European banks are being accused of overcharging small to medium enterprises and similar customers for foreign exchange services. These banks earned hundreds of millions of Euros that mainly came from the pockets of small corporations, according to a new report from the European Central Bank. The Irish Times claims that the research is the first of its kind, a data-driven study that looks into the 'traditionally opaque world of Forex derivatives pricing'. The report provides evidence to what used to be merely hearsay, that smaller corporate clients paid higher rates for protection against the fluctuations of the Forex market.
Discrimination on Forex Expertise
The lead author of the much-anticipated paper is Geneva School of Economics and Management Professor Harald Hau, who says the elephant in the room is that dealers systematically and consistently overcharge clients who don’t have experience in trading currency. This systematic price discrimination occurs against ‘less sophisticated market participants’, or smaller clients who don’t have expertise in currency transactions. While these banks have always argued that the difference in charges is in part due to clients’ individual needs and circumstances, the study shows otherwise. The report indicated that there wasn’t much difference in pricing when it came to the length of the contracts. Instead, the rates were determined by the banks' perception of the clients’ expertise in trading currency.
Banks reportedly collect an extra €638 million ($716 million) on average a year because of discriminatory pricing when it comes to euro-dollar contracts. While most small corporations pay 50 basis points on these contracts, larger companies pay merely two basis points.
This discovery happened to be timed with another connected controversy related to financial institutions being fined for rigging the Forex market. CNBC reports that Barclays, J.P. Morgan, Citigroup, Royal Bank of Scotland and MUFG have all been fined a total of €1.07 billion ($1.2 billion) by European Union antitrust regulators for rigging the spot foreign exchange market for 11 different currencies. Forex spot trading is one of the biggest markets in the world, raking in billions of euros and dollars daily. The regulators found individuals from these institutions who've proven to be displaying collusive behaviour, which allows them to make informed market decisions. EU Commissioner Margrethe Vestager commented that “the behaviour of these banks undermined the integrity of the sector at the expense of the European economy and consumers.”
Implications for the Forex Market
The Forex market is one of the largest and most liquid markets in the world. Businesses with transactions overseas, and even individual travellers, all regularly make Forex transactions. Moreover, FXCM notes how the euro and the USD continue to be the most traded currency pair in the world. This underscores the large implications of European banks allegedly overcharging for Forex services, and international banks being fined for rigging the market for their own benefit. As the dollar and euro is the most traded pair on the market, the number of businesses and individuals affected is much higher than if it had been any other currency pair. In our article, ‘Greed In Forex- One of The Deadly Sins of Trading’ we looked at the excessive greed by these mammoth financial institutions to rig the Forex market or discriminate against smaller institutions. This is to undermine the integrity of a market where everyone should have an equal chance of benefitting from. This leads to small institutions earning less and big institutions earning even more. Hopefully, through more data-driven studies and tighter regulations, occurrences like this won’t continue to happen in the Forex market.