Royal Bank of Canada agreed to pay $13.55-million and Toronto-Dominion Bank $9.3-million to the Ontario Securities Commission to settle charges they failed to supervise foreign-exchange traders during a three-year period.
The settlements were approved by the commission Friday morning, with the OSC saying it’ll be looking at the trading activities of other big banks as well.
The OSC pursued the two banks in the first major Canadian regulatory action as part of global investigations into foreign-exchange traders. From 2011 to 2013, employees at both banks used electronic chat rooms “hundreds” of times to share confidential customer information with foreign-exchange traders at outside firms, the OSC’s Cullen Price said Friday.
The traders at both banks had a “profit motive," said Mr. Price, head of the OSC’s market-abuse team, who presented the case to the commission Friday.
RBC and TD are among “the biggest, most sophisticated and well-resourced financial institutions, and failed to have sufficient supervisory controls” at their foreign-exchange operations, he said. “The failings took place in a systemically important way.”
However, Mr. Price said the OSC was not alleging, and had no evidence of, market manipulation, and the banks were not admitting to a breach of Ontario securities law.
The settlements call for RBC and TD to conduct internal audits of their compliance with the FX Global Code, a set of best-practice principles established by a group of central banks and major international financial institutions. They have until December, 2020, to turn over the results to the OSC, and additional timelines to fix any flaws.
The OSC said Friday “the largest derivatives dealers in Ontario” – that is, the big banks – will also need to audit themselves and self-report any problems to the OSC. The OSC “will also co-ordinate with other Canadian regulators as appropriate,” it said.
The OSC said RBC’s fine was equivalent to 10 per cent of its “revenue from the relevant products or business area,” which the OSC said was $124-million over the three years, plus $1-million for each of the three years the activity occurred.
The OSC said TD’s fine was equivalent to 10 per cent of TD’s “relevant” revenue of $102.9-million over the three years, plus $1-million for each of the three years the activity occurred.
The OSC reduced the penalties for each bank in recognition of their co-operation with the investigation, noting TD’s “exemplary” efforts and reducing its penalty by 30 per cent. Mr. Price said TD was ”pro-active and collaborative throughout the investigation and the resolution of this matter.”
RBC, which was not described as “exemplary,” got a reduction of 12 per cent.
RBC spokesman Andrew Block declined to address the discrepancy Friday except to point to the OSC’s reasons for approving the settlement, which said RBC has “engaged in significant continuing compliance remediation efforts,” improving its supervision and controls by shutting down chat rooms, adopting codes of conduct, training employees and monitoring communications. “We don’t have anything further to add beyond what’s in that document,” he said in an e-mail.
RBC and TD each paid an additional $800,000 to the OSC to cover the regulator’s investigatory costs.
Lawrence Ritchie, a partner at Osler, Hoskin & Harcourt LLP who represented RBC at Friday’s hearing, said the bank “takes its duty to supervise its trading activities and comply with its compliance obligations seriously. RBC is committed to ensuring a strong culture of compliance with appropriate supervision and controls.”
Paul Le Vay of Stockwoods LLP, representing TD, said “TD takes its obligations to have sufficient supervision and controls in its business extremely seriously. … The bottom line is TD’s internal controls are much different than they were six to eight years ago.”
Ermanno Pascutto, executive director of the Canadian Foundation for the Advancement of Investor Rights, said the settlement “seems quite reasonable. … This was simply a failure of having adequate controls in place. In terms of the management and supervisory staff at other banks there is probably a feeling of, there but for the grace of God go I."
The OSC statements of fact describe inappropriate chat communications by three RBC traders, labelled “A” “B” and “C,” and a managing director labelled “A,” as well as TD trader “A,” a TD managing director “A” and a salesperson “A.” None of the employees’ names were revealed at Friday’s hearing, and the OSC declined to comment when asked whether it was pursuing any individuals in the case.
Mr. Block of RBC declined to say Friday whether any of the employees had been disciplined or fired. “We don’t comment on specific personnel matters.” A TD spokesperson did not reply to an e-mail on the matter Friday.
In 2013, the little-known world of foreign-currency trading made headlines on news that traders at some of the world’s biggest banks had possibly colluded using chat rooms with names such as The Cartel, The Bandits’ Club and The Mafia. The activity was alleged to have stretched back a decade.
The OSC has not alleged the Canadian banks were part of those specific chat rooms, but said Friday RBC traders were in other rooms with “suggestive names,” including the Anthill Mob, the Cognoscenti and Rule 76, which was a reference to “No excuses; play like a champion” from the movie Wedding Crashers.
A dozen global giants of banking have already set aside more than $100-million in a Canadian class-action suit to compensate this country’s investors for foreign-currency shenanigans. RBC and TD, as well as Bank of Montreal, which has not been named by regulators, remain as defendants in that lawsuit, which sought $1-billion in damages from inappropriate trading in Canada.
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David Milstead