Foreign Exchange Firm Fined in Britain

Britain’s Financial Conduct Authority on Wednesday fined the British units of FXCM, a retail foreign exchange trading firm, 4 million pounds for
withholding profits from its clients.

In what appears to be a classic ‘heads we win, tails you lose’ case, FXCM, whose United States parent is listed on the New York Stock Exchange, allowed its British units to execute trades in another part of the firm and profit from them if the market moved their way but passed on losses to the clients if the market moved against them.

The regulator said nearly £6 million, or $10 million, which should have gone to its customers went into its own coffers instead. The firm will pay that amount to clients in restitution.

Most of the of fine that FXCM will pay is for failing to treat its customers fairly. But the authority also fined the firm for failing to disclose that the United States authorities were investigating another part of FXCM for the same misconduct. In 2011, the Commodity Futures Trading Commission ordered the company to pay $14.2 million to settle similar accusations.

FXCM violated an F.C.A. principle that says firms must have an open relationship with its regulators.

“Not only did FXCM UK fail to treat its customers fairly or correctly apply our rules, I am particularly disappointed that it was not transparent in its dealings with the F.C.A.,” said Tracey McDermott, the authority’s director of enforcement and financial crime.

FXCM said in a statement that it had put in place changes to make sure it does not profit from trades at its clients’ expense. “This settlement is a significant step in our efforts to put this legacy trade execution issue behind us,” said Brendan Callan, the chief executive of FXCM’s British operations.

The investigation and settlement are unrelated to the broader foreign exchange investigation being led by the United States Justice Department, the Financial Conduct Authority, the Serious Fraud Office and other regulators spanning the globe.

But it does highlight the opaque nature of the huge foreign exchange market, which is bigger than both the stock and bond markets.

According to the authority, FXCM’s British division placed “over the counter” foreign exchange transactions known as rolling spot forex contracts on behalf of retail clients, which were then executed by another part of FXCM in the United States. Between August 2006 and December 2010, FXCM kept trading profits but passed on any losses to clients - a practice known as “asymmetric price slippage.”

The authority is conducting a so-called thematic review of firms’ execution practices, including the way services are described to clients and arrangements for order execution and review, and plans to publish its findings by summer.