it as the Bank of England. How are we going to change our procedures, not just our policies but how they are followed and the extent to which they are followed? Not just some of the time but all of the time. How are we going to reinforce that through changes of culture at the institution as well?
In terms of what we are doing on the policy front: we have not just updated our escalation policy and put it in a drawer. We have rebriefed staff on that escalation policy. Mr Fisher and colleagues in the relevant areas have asked staff to attest that they are following the escalation policy and that they are not aware of any other circumstance in the past that is similar, analogous to potential market abuse, so that we have a clear attestation from individuals. Attestation for records management is also one of the issues here. One of the questions is the accuracy of minutes and records management procedures. We have updated— based on TSC advice or prodding, I should say—our records management approach. So we are doing that. We are going to reinforce our compliance area, so it is not just the attestation but there are checks on compliance with these and other policies.
I referenced earlier in the previous session that we are going to launch our new strategic plan a week from today. Embedded in that are a series of measures to reinforce some of the positive cultural changes that have happened in the institution—more openness, more accountability. We are going to reinforce that through performance management and we are going to change some of the structure of the organisation. These are changes that were going to come in advance of the topic we are discussing today, but specifically for the markets area we are going to create a new position, a new Deputy Governor position, responsible for markets and banking. We have a £400 billion-plus balance sheet, as you are aware, a series of issues that need to be addressed and it will benefit from the senior most executive responsibility there. But one of the first tasks of that individual is that he or she will conduct a root and branch review of how we conduct market intelligence, how we use it, and again looping back to our core policies and procedures and making sure that they are not just the right policies but they are consistently applied.
Q40 Mr McFadden: Could you summarise, Governor, what you feel is at stake here for the Bank, reputation-wise, given these allegations?
Dr Carney: The institution has to be beyond reproach. We have to have the highest standards of integrity so how do we assure that? We ruthlessly, relentlessly, follow through with the investigation of what happened. If there were failings, we explain very clearly why those occurred. We very clearly take actions along the lines of what I have just outlined to ensure that these do not happen again.
There is one other thing that we should do, there may be others and I am abstracting from the questions of the Oversight Committee and reviews, and so on, but the other thing that we need to do for internal understanding, but also external understanding, is to more clearly establish what the principles are around a fair market. The market system is the best way to allocative and dynamic efficiency but it has to be a real market. That means not just there is no market abuse, it means open access to anyone who wants to be in the market. It means that if you are acting on behalf of a client that you are giving them the best terms, terms equivalent to those you would get yourself.
What we saw in LIBOR, and what the FCA and other authorities around the world are investigating in the FX markets around fixes, are symptomatic of a group of individuals in markets who clearly—in the case of LIBOR, because there have been prosecutions, and it would appear to be the case in FX—have lost sight of what a real market is. That is unacceptable. So part of the way we ensure that the Bank has its rightful place is to help lead the effort to rebalance these markets.
I mentioned the principles. The other thing we are doing at the international level is fixing the hardware market. In fact Mr Fisher is co-chairing a group that has been set up by the FSB under my chairmanship to change the way these fixes are calculated. It looks at ways to change things so the opportunity for manipulation is not there. We are working with other major central banks to look at the right structure in terms of issues like that. We will consider jointly with the Treasury and FCA in the context of all those other changes whether there are any other regulatory changes that might be warranted to this market to ensure that it is a true and fair open market, as people have the right to expect.
Q41 Mr Ruffley: Just to clarify, when did the executive hear about these specific allegations?
Dr Carney: On 16 October.
Q42 Mr Ruffley: How was that communicated?
Dr Carney: A colleague had been informed by a market participant of an allegation. It was communicated to the governors. We met and decided to act immediately. I informed the chairman of Court that day and within 48 hours we instructed external counsel and the investigation began.
Q43 Mr Ruffley: The executive did not do any investigation on its own before calling in Travers Smith?
Dr Carney: No. The reason being that just the fact of the allegations were serious and so we instantly recognised that they had to be chased down to the full extent.
Q44 Mr Ruffley: That is in October. But we learn from the press release on 11 February that the Oversight Committee of the Bank’s Court of governors will lead an investigation into the allegations regarding forex manipulation at the Bank. Can you explain why that responsibility changed?
Dr Carney: The first phase of the investigation was to gather evidence and there was a very, as you can appreciate, comprehensive effort to gather that evidence, reviewing—I think we have released it—14,000 emails, 21,000 chats and 40 hours of telephone conversations, and that is an effort that branched out in terms of following the trail to make sure that as comprehensive a picture as possible was developed.
Once we came into possession of information that warranted an intensification of the investigation and the associated suspension of an employee, we, as governors, met, made that decision, went to Court—the next Court meeting was, from memory, 4 March—and communicated our decision to Court. The Associated Press release, I think, was 5 March.
Then the Oversight Committee, without the executive, met immediately after and made their determination, rightly in my view, to take responsibility for the investigation and procedures as they see fit.
Q45 Mr Ruffley: But there had not been any independent oversight of that initial phase? The initial phase was essentially Travers Smith and the executive—
Dr Carney: The initial phase was Travers Smith, our internal counsel, in association, as appropriate, with the FCA, keeping the FCA in the loop and aware of everything that we were working through and discovering.
Court was briefed at every meeting subsequent to the launch of the investigation, so in November and December—sorry, I do not have the exact dates in front of me but there was a meeting prior to the 4 March meeting as well. So Court was briefed on what we were learning or not learning in the investigation. Even during the initial phase when our review was not uncovering issues of concern there were full briefings of Court.
Q46 Mr Ruffley: The seeking of external legal assistance—Travers Smith again—why were Travers Smith appointed by the Oversight Committee? Do you think they were influenced by presumably the steer that the executive directors had given them initially to ask Travers Smith in the autumn to do this initial phase?
Dr Carney: I do not speak for the Oversight Committee. My presumption would be, and I would agree if this were indeed the case, that Travers Smith has conducted this investigation. They have a team of lawyers who are fully up to speed on all the issues. They know where they have looked. They know where they have not looked. They know the matters of law. They have the benefit of technical conversations to be briefed on what the issues could be, so my view would be—and I could see taking the same view if I had been on the Oversight Committee as an independent director—for reasons of efficiency on a very serious matter that has to be chased down as rapidly and fairly as possible, to use the same external independent counsel that was in place.
Q47 Mr Ruffley: Is it substantially the same team from Travers Smith?
Dr Carney: I presume it is exactly the same team, yes.
Q48 Mr Ruffley: The Bank has put out the following statement, “To date no evidence has been found that the Bank of England staff colluded in any way in manipulating the forex market”. Could you just clarify, so far as you are able and allowed to, having regard to legal issues, the specific grounds on which the employee has been suspended? I am clocking the fact that Mr Fisher said it was to facilitate the inquiry but what is the technical specific ground on which the employee has been suspended?
Dr Carney: For reasons of fairness and due process, I will give you a more general answer, which is the suspension relates to investigation of the keeping of our rigorous internal control procedures, including around records management and escalation.
Q49 Mr Ruffley: My final question, and I think this has been answered, but just so I am clear about this: the suspended individual’s line managers above him or her, why are they not the subject of the investigation?
Dr Carney: We take the situation extremely seriously, as you would expect. We have conducted an investigation that has looked at, to the maximum extent possible, and I believe under the Oversight Committee will look at, not the actions of one individual employee but of all relevant employees. I do not think we can come out of this on the other side and have a very targeted focused report, which relates to just an individual. I make no judgment on the actions of that individual in that again suspension is not a disciplinary action, but to facilitate completion of the investigation. But I think it is imperative that we look at all aspects of this situation and that we reconfirm, as I expect we will, the integrity, probity, prudence and dedication of the ongoing employees of the Bank of England, which I can understand we would not be able to do if we were to micro-target the effort.
Q50 Mr Ruffley: There is nothing in the terms of reference given to Travers Smith by the Oversight Committee which would preclude Travers Smith making comment on what the line managers of this suspended individual did or did not know, is that correct?
Dr Carney: There is nothing to preclude that. In my understanding of it, the mandate of Travers Smith is outlined in the press release that we—
Q51 Mr Ruffley: Is that your understanding, Mr Fisher?
Paul Fisher: Yes, it is. As far as I am aware they have carte blanche to investigate what they need to.
Q52 Mr Ruffley: They have carte blanche to go where the evidence takes them?
Dr Carney: Exactly.
Paul Fisher: I cannot imagine any other—
Dr Carney: To the extent there are issues of escalation one has to look at those questions.
Mr Ruffley: Of course. Thank you.
Q53 Chair: I think it might be helpful if we not only see the mandate but also any accompanying documentation setting out and elaborating on how they might perform the function so we can be confident that the job is being done both independently, which we have had some reassurance of today, and also that it means that they can come with a full spectrum of issues that they might want to report or review. That is a key function of this hearing, to make sure that we have confidence in what is taking place externally and is being reported to the non-executives.
Dr Carney: I will relay that request to the chair of the Oversight Committee and I am sure that he will comply. That is certainly the spirit of their decision.
Q54 Mr Love: Can I come back to the information you were provided with on 16 October and relate it to the Financial Conduct Authority? Who was the official that relayed this information to you on that day? Was he a member of the Financial Conduct Authority?
Dr Carney: With the specifics, we had information from a credible member of the private sector, and also associated contact from the head of enforcement at the Financial Conduct Authority.
Q55 Mr Love: Did you on the 16th or soon afterwards inform the Financial Conduct Authority of the information that you had received on 16 October?
Dr Carney: Yes. There was a conversation between our general counsel and the head of enforcement of the FCA on that day.
Q56 Mr Love: Have they subsequently asked you for further information not only relating to the minutes of the meetings of the subcommittee but of the activities of that whole branch of the Bank?
Dr Carney: We have shared all relevant information of the Financial Conduct Authority, which would include information gleaned from the review of emails, chat rooms, voice recordings.
Paul Fisher: We are also helping them more generally with information about how the FX market works.
Q57 Mr Love: Which is complicated, as you indicated earlier on. People do have to have an understanding of that. I am slightly surprised and maybe just a tad naive, but you were informed of these matters on 16 October, yet new speculation had been rife from June 2013. Admittedly most of that speculation was about manipulation of the market place and it did not directly involve the Bank, but since the Bank has a major section involved in foreign exchange dealing did that heighten awareness? Were any steps taken by the Bank to ensure that none of this speculation would touch them?
Dr Carney: From the start, which slightly predated my arrival but certainly by the time I was there—
Mr Love: Bloomberg News and—
Dr Carney: No, you are correct in your timing. We were engaged from the start with the FCA in terms of supporting their investigation, including, as Mr Fisher has said, providing technical perspective on the functioning of the foreign exchange market, potential dynamics that could be relevant, and we proceeded from there. I should add that during the course of the time, in terms of internal governance, we were finishing off an intensive review of our records management policy and updating our escalation policy. The updated policies came out prior to our learning about more specific allegations.
Q58 Mr Love: Correct me if I am wrong, some time between June and October the FCA contacted you about their investigation and sought expertise on how the foreign exchange market operates. Did they ask you to investigate any activities in the Bank at that time?
Dr Carney: Not to my knowledge, no.
Q59 Mr Love: The first contact you had with the FCA was in October when this information that we are talking about was made available to you and you made it available to them, and they have not extended their investigation into further employees of the Bank, as far as you are aware, at this stage?
Dr Carney: As far as I am aware, yes. It is not—
Mr Love: You were somewhat hesitant about that.
Dr Carney: I am hesitant because I am commenting on the FCA: so as far as I am aware, yes. I would underscore, there has been complete open, consistent co-operation, at least from our perspective, with the FCA. We have been very intensively co-operating with other major central banks around the world addressing this, and so we have been supporting investigations and we have been doing what you would expect us to do, which is to think about where do we go from here? There are lots of issues here, but one of them is where do we go from here in the organisation of the foreign exchange market, 40% of which is transacted in London.
Q60 Mr Love: You underscore the importance of this investigation. I take on board the point you make about the wider discussion that you brought in when you came into this job, and I think that is important, but it is critically important that we get to the bottom of this. So co-operative working between the FCA, who are primarily responsible for the regulation in this matter, and the Bank is critically important. Let me ask one final question because I do not want to dwell on this. Are you confident there are no other issues relating to manipulation of foreign exchange, that the Bank has to answer in terms of the FCA investigation?
Dr Carney: I am not aware of any additional issues but I am acutely aware of our responsibility to complete a thorough, comprehensive investigation of all aspects related to this issue. You rightly said this is incredibly important. It is incredibly important for the foreign exchange market and it is fundamentally important to the integrity of the Bank of England.
I would not want to leave you with the impression that we feel like we have done something and we can relax and pass this. No, we are going to proceed with this all the way and we owe it to the people of this country. We owe it to Parliament. We also owe it to our employees who have acted with integrity, dedication and the true spirit of public service. We cannot come out of this at the back end with a shadow of doubt about the integrity of the Bank of England and we will not. So we will finish this investigation but what we will do in tandem is a series of internal re-organisation steps and a series of measures, which we will unveil for a variety of reasons next week in our strategic plan, that reinforce the best aspects of the culture at the Bank of England.
Chair: We are going to come on to governance in a moment but those are very helpful remarks.
Q61 Mr Mudie: Sorry, Governor, this is going to be a bit ragged because my questions were all taken by another member so I am almost speechless, but I will try to make up for it. What exactly are the overseeing board investigating? Is this an internal matter of behaviour in the Bank of England by a staff member or staff members? It is not part of the wider exercise?
Dr Carney: That is correct. They are investigating, as they have disclosed publicly, whether any Bank officials were involved in either attempted manipulation of foreign exchange, whether they were aware of the potential for such manipulation, whether they facilitated any collusion between market participants, sharing of client information or otherwise aware of improper behaviour or practices in the foreign exchange market, so it is quite a comprehensive list, as it should be. But it is looking at officials within the Bank of England because, as you can appreciate, there is a broader investigation, which is quite properly being run by the FCA in co-operation with authorities around the world.
Q62 Mr Mudie: I thought that the new regulatory system was to end this separation. You could almost be Mervyn King. “This is not a matter for me, this is a matter for the FCA. This is not a matter for the Bank of England, this is a matter for the FCA.” Have we gone through all these regulatory changes to end up with the same silence?
Dr Carney: Two points: first in terms of the regulatory change, the wisdom of Parliament was to keep conduct regulations separate from prudential regulations, so the FCA always separate. In my view, I would agree with that separation. That is an effective separation and the FCA is very focused on its responsibilities and increasingly effective.
But the conduct of Bank of England officials is very much a matter for us. It is very much a matter for me as Governor and Mr Fisher. It is very much a matter for Court, which is why we are pursuing this. We have a higher standard, so there are steps we could take if the facts warrant, that would reach above and beyond the standards of the FCA because the standards of the FCA ultimately are questions of criminal misconduct, of market abuse, and other aspects, so we go above and beyond. But just to reiterate, the conduct of Bank officials is very much our responsibility. We take those seriously, as does Court and the Oversight Committee of the Bank.
There is no shifting of responsibility here, Mr Mudie. I do not want to leave you with that impression.
Q63 Mr Mudie: I am not suggesting there is a shifting of responsibility. I would have liked a shift of responsibility because Lord King complained that he was not being kept in touch with everything because they were so separate. It seems they are separate still but leave that as it is. From the outside you are more concerned—and it is a fair concern, the integrity of the Bank—about the behaviour of your staff, and whether they were involved in it, whether they condoned it, whether they knew about it, is part of the bigger thing. I find you very relaxed about the actual market manipulation. You are trying to do something on the Financial Stability Board, you are in the middle of it, and that was not triggered by tidiness, hopefully that was triggered by some knowledge of what was happening in all the financial centres about the issue. Yet when you have come to London it is a secondary matter. It is a very serious matter.
Dr Carney: It is an extremely serious matter.
Q64 Mr Mudie: Let me just take the disciplinary one first. I am an old trade union official and I was asking Mr McFadden what we do under these circumstances. You have a Court, and so on, but you are the Governor. It is reported to you that one of your officials may be acting improperly in one way or another. I would expect you, as the Governor, to investigate the matter and take the appropriate action and report it. If you wanted to examine it, they could examine it after you had, as the Governor, put it right or taken the appropriate action. Whereas you seem to have exited yourself from the business and passed it over to the old duffers on the Court. That is fine, is it not? Then on the bigger thing, you have given that to Mr Wheatley. “It is nothing to do with me, Guv.”
Dr Carney: There are so many points that I could pick up in that.
Mr Mudie: I told you this was unscripted.
Dr Carney: Yes, it was very much so. The first point is it is the responsibility of the Financial Conduct Authority to address these potential issues of market abuse. That is the responsibility given by Parliament. We are doing everything we can to support that. The second point is that in terms of the seriousness and, maybe I should start with this, this is extremely serious. As Martin Wheatley has rightly said, this is as serious as LIBOR if not more so—time will tell—because this goes to the heart of integrity of markets and we have to establish the integrity of markets.
In my role as chairman of the FSB, and relatedly as Governor of the Bank of England, I have had discussions with the heads of all the other major central banks. We have launched a process to help fix the market infrastructure, how this market is conducted, that Paul and Guy Debelle, who is the Assistant Governor of the Reserve Bank of Australia, are leading. That is on an expedited thing. We are going to report to the leaders of the G20 on this issue, so we are taking this very seriously.
Above and beyond that, what we have to do, as I referenced earlier, is to re-establish principles of fair markets so people in these markets know how to behave and do so. In terms of how we are addressing this internally, given your long history as a trade union official and focused on workers’ rights, we have to be fair in how we discharge this. So I, and my fellow governors, immediately engaged an investigation with external counsel. It was comprehensive. It does not matter how many man hours and pounds, but we have spared no expense in conducting this, and we will spare no expense ultimately in terms of completing it.
In full possession of the information we will take the appropriate steps, but those decisions have to be conducted fairly. We will do those as quickly as possible, but at the same time we are going to work at the international level, which we are doing, to fix that.
Q65 Mr Mudie: I accept that, but at this moment in time after four months of the first investigation—Mr Bailey is quite clear how many hours, how many chat rooms, and so on—there was no evidence; is that still the situation?
Dr Carney: Clearly, that is not still the situation. It was clear at the time Mr Bailey made his statement, I absolutely stand by Mr Bailey’s statement, which was made in early February to this Committee. But that is the point, there is no evidence until there is evidence and that is why—
Q66 Mr Mudie: That is Rumsfeld/Bailey, is it not? There is no evidence until there is evidence.
Dr Carney: I am sure Andrew will appreciate the comparison. But, as we move forward, we have evidence now, which has warranted suspension, and that process will be seen through fairly. If we have any additional evidence we will take action and we will, as appropriate, make public.
On the last point, Mr Mudie, there are questions of fairness but there are also questions of prejudicing the investigation and any action that could be taken, so we do not want to be in a position and we will not be in a position where we, through our actions, somehow impede the very important efforts of the FCA.
Q67 Mr Mudie: Last question: at the April meeting there was someone from the FSA/FCA, but I think it was still the FSA then, who was that person?
Dr Carney: I apologise, which meeting?
Q68 Mr Mudie: The April meeting. One of these meetings where information was volunteered. It is in the minutes. I will pass it to you if you wish, if you will promise to pass back to the Committee the name of the FSA official. The next question would be: has anyone spoken to that individual, have they looked at the notes, have they drawn it to the attention of Mr Wheatley?
Dr Carney: I will—
Mr Mudie: Consider it.
Dr Carney: No, it is not, “I will consider it”. Obviously we will consider it but all avenues of investigation are being explored.
Q69 Mr Mudie: But we would like the name of the FSA official.
Dr Carney: That is a separate question.
Q70 Mr Mudie: That is another line. We would like to know what the regulators were doing. When one of the regulators is in a room, we should be looking at this person to say, “Well, you are an actual regulator. You heard this, have you done anything within the regulatory body?”
Dr Carney: Understood.
Q71 Chair: Mr Fisher, you gave a very important, full, quite long and crucial reply to the question about the 2006 minutes. Can I ask you about the July 2008 minutes, which I also have an extract from in front of me? The meeting notes state, “The dealers had expressed to the firm responsible for the benchmarks”—that was Reuters—“using a snapshot of the market may be problematic and it could be subject to manipulation.” So a vulnerability was identified. Was that the same vulnerability that has been identified in the more recent forex manipulation?
Paul Fisher: I do not think so. My understanding of the allegations, as they are now, is the dealers have been colluding to manipulate markets. That is not, I think, what has been referred to here. You have a trade-off. The fix is meant to be the market price at a particular point in time. The shorter you make that point in time the fewer transactions you have. The wider you make it, the more you have an average, and it is not truly a market price. The dealers were saying, “Look, we have seen this volatility. It is moving the fix around, we would prefer something more stable, we would prefer a wider window”. They would, wouldn’t they, because it is what they were trying to do?
Q72 Chair: You have given a very important reply and we will be looking very carefully at the text of it in relation to the minutes after this meeting, as I am sure others will too. The Governor wants to come in with a rejoinder, and then Andrea Leadsom.
Dr Carney: As a matter of foreign policy, how you change the way this is calculated is precisely the issue that Mr Fisher is looking at on behalf of the FSB.
Q73 Andrea Leadsom: Governor, I am afraid I am not going to cheer you up at all because you are doing a fantastic job of defending the importance of the Bank’s integrity and talking about the action that you have taken since 16 October, but this surely goes way back beyond that. As the Chairman has just said, the minutes of 2008 were very clearly, “Using a snapshot of the market may be problematic and it could be subject to manipulation”. In the 2006 minutes, “Talk of dark room netting, which might change the dynamics of fixing flows.” “Talk of a lack of transparency among some methodologies”. “There was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix”. These were July 2006, October 2006, May 2008 and July 2008. Those predate you significantly and it seems to me since then you have had the LIBOR rigging scandal and this Committee has raised several times with the Bank of England, before your time, that it was perfectly possible that other rates may have been rigged as well. We specifically talked about foreign exchange, we talked about gold, we talked about oil, we talked about the ISDA swap rates, and the Bank of England has never deigned to come back to us on those points. So as far ago as 2006 we have clear documentation that issues were being raised, whether it was precisely the same issue or not.
So what I would like to ask you about is precisely what was the route by which the individual who represented the Bank of England should—not could but should—have, on the face of those minutes, raised those issues. We have asked for your Bank’s guidance to staff on the escalation of misconduct and the earliest version we have received dates from 1 August 2012. Is that the first time that there was written guidance on escalating misconduct or was there an earlier one that we have not been given a copy of? We asked for all copies.
Chair: It must be Mr Fisher to answer that question.
Paul Fisher: That is the earliest one in terms of a specific written policy, but we have had whistle-blowing policies and so on in the Bank for many years.
Andrea Leadsom: We would like to see what those are.
Paul Fisher: This was one tailored. I think you have had a copy of that—
Chair: The earlier one as well.
Dr Carney: The whistle-blowing policy, I believe, was in the package but we can resend it.
Q74 Chair: The question is about earlier escalation policies.
Andrea Leadsom: Yes.
Paul Fisher: This was tailored specifically in relation as a follow-up to the points that were being made at that time.
Q75 Andrea Leadsom: The point is that there were very clear bells that should have been going off, and it goes to this point of complacency and a general assumption that all will be fine. Quite clearly, all has not been fine. There were very clear examples of markets being rigged long ago, long before October last year, that the Bank surely should have gone back to. Did it go back? Did it look at previous concerns that had been raised and decide to do a thorough investigation of the potential for fixing of other rates—not LIBOR—other rates, such as foreign exchange?
Paul Fisher: None of these concerns in these minutes go to the dealers colluding to manipulate.
Q76 Andrea Leadsom: I agree with you. I agree with you. They do not talk about dealers colluding, but they do talk about manipulation of foreign exchange rates. Surely, if you are a Bank of England senior person, as this person would have been, you would think, if you heard something about talking to chief dealers, not about collusion on fixing foreign exchange but on manipulation of foreign exchange rates, you would escalate that in accordance with the Bank’s own policy? I am asking you a straightforward question. What was the Bank’s own policy prior to August 2012 on escalating—
Paul Fisher: Had there been any specific allegations of wrongdoing, they should have been escalated. That is clear.
Q77 Andrea Leadsom: What was the policy? Is there a written policy on what that person should have done?
Paul Fisher: I would have to go back and check. It would have been a general one within the Bank’s overall guidelines.
Dr Carney: If I may, Ms Leadsom. As a consequence of LIBOR—as a consequence is my interpretation of it—also as a consequence of discussions in front of TSC and on reflection, what the Bank has done has been to reinforce, update, improve both its escalation policy and, very importantly, its records management policy. I would characterise the situation as we are today that we have the right policies in place. The issue is implementing them and making sure that they are consistently implemented, not just while this is on the headlines, but 10 years from now, 20 years from now, and so on. How do we do that? We do several things. We buttress them with attestation, which we are now asking all our relevant professionals to make—
Q78 Andrea Leadsom: I am sorry, Governor, you are talking forwards. I am talking backwards. I am interested in the period 2006 to 2014. Where we are today; why the LIBOR scandal happened and the Bank clearly did not see fit until 1 August 2012 to put in writing an escalation policy, and then amended it on 13 December 2013. What I want to know is, did the Bank consider, following discussions with this Committee and in the press, that other rates could have been rigged, following the LIBOR scandal? Did it do anything to try to look back at minutes that we have now seen, which clearly suggest to me and to others that there should have been concerns raised?
Paul Fisher: Those minutes did not convey to me the sense that markets were being rigged, or that those markets were being rigged. Personally, I fully understand what—
Andrea Leadsom: The word “manipulation” is used.
Paul Fisher: —is being described there, and I do not think those were concerns. What we are talking about here is collusion between the dealers, that is the allegation. There was nothing in these minutes that—
Q79 Andrea Leadsom: The word “manipulation” in minutes would not spark any alarm calls? In the context of the LIBOR rigging, looking at minutes where there is talk of the possibility of manipulating foreign exchange markets, that would not raise any alarm bells in the Bank of England, as the regulator? The possibility of manipulation, clearly written in the minutes, does not raise any alarm bells?
Paul Fisher: Not in the context of the conversation at that time.
Andrea Leadsom: At what time?
Paul Fisher: At the time that discussion took place.
Q80 Andrea Leadsom: No. What I am asking, very specifically, is, in wake of LIBOR and the clear concerns of the Committee that other rates may have been fixed, did you then go back and look at whether there was any evidence that foreign exchange or gold or oil or ISDA swap rates might also have been fixed? Did you do that? It is a simple yes or no question. Have you looked at your records in other markets?
Paul Fisher: We have gone through a process recently of asking people whether they knew of any other issues in markets. It is not our job to go off hunting for rigging of markets.
Q81 Andrea Leadsom: Is it not? It is not the Bank of England’s job to do that?
Paul Fisher: Not to go out searching for it. If we come across it, that is very important for us to—
Andrea Leadsom: You came across it in 2006.
Paul Fisher: No, we did not.
Q82 Andrea Leadsom: Well, it was noted, “there was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix.” What is that, then?
Paul Fisher: That is specifically not, because it is about players who do not have an interest in the fix. That is specifically not about somebody trying to rig the fix.
Andrea Leadsom: What is it, then?
Paul Fisher: That is the point.
Q83 Andrea Leadsom: No, but that is not the point, is it? It is rigging markets.
Paul Fisher: You see, this is the hedge fund moving the market against the dealer.
Andrea Leadsom: This is not about—
Paul Fisher: That is what it is.
Q84 Andrea Leadsom: “There was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix.” Was it just a hobby of theirs, then, do you think?
Paul Fisher: If we were talking about rigging of rates, that would be someone who did have an interest in the fix. This is very specifically not about somebody who has an interest in the fix price.
Q85 Andrea Leadsom: Moving markets around popular fixing times would just be a random act by—
Paul Fisher: This would be how it would appear to the dealers.
Q86 Andrea Leadsom: What other reason would you, as a market maker, have for trying to move the market, other than for your own gain?
Dr Carney: It is not a market.
Paul Fisher: It is about a hedge fund moving the market. That is what I am explaining.
Dr Carney: It is a market participant, as opposed to a market maker.
Q87 Andrea Leadsom: What does this minute mean, then? “There was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix. This was not in the interest of customers, if the market was forced away from where it should be when the fixing snapshot was taken. It was noted that fixing business generally was becoming increasingly fraught due to this behaviour.” What does that mean, then? Does that not ring alarm bells that somebody is doing something that is not—
Paul Fisher: I can go through the explanation again, if you like. This is the dealers trying to produce foreign exchange orders for their clients at the fixed price, and finding that the rates were being moved by the activities of other participants in the market such as the large hedge funds, which would appear to the dealers to be moving the market against them. That is what is being described here in a conversation with the dealers. This is their perspective on it. They would like the situation to be nice and stable in the run-up to the fix, so that they can manage their risk appropriately. Other people are coming in, as they have a perfectly legitimate right to do, dealing and moving the market away. The dealers do not see that in their interest, and that is how it is being reported.
Q88 Chair: When you were talking about dealing and moving away, that is something that could quite happily have been called manipulation?
Paul Fisher: The dealers would probably have used that word, yes, because that is how it looks to them.
Q89 Andrea Leadsom: But it is in the minutes taken by the Bank of England?
Paul Fisher: Yes.
Andrea Leadsom: The minutes were taken by the Bank of England and later on, after the presentation of the WM company model, “It was suggested that using a snapshot of the market may be problematic, as it could be subject to manipulation.” Again, that is a Bank of England minute.
Paul Fisher: It could be subject to somebody else coming in and trading a large size before the fix, and moving the market away from where the dealers thought it was going to be. That is what it is describing.
Q90 Andrea Leadsom: You are absolutely confident that despite talk of lack of transparency and darkroom netting, there was absolutely no opportunity to have seen that in fact attempts at market manipulation were taking place?
Paul Fisher: Well, certainly not by the dealers manipulating the markets, no. The shocking thing, throughout this whole episode in LIBOR and in these latest allegations, is the fact that dealers between different firms may be colluding. That is part of the case behind the LIBOR thing. That is what is really shocking here, is that degree of collusion, and there is no hint of that in any of our discussions. What we are talking about here is normal market trading causing difficulties for some participants as other participants come in and out of the market. There is always a trade-off here. A fix represents a market price; trading changes market prices. That is what you have to adjust to. There are some deep structural issues here, which we are going to be addressing with the group that is working on this, where we can see some tensions here that need to be resolved, around the way these fixes are both set and used, and it is the combination of the two that needs to be fixed. But this does not go to the dealers manipulating or rigging the rates.
Q91 Chair: Now you have moved straight from the word “manipulating” to “rigging”. When I asked you whether manipulation, in this context, should be considered normal trading, you said, “Yes”. Now you describe manipulation as being coterminous with rigging, which is of course what most of us think it does mean. That is why we are all looking at these minutes somewhat, if I may say so, quizzically, not to say sceptically, about the explanation you are giving.
Paul Fisher: That is because you are looking at it now, through the lens of the LIBOR scandal, as opposed to the conversations that we were having at the time.
Q92 Chair:Yes. If I may say so, that brings me to the second point that Andrea has raised, which is that once you have had that scandal, which started some time ago, might it not have been a good idea to go back and have a look at other markets? You said, and I quote pretty much, “It was not our job to go looking for poor conduct in markets”. But I would have thought that it very much was your job to make sure that these markets were in good shape, and since there had already been some evidence that they were not, even from the early stages of rumours of the LIBOR scandal, it would have been a good idea to start looking for this stuff in your—I will give you a chance to reply in a minute—minutes and other records that you may have kept of these meetings with the forex dealers?
Paul Fisher: Over the years, we have made a number of improvements to the FX market, around market structure, to help improve it, but we do not have the resources to go out looking and saying, “Have you been colluding with him?” We cannot do that. Only the FCA has the investigating powers to do that sort of deep digging into conduct issues. What we are looking for is evidence that there is market structure that was not working. As described here, this was the then market structure working as it was intended, and it was the—
Q93 Andrea Leadsom: Again, you have just said that the market structure was not working as well as intended, so it was not manipulation, it was just that the market was not working very well. You cannot have it both ways. Either, in 2006, the market was not working well, which is what you have just said, or there were attempts to manipulate the market, which was what I was putting to you.
Paul Fisher: The dealers were complaining about the way the market was working.
Andrea Leadsom: As far as the Bank of England is concerned, the market is working well, but as far as the dealers are concerned, it is not?
Paul Fisher: That would be my interpretation of that conversation, yes.
Q94 Andrea Leadsom: How can the Bank of England think a market is fine when the market does not think the market is fine? Is there no contradiction in that?
Paul Fisher: No, you have a group of traders here who have their own interests, and they are talking to those. We have to look through those own interests. We are not going to go around changing the market just to suit the market makers.
Andrea Leadsom: Of course you are not.
Paul Fisher: It is a market for everybody. We have to take a wider view.
Q95 Andrea Leadsom: There are plenty of examples here, some very specific examples. There is one of an incident in Japan, “When an erroneously submitted rand/yen rate produced an incorrect fixing, against which affected many mostly retail-sized clients”. So we know there are some specific examples where the market was not working properly. Yet the committee favoured treating such problems on a case by case basis but did agree that there was a potential gap in the FX market, and that a more robust process could help reduce the time spent resolving disputes, and reduce the risk of price manipulation. But you still think that all was fine, the market was working fine?
Paul Fisher: This is all the dealers worrying about the volatility in their business, leading up to the fix. I have to see it knowing that that is their vested interest.
Dr Carney: If I may, without commenting on the specific minutes, but as a general point, to support what Mr Fisher was saying, it is not outside the realm of possibility—in fact, this is what is being investigated—that the dealers want a quiet life. They want the ability to both promise to their clients that they will deliver the 4 pm fix and not have any risk in delivering that promise. Other market activity around the 4 pm fix by others, whether they are hedge funds, asset managers, corporate, whatever, will make that promise riskier.
That is the dealer’s job. That is the dealer’s job, in making that promise. What they may have done, which is alleged and which is being investigated around the world, is that having developed a pattern of making those promises, they decided to cheat to make their life easier, to collude across the dealers. That is fundamentally—
Paul Fisher: Richer and easier.
Dr Carney: Well, exactly. Easier and richer sometimes goes together—it does not always go together—to buy happiness. That is what is being alleged, so you have a circumstance, and obviously, I was not present at the meeting and one reads into the minutes, where you have a circumstance where you have volatility because of the market functioning, and the dealers want to change that. What is being investigated is whether they tried to change it by colluding, sharing client information and doing above and beyond. That is fundamentally against the principles of fair markets. It is unacceptable and it has to be prosecuted to the full extent of the law, and that is exactly what is going to happen. It is what is happening, and that is what is going to happen.
Q96 Andrea Leadsom: The fact that a number of traders have already been suspended or sacked across the world does suggest that clearly the market was not working robustly. Again, coming back to the point of what procedures were in place for escalation within the Bank of any concerns. You are now clearly able to say that on 16 October, suddenly you were aware of concerns, and that was the very first time ever, and prior to that there was absolutely no evidence whatsoever. But the fact still remains that there should have been an escalation procedure. It would be very interesting to see whether, between 2006, in wake of LIBOR, and 2014 now, whether there have been any issues raised up the line and if so, by what method and who to?
Q97 Chair: Is the Travers Smith investigation looking at exactly that issue, Mr Fisher?
Paul Fisher: The Oversight Committee investigation is something I cannot comment on.
Q98 Chair: No. I am asking if the terms of reference of the Travers Smith investigation would lead them to expect that they should be looking at that issue?
Dr Carney: No.
Chair: Could Mr Fisher answer it in the first instance, because he is the line manager responsible for this?
Paul Fisher: I have not seen the terms of reference for the Travers Smith investigation.
Q99 Chair: You have not seen them?
Paul Fisher: No.
Dr Carney: If I may, Chair. The initial investigation was launched by governors. Mr Fisher is not a governor. So, the initial launch is by governors. This is now being run by the Oversight Committee, given what we have discovered. I can answer your question, though, on terms, because the publicly disclosed terms of reference focus on the foreign exchange market. I believe that what is being raised here is other activity, other markets—are we aware of other activities, whether it is in swaps or gold or whatever? As a first step to address that what we are doing is going through an attestation process, which is, are you currently aware of something that is happening this week? Have you ever been aware? Do you have any reason to believe it? Is there any evidence? Is there anything that we should be looking at across markets, other markets? We are doing that process.
Q100 Andrea Leadsom: You are doing that over all markets?
Dr Carney: We are doing it. We are doing that, yes.
Q101 Andrea Leadsom: Effectively, if we were in the same place today, you would have been looking through these foreign exchange minutes and looking for evidence of any kind of back-testing of potential for collusion? As things stand today, you will be looking for that in the gold markets and the business swaps markets?
Dr Carney: Yes. We do not necessarily have analogous formal meetings in those markets that would be minuted, but to the extent we have them, we are looking at them. But what we are doing is going to our employees, who are of the highest integrity, to have their attestation of what they are aware of or not in that case.
Q102 Andrea Leadsom: Just then Mr Fisher said it is not your job to go looking for trouble, so why are you going and looking for trouble?
Dr Carney: The question is whether we are aware of something, as opposed to whether we are trying to do the FCA’s job—
Andrea Leadsom: That is lost on me, sorry.
Dr Carney: It is very straightforward. The FCA is responsible for conduct. It is the FCA’s responsibility to investigate these markets as appropriate. They are doing so. If we are in possession of any information that could be helpful to their broader efforts, at a minimum we need to be aware of it in the senior ranks of the Bank of England, and we would obviously share it.
We are going through the process of determining whether we are in possession of any information, and whether any individuals are aware of any such circumstances. We would have gained this information in the normal conduct of our activities, not as a regulator. We do not regulate the swaps market; we do not regulate the gold market. But we have contact and so, through that market intelligence function, are we aware of anything today—with the wisdom of hindsight, what we have seen in LIBOR and what we have seen in FX—that should raise similar concerns? If there is a hint of similar concerns, given the behaviour that has been demonstrated in other markets, they need to be chased down, that is absolutely clear.
Q103 Chair: I want to go back to an earlier point. Am I right in saying that the Travers Smith terms of reference and mandate was written without any consultation with you at all, Mr Fisher?
Paul Fisher: It is important that I, as the line manager of the relevant area, am not part of the investigating team or the process, so it is being done independently of me. In fact, I asked for that just in case.
Q104 Chair: It could end up as an investigation into you, therefore you have been removed from it? But presumably, people who are expert in these markets have helped draw this up, other people in the Bank, elsewhere, these terms of reference? Is that correct, Governor?
Dr Carney: The investigation that was conducted by the Bank, not by the Oversight Committee, had the benefit of the informed opinion of those expert in markets, including the governors, but also technical experts, in terms of drawing up the terms of reference, the scope and breadth of that investigation—I should speak conditionally—that would help inform the decisions of the Oversight Committee in terms of their terms of reference. But, again, the Oversight Committee set these terms of reference and they are best placed to respond.
Q105 Chair: It took the evidence with sufficient seriousness to suspend someone, for the Oversight Committee to take charge, did it not?
Dr Carney: It did, but it was—
Chair: Should they not have led on this from the start?
Dr Carney: Well, the view of the governors was that this was a serious situation that needed to be run down. We immediately initiated an investigation ultimately that has had the consequences that we are discussing today.
Q106 Chair: That is the external investigation, the Travers Smith investigation we are talking about here, that you initiated?
Dr Carney: Yes.
Chair: The one that is independent, correct?
Dr Carney: Correct.
Q107 Chair: So all the Oversight Committee has in fact done so far is reappoint the law firm that you had already appointed in October?
Dr Carney: Again, I do not speak for the Oversight Committee and I am uncomfortable consistently interpreting them, because to the uninformed it can blur the distinction between the two. You are not uninformed, Chairman, but what they have done is to set terms of reference, take charge of this investigation and, as you began the discussion, potentially they will put in place additional resources.
Q108 Chair: Right at the heart of this on the governance side, and you have just alluded to it by saying “the uninformed”, or by implying the uninformed might have been misled by what was being said or exchanged between us, is that we have a governance structure that is still opaque, complex and byzantine and we desperately need to sort it out? Now it is being subjected to its first test and it is not doing very well.
Dr Carney: This is—
Q109 Chair: You are not rushing to challenge that, Governor?
Dr Carney: This is an unhappy situation to be in. I think I would stand by there is no regrets about the actions of the governors in addressing this issue. We have the governance structure that we have inherited from Parliament. It is our job to make it work, our collective job, the governors, but also the members of the Oversight Committee.
Chair: We need to help you do that as well.
Dr Carney: We always welcome assistance. I would suggest that the Oversight Committee’s efforts can be buttressed, as you have alluded to, by external assistance, not just in legal assistance but in expertise in terms of best practice. It could be buttressed as a matter of course by having a dedicated resource within the organisation, something, if memory serves, you raised with me about a year ago in my confirmation hearing. The way I would like to think of it is something akin to the IMF’s internal evaluation office. A dedicated resource that they can draw on, which brings that expertise and perspective to what sometimes can be technical issues, whether they are issues of policy or issues of conduct in this circumstance, and obviously—what you would expect—a commitment to public disclosure of the results of those investigations.
On the last point, I would state the caveat, which I think you would all appreciate, that obviously any publication of results of our internal investigation, the Oversight Committee’s investigations, would have to be governed by the requirements of the FCA’s investigation to ensure that we did not prejudice it.
Chair: Governor, you have had a long and very demanding morning and now two hours of afternoon, so I am going to bring this hearing to a close. We are very grateful to you and to all the Bank staff who have also participated in this hearing. We do try and make our hearings to be somewhat shorter than five hours. Perhaps in future we will have to make a demand on your afternoon or the following day. Thank you very much for coming.
Dr Carney: Thank you very much.
Chair: We will be following these issues very carefully.
Oral evidence: Foreign Exchange Market Review 35