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February 26, 2014 4:28 PM
Forex-Trading Firm FXCM Fined by U.K. Regulator
Firm to Pay $16.7 Million to Settle Allegations of Withholding Profits From Clients
By JENNY STRASBURG And MAX COLCHESTER
LONDON—Foreign-exchange trading firm FXCM Inc. agreed to pay fines and refunds totaling almost £10 million ($16.7 million) to settle allegations by a U.K. financial regulator that the company withheld profits from clients and failed to inform British authorities that it was under investigation in the U.S.
The Financial Conduct Authority said that U.K. units of FXCM withheld £6 million from customers on foreign-exchange transactions between August 2006 and December 2010. The regulator said the broker pocketed profits when exchange rates moved in its customers' favor while a trade was in process, but it passed on losses that occurred on other trades.
FXCM, which is based in New York and is publicly listed on the New York Stock Exchange, is a dominant broker in online foreign-exchange trading for retail clients and serves banks, hedge funds and other asset managers. The company in 2012 sought to boost its institutional-trading business by investing in, and trading with, an electronic-trading platform called FastMatch, in partnership with Credit Suisse Group AG. In trades with retail customers, FXCM matches orders electronically with quotes from more than a dozen banks and other so-called market-making firms, including high-frequency-trading firms. FXCM earns a "markup," or fee from clients based on trading volume, according to the company's description of its business.
As part of its settlement with the British regulator, FXCM agreed to pay £4 million in fines plus almost £6 million to refund money to U.K. clients.
In a statement, FXCM played down the impact on customers as "typically very limited," with individual traders suffering an average hit of $3.70 apiece because of the practices over the four-year period addressed in the settlement.
"It's not like this was a major source of profit," FXCM Chief Executive Drew Niv said in an interview Wednesday, adding that FXCM operated similarly to competitors when it pocketed price improvements instead of crediting customers. FXCM changed its practices in 2010 to pass along those price improvements to customers, Mr. Niv said.
"This is how the system was set up. As far as we were concerned at the time, the customer traded with us, and we hedged," Mr. Niv said. "The only thing we held back on was the price improvement. We still gave the customer the best price out of multiple market makers."
About the FCA agreement, Mr. Niv said, "The idea of a settlement is I don't argue with it."
The FCA said the fine wasn't related to any continuing probe into allegations that traders at banks and other institutions attempted to rig foreign-exchange markets.
FXCM said it had provisioned $15 million in the third quarter of 2013 for this matter. "All clients receiving restitution will be notified within 60 days," the company said. FXCM's U.K. customers who lost more than $1 as a result of its practices will be reimbursed to their accounts.
The FCA became aware of the practice in 2011. But it was unaware that U.S. authorities had begun their own probe into the matter a year earlier. In 2011, FXCM agreed to pay more than $14 million to settle allegations from U.S. market regulators that the company had failed to supervise customer accounts. As a result, regulators said, FXCM customers suffered detrimental pricing on trades.
FXCM's failure to alert the FCA breached requirements that businesses be open and cooperative with the U.K. regulator. "I'm not contesting that," Mr. Niv said, adding that an FXCM executive at the time responsible for informing the British regulator mistakenly "thought he had."
Write to Jenny Strasburg at jenny.strasburg@wsj.com and Max Colchester at max.colchester@wsj.com
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