A number of legal cases have recently emerged by companies alleging they have been mis-sold complex currency derivatives, which became dramatically more expensive due to the fall in the value of sterling following the UK’s vote to leave the European Union (EU). These cases could be the tip of the iceberg with transparency and education now becoming imperative in the foreign exchange (FX) industry.
Paul Langley, Managing Director of OSTC FX, believes the type of mis-selling alleged in these recent court filings has become commonplace in parts of the FX world as a result of complex products being sold to businesses with inadequate knowledge and understanding of them. Such practices, he said, should not be tolerated, as it creates distrust, tarnishes the industry and leaves businesses out of pocket.
Major banks and brokers have been accused by small firms of mis-selling them complex financial products, where the risks involved in taking out foreign exchange derivatives contracts were not properly explained. These financial products were designed to protect these small companies from instabilities in currency markets. However, the businesses suffered substantial charges when the pound dropped following the EU referendum in June 2016.
One of the first companies to bring such a case is a British clothing manufacturer, but it is estimated at least a further 25 lawsuits have already been filed.
Langley commented: “Some of these companies claim to have lost millions of pounds as a result of being mis-sold currency products, which could be catastrophic for a company. It shows a breach of a duty of care and this lack of transparency is simply not acceptable.”
“With such a momentous event as the EU referendum, where uncertainty prevails and so currency markets were bound to fluctuate to a significant degree, businesses were right to try to hedge to protect themselves from currency volatility. Yet it appears some FX providers have taken advantage of this by offering unnecessarily complex contracts that businesses did not understand and left them exposed to higher risks.”
Education, Langley suggests, is crucial when it comes to managing foreign exchange dealings, as understanding exactly what strategy a business is agreeing to can help protect against financial loss.
Langley commented: “In light of the devaluation of sterling since the UK opted to leave the EU, business leaders and finance directors have had to wake up to currency risk and how they can manage it effectively. They may have never needed to give it such consideration before, yet now need to understand the risks and potential strategies available to deal with these risks. An FX company that aims to establish a lasting and open relationship with a business should help provide this understanding. This creates trust and gives the business confidence that they have a robust hedging policy in place.”