James Moore: Look out – now the heat is on, the regulators are stripping for action

Outlook The international investigation into banks' foreign exchange trading is fast becoming the hottest ticket in town. The latest to arrive at the party is the US Federal Reserve, joining yesterday after the first round of cocktails had been served to the US Securities & Exchange Commission, Britain's Financial Conduct Authority, the European Commission, Switzerland's markets regulator (the Finma), and its competition regulator (the Weko).

Expect them to generate a fine-looking treasure chest of penalties to pay for their drinks. Multiple American agencies are involved, and the EC, which has some pretty draconian powers at its disposal, won't want to be outdone. You'd think that co-ordinating that lot would be beyond even Gandhi. But actually it's reasonably straightforward. The Americans will sit around a conference table, decide when they're ready to go, and then everyone else will follow their lead.

What's got them all exercised is that traders appear to have been playing dirty over the benchmark WM/Reuters currency rates, determined by a minute-long "fix" at 4pm in London. This can be manipulated before and during that window if traders push through a high volume of orders at the right time. If they act in collusion, so much the better (or worse).

At least 12 banks have been contacted by regulators, two (RBS and Lloyds) have set up their own reviews, and 12 traders have been suspended or fired. But it's not only the banks and their traders that were at fault. This unlovely situation only developed because financial regulators allowed it to.

Had anyone raised questions about what had happened in the past – and there have been suggestions that this could have been going on for a decade a more – the stock response would have been "we don't regulate forex". The same goes for other benchmarks that have either led to scandals (Libor) or might lead to them at some point (metals, oil, other commodities).

Now that the heat is on, every watchdog in town has found it can take action after all. So if you have shares in banks prepare for some chunky, one-off, "exceptional items" in the small print of your investment's results statement whenever the hammer falls.

If you're a trader, you'd be advised to cosy up with m'learned friends. The FBI are sniffing around and the extradition treaty we have with the US isn't in your favour. And if you're in management? Well, you can always get the PR department to craft you some pious quotes about how shocked and disappointed you feel. The regulators might be making a show of being tough. But they'll focus on the easy targets, and that's not you.

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