To be or not to be ‘Sophisticated’. That is the question.

On May 20th 2015 the NYDFS (New York Department of Financial Services) fined Barclays $2.4 billion for a variety of wrongdoing in FX, and forced by the U.S. Department of Justice (DOJ) to plead guilty to Parent Level charges of criminality.

It is important that EVERY UK banking customer reads this plea agreement, and understand why it is significant to them. This is particularly so if you have ever been sold ANY product by a UK bank, and particularly if you have ever been classified as a ‘sophisticated’ customer by either your, the FCA or the Financial Ombudsman Service.

And here is why…..

Firstly, my STATEMENT OF TRUTH AND FACT as a banking and financial markets expert with over 30 years experience working on the trading floors of many of the world’s largest banks including Citibank (FX Back Office), Chemical Bank, Lehman Brothers, Natwest, Nationsbanc (Now part of Bank of America), Swiss Bank Corp (SBC), UBS (following merger with SBC), Chase Manhattan, UBS again 2010-2012 and finally Lloyds Banking Group 2012-2014.

  1. Banks and bank sales persons do evaluate a customer’s sophistication when conducting business with them.

2. However, the purpose of this sophistication evaluation has little or nothing to do with the duty of care they must afford, or type of product that they could sell to, the customer.

3. Indeed, the formal criteria for sophistication that has been relied upon by the banks (and their lawyers), FCA and FOS to deny customers the compensation that they know the customer is entitled to, is not, and rarely ever was, the criteria being used by the bank or sales persons when evaluating the customer.

4. Instead the banks and their sales persons were evaluating the ‘sophistication’ of the customer by other criteria. This criteria was:

a) How much does the customer know about this product?


b) How much does the customer know about the true market price of this product?

5. The intent was to make financial gain, and to determine how much ‘Hard’ mark up they could take from the customer from any given transaction.

6. This was achieved by way of saying anything, be it true, false or misleading, that was required so as to convince the customer to buy the product and pay the excessive and unfair price.

7. This approach was adopted whether the customer was the smallest SME, or the largest corporate, and the formal ‘sophistication’ criteria never entered their thinking or the equation.

8. UNLESS, the bank or sales person could achieve a greater amount of financial gain by selling an inappropriate and complex product to a customer that did not meet the formal ‘sophistication’ criteria required to do so. In which case they would ‘encourage’ the customer to self certify, or sign an ISDA, so as to manipulate the formal ‘sophistication’ of the customer.

9. EVERY sales person or sales desk/team had P&L targets for ‘Production Credits’, a form of ‘Soft’ mark up based on volume of business, or REV (Real Economic Value of a trade) metric.

10. But they also had P&L targets for these ‘Hard’ Mark Ups. A ‘Hard’ Mark Up is the amount the sales person would add to the price given to them by a trader (The trader’s price represented the best execution price that the bank was bound to provide to customers), before passing the new and excessive price to the customer.

11. The existence of Hard Mark Up P&L targets for sales persons, required the sales persons to pass on a price to a customer that was not the ‘best execution’ price provided by the trader. And in order to generate the required P&L, sales persons would have to adopt practises that involved them misleading, or making false representations to, a customer.

12. These P&L targets were set by senior management, and cascaded down from Board level where the broader Business Unit P&L targets were set. Board and Senior management knew they could only be achieved by way of deceiving customers and pricing products on a ‘whatever they could get away with basis’.

13. This was true at every bank that I worked for during my career.

14. The FCA know that all of the above is true, but have gone to extraordinary lengths to mislead victims and conceal this from customers, and worse, have themselves made knowingly false representations so as to deny appropriate redress for customers, and limit bank liabilities.

15. The banks, the FCA and the FOS also therefore know that the following is also true in the case of any customer that the bank, FCA or FOS has deemed as ‘sophisticated’:

a) If you bought ANY product, including and particularly an FCA Regulated derivative that was a toxic IRHP, as a result of false or misleading representations by the bank and sales person, you could not have understood the product, and therefore the product was mis-sold, or sold by way of fraud.

b) If you bought an FCA regulated derivative that was a toxic IRHP, then it will have had a credit line attached to it in the name of the customer (The credit line was required as a result of the purchase of the toxic IRHP). This credit line was also FCA regulated because it is classified as an “Ancillary Service”. Therefore, it MUST be disclosed to the customer. Whereas, if this credit line was concealed from you the customer, you could not possibly have understood the product or its risks, and therefore the product was mis-sold, or sold by way of fraud.

c) It is one thing for the bank, FCA and FOS to claim that you must have understood the FCA regulated toxic derivative product because you were classified as ‘sophisticated. However, it is another entirely to expect a customer, sophisticated or otherwise, to have clairvoyant abilities and understand and assess the risks, potential damages and potential consequences pursuant to the FCA regulated credit lines that they were sold, but did not even know existed, and therefore the FCA regulated toxic derivative product was mis-sold, or sold by way of fraud.

It really is that simple.

15. I stand by all of the above. So much so, I would be happy to provide a signed statement to this effect for any IRHP victim, or any customer that has been denied appropriate review and compensation on the basis of ‘sophistication’.

16. I could bring forward any number of former bank employees who would testify to the same.

Moving on to further evidence to substantiate the above……

Exhibit 1Barclays plea agreement with NYDFS

Included within the findings by the NYDFS and DOJ on May 20th 2015, was a section called ‘Sales Practises’. Within this section there is critical content (numbering below is consistent with the numbering in the NYDFS Findings):

41. On numerous occasions, from at least 2008 to 2014, Barclays employees on the FX Sales team engaged in misleading sales practices with clients. Sales employees applied “hard mark-ups” to the prices that traders gave them without their clients’ knowledge. A hard mark-up represents the difference between the price the trader gives a salesperson and the price the salesperson shows to the client.

42. FX Sales employees would determine the appropriate mark-up by calculating the most advantageous rate for Barclays that did not cause the client to question whether executing the transaction with the Bank was a good idea, based on the relationship with the client, recent pricing history, client expectations and other factors.

The NYDFS discovered evidence within conversations over an electronic chat system between Barclays sales persons, and include them in their findings.

43. As one FX Sales employee wrote in a chat to an employee at another bank on December 30, 2009, “hard mark up is key . . . but i was taught early . . . u dont have clients . . . u dont make money . . . so dont be stupid.”

As if this were not bad enough, the NYDFS included this:

“……the future Co-Head of UK FX Hedge Fund Sales (who was then a Vice President in the New York Branch) wrote in a November 5, 2010 chat: “markup is making sure you make the right decision on price . . . which is whats the worst price i can put on this where the customers decision to trade with me or give me future business doesn’t change . . . if you aint cheating, you aint trying.”

Another was found to have said:

the goal was to “give the rate that was most advantageous to the bank, but would not make the customer go away!”

This is consistent with the pricing practises of all banks, and corroborates the practises that I testify to above, and witnessed at the various banks I worked for.

It confirms that banks and sales persons were pricing to all customers on a ‘whatever they could get away with basis’.

There is no intent to make a fair price, and there is no reference to the client ‘sophistication’. It confirms that it was policy to lie and mislead customers with intent to make financial gain.

Indeed, this person quoted was a sales person dedicated to servicing supposedly the most sophisticated of all clients, Hedge Funds.

The NYDFS, and the DoJ findings do not cite caveats whereby these sales practises are not wrongdoing and are not criminal, in the event that the client being cheated is ‘sophisticated’.

Indeed, the NYDFS goes further and elaborates as to the dishonest lengths that Barclays employees would go to so as to deceive customers and secure excessive and undisclosed Hard Mark Ups:

“44. At one point, certain members of the FX Sales team sat right next to the FX G10 traders and only a few rows away from the FX Emerging Markets traders, close enough to communicate verbally. At some point certain members of the FX Sales team were moved further away from the traders, but still close enough to communicate verbally. In this seating arrangement, certain FX Sales employees were able to communicate mark-ups to traders verbally and, at times, through the use of hand signals.”

45. The practice of certain FX Sales Employees when a client called for a price quote was to mute the telephone line when asking the trader for a price, which would allow Sales employees to add mark-up without the client’s knowledge. However, some clients demanded to hear the Sales employees’ communications with traders, and stayed on an open line while the FX Sales employees communicated with the traders.”

“46. In such circumstances, at least two Barclays FX Sales employees used hand signals to ask traders to add hard mark-up without the client’s knowledge. For example, one finger held sideways would indicate a one-pip markup, while two fingers held sideways would indicate a two-pip mark-up.”

Let’s be clear here, before continuing. EVERY customer that was sold a toxic FCA Regulated derivative (IRHP) as a condition of lending, will have been charged a Hard Mark Up. It will have been excessive (or ‘whatever they could get away with’), and it was not disclosed to you.

The Hard Mark Up is an absolute cost to you the customer, and an absolute profit to the bank. But for you the customer buying the product, the Hard Mark Up does not exist and does not contribute to sales persons and bank revenues.

Banks and the FCA will try and argue that these Hard Mark Ups reflected a ‘cost to cover’, or in some way an ‘adjustment’ for credit risk. False, This was hard profit, and Hard profit that was locked in at point of sale.

Indeed, the NYDFS findings go further, and confirm that there were P&L targets for Hard Mark Ups at Barclays, just as there was at every bank I worked for:

“47. Mark-ups represented a key revenue source for Barclays and generating mark-ups was a high priority for Sales managers.”

“48. Historically, specific targets were set for mark-ups, and although specific targets are no longer set, most FX Sales employees continued to believe mark-ups remained a significant factor in determining compensation. Almost all FX Sales employees admitted they engaged in marking-up request-for- quotation and at-best orders, when possible. “

“49. Even though more recent managers of Barclays’ FX Sales group stated that they set no hard targets, certain FX Sales employees said they aimed for mark-ups to contribute at least 20% of the total revenue they were credited with. Mark-ups were thus one of three primary methods for FX Sales to generate revenue (along with sales credits based on volume, and allocations from traders in recognition of receiving profitable orders from Sales).”

As you can see, Hard Mark Ups were very much an important revenue stream, were subject to P&L targets set by senior management & Board, and these senior managers and Board were well aware just what practises were used so as to secure this ‘revenue’.

The NYDFS continued, citing further examples of Barclays sales practises:

“51. The agreements between Barclays and its FX clients did not disclose that Barclays was charging mark-ups to FX trades, and clients were generally not told when mark-ups were being applied to their specific trades.”

“52. On at least two occasions, FX Sales employees affirmatively represented to a client that no mark-up had been added, when in fact it had been.”

“53. On June 26, 2009, after one FX Sales employee appeared to admit to another Sales employee that he “came clean” about charging a hard mark-up after a client called him out on it, the second employee stated “i wouldnt normally admit to clients if you pip them. i think saying you rounded is fine.” The first employee agreed, and replied that he didn’t actually come clean to the client, but rather “said i was rounding.”

“54. On September 23, 2014, another FX Sales employee applied a mark-up to a client’s trade. The client called and asked if had applied a mark-up, and this Sales employee lied and said that he had not.”

Furthermore, not only was this revenue and pricing practises subject to P&L targets, it was also the subject of ‘policy’ and specific training. The NYDFS discovered the following:

“Not only did some Sales managers encourage this practice, but one senior trader on the Hedge Fund FX Sales Desk—who later became the Co- Head of UK FX Hedge Fund Sales—regularly gave presentations to incoming FX Sales employees to teach them, among other things, how to charge mark- ups.”

The bottom line, is that Just like Lloyds Banking Group and EVERY other bank I worked for, the sales practises were the same; “Say or do whatever it takes to secure as much profit as you can on a ‘whatever you can get away with basis’, and irrespective of any formal sophistication criteria.

It is important to understand that these fines issued by the NYDFS were for what was an ‘unregulated product’. This is the often used ‘escape road’ for the FCA when seeing ways not to investigate or take action against banks and their employees.

Importantly, the FCA also issued fines against five banks in November 2014 for the same FX wrongdoing, and in respect to the same ‘unregulated’ product. (I will cover the FCA’s FX ‘actions’ in more detail in a separate article)

Exhibit 2 – The Lloyds Banking Group FM Pricing Framework

This document was produced by Lloyds Banking group and signed off by multiple heads of departments. It was also the subject of at least one of the multiple protected whistleblower disclosures that I made during my time as a Director of Lloyds Banking Group in respect to dishonest sales practises and particularly the levying of excessive and undisclosed ‘Mark Ups’ on customers, and on the same ‘whatever you can get away with basis’.

It is important to understand that this policy was actually produced so as to limit the excesses of these same practises, and the extent to which Hard Mark Ups were being taken by Lloyds Banking Group sales persons prior to the introduction of this policy.

However, and importantly:

a) It did not seek to eliminate these practises at all

b) It included pricing tables for FX (and Interest Rate Swaps) that sought only to establish a ‘maximum’ amount of Hard Mark Up that could be taken. A maximum that was still very generous to say the least for the sales person, and incredibly costly to the customer.

IMPORTANT FOR ALL CUSTOMERS/VICTIMS Including GRG victims. Pricing tables and policies are deliberately designed to include ‘maximums’ or a ‘limit up to’ a defined amount. This facilitates the discriminatory pricing on a ‘whatever you can get away with basis’ irrespective of customer and sophistication. This was discovered within GRG also. The FCA chose to ignore or gloss over its significance.

c) Included an exception whereby a greater amount of Hard Mark Up could be charged with management approval.

On page 4 of this pricing policy it states the following:

“Pricing Principles

Across all products and client segments, FM (Financial Markets) aspires to the following principles:

  1. pricing should be fair and transparent for clients
  2. pricing should represent value for clients
  3. pricing should be competitive in the marketplace
  4. pricing should reflect the full cost to serve via a particular channel
  5. pricing should enable the business to remain commercially viable over the long term
  6. pricing should be consistent across channels where possible and appropriate
  7. full, pre-deal, price disclosure should be provided to clients”

1, 2 and 7 are my personal favourites.

Now consider the above pricing principles, and that at the time Lloyds were also advertising FX services to clients as follows:

And now consider that the pricing tables referred to as “Maximum Margin Matrix (%)” within this same policy permitted sales persons to take Hard MarkUps of up to:

2.45% on trades of between £200,000-£250,000.

For the record a 2.45% Mark Up on a trade of £250,000 = £6,125.00

1.92% on trades of between £900,000-£1,000,000.

For the record a 1.92% Mark Up on a trade of £1,000,000 = £52,083.00

Between a maximum of 0.85% – 1.92% on trades between £3mio-£5mio (Depending on the pricing channel (I.E. ‘Arena Platform’, ‘Inward payments’ SME & Corporate’ etc.)

For the record a 1.92% Mark Up on a trade of £5mio = £96,000.00

These Mark Ups are for pure Spot FX trades. Spot trades are for two day settlement and require the full amount that is to be converted to be deposited by the client before the trade can take place. Therefore there is no credit or counterparty risk to the bank, and the trade has zero balance sheet intensity.


These Mark Ups are a charge to the customer.

The revenue generated by these Mark Ups exists only because the customer did the trade. No trade, No mark Up, therefore a charge to the customer for having done the trade.

How is this consistent with the “No Charge” advertising?

It is not. The advertising and client agreements are false.

Are these Mark ups ever disclosed to the customer?

No, they are not.

Does this not contradict the price transparency, value for clients and price fairness that Lloyds proclaim in those “Pricing Principles”?

Yes, it does, and it does so by design.

If the bank can have a pricing table whereby it determines the Mark Up as a % of the trade, can the bank not simply apply that % calculation to the trade and tell the customer ‘pre-trade’ what the Mark Up or charge to the customer will be?

Yes, of course they can, and they can do so automatically. Indeed, on the deal ticket for all trades, there is a field that includes the precise amount of Mark Up taken on the trade. However, the bank chooses not to disclose that any Mark Up was taken, or the actual amount of Mark Up that was taken.

Moving on to SME definition. The FM Pricing Framework also defines an SME in the eyes of Lloyds Banking Group, and does so as follows:

  • SME’s are defined as UK Companies with turnovers up to £25mio
  • SME’s require access to the FX and interest rate markets and term deposit products with limited need for more value added risk management services. The Fundamental difference between SME’s and the more sophisticated GC (Global Corporates) and MM (Mid Markets) proposition is its simplicity for the end client. Products are designed to ensure ease of understanding and flexibility.

This clearly establishes that Lloyds Banking Group deems all businesses with turnovers up to £25mio as non-sophisticated.

However, and more importantly, this 22 page Pricing Framework Policy that governed all pricing policy and conduct of sales persons of all products, makes only one reference throughout the entire document to ‘Client Sophistication’. It reads:

Client Sophistication

The vast majority of Financial Institutions and Global Corporate clients are classified as professional counterparties under MiFID and as such typically have access to a wide range of banks and counterparties. Pricing to these clients is generally determined by competitive benchmarking, rather than pricing policy/guidelines.

It confirms that the only clients Lloyds regarded as ‘sophisticated’ was Financial Institutions or Global Corporate Clients (Turnover above £750mio).

There is no other mention or reference to any other ‘sophistication’ criteria. Certainly no reference to any criteria used by the banks or FCA to deny SME customers appropriate protection and remedy.

IMPORTANT: Therefore, the FCA and banks are dishonestly applying a metric and criteria as to sophistication, so as to unlawfully deny customers appropriate review and remedy, that the FCA and the bank knew was never considered by the bank when selling the products in the first instance.

Indeed, perhaps the most critical statement within the FM Pricing Framework demonstrates the true Lloyds Banking Group approach to different client types and how it encouraged sales persons to target the less sophisticated customers for excessive and undisclosed Mark Ups.

“In highly competitive markets where clients are sophisticated (Turnover of over £750mio by Lloyds definition), highly price sensitive, with minimal requirement for market colour, AV (AV = ‘Added Value’ aka ‘Hard Mark Up’) may not be charged. Where AV is charged, for smaller, less sophisticated customers (Turnover of less than £750mio), AV is limited to a set level.”

In short, if the client is sophisticated and knows where the price really is, be competitive and don’t take any Mark Up. Whereas if the client is smaller and less sophisticated, and does not know where the true price is, don’t worry about being competitive and take as much Mark Up as you can up to the maximum levels.

Lloyds Banking Group will argue that the application of Mark Ups was a ‘cost to cover’ (a charge to cover the cost of providing the services).


How can the application of Mark Ups be a cost levied so as to cover the cost of provision of the services, when the costs are only being levied on the smaller, less sophisticated customers, and not the sophisticated customers?

And does it cost the bank £96,000 to execute a vanilla FX Spot trade for £5mio that involves two day settlement with zero counterparty or credit risk?

No, it does not. And consider this:

If Customer A calls the bank and asks for a price in £5mio vs USD, or says they want to sell £5mio vs USD, but has no idea where the true price is, they are likely to be charged the maximum of £96,000.

Whereas, if I were to call as Customer B, and ask for a price in £5mio vs USD, or tell them I want to sell £5mio vs USD, whilst I make receive the same initial price, I would obviously challenge this price and let them know that I know where the true market price is. I would likely end up paying no more than £1,000 for doing the same trade as Customer A.

Price discrimination on a whatever they can get away with basis.

However, to achieve this there is a key technique that bank sales persons have to master, and it’s little different from those used by Double Glazing salespeople. Namely:

“How do I improve my price to the customer from the first ‘rip-off’ price, without making it appear that I was ripping them off with that first price?

Simple. Lie, and use any number of well rehearsed lines, including:

“Sorry, the market a little jumpy and has moved in your favour so I can improve the price.”


“Sorry, I was looking at the wrong screen. The price is actually a little better….”

However, the dishonesty doesn’t stop there. A serious problem that banks had as the internet evolved, was that customers could now see pricing of certain Financial Markets Products. This was especially true of the more vanilla Spot products. So, how do you generate excessive markets as more and more customers are aware of the true market price?

Simple. You seek ways to sell a product that has a less visible price (IRHP’s fall into this category).

Another practise is what I refer to as ‘Backloading’ of Mark Ups.

a) Often Sales persons will know that a customer wishes to do an FX Spot transaction but wishes to ‘Roll it Forward’ for settlement on a future date.

b) This involves first obtaining a Spot FX price, then adjusting the price to reflect the prevailing Forward rate adjustment required for the customers selected maturity/settlement date.

c) Often the sales person will be aware that the customer might know where the Spot FX market is, or that they might be in competition for the transaction, so will take a loss on the Spot part of the transaction (Show the client a better price than the trader has given the sales person), knowing that the customer is unaware of the Forward market and they will therefore be able to apply significant Mark Up to the Forward part of the transaction.

d) Therefore deliberately misleading the client in to believing they are receiving good value by way of what appears to be a highly competitive Spot price, whilst applying an excessive and undisclosed charge on the client for the Forward part of the transaction.

e) I have evidence of an actual example where a sales person at Lloyds did just that. The sales person knew that he was in competition with another bank for the transaction, and knew that whichever bank won the Spot transaction would be the bank then tasked with the Forward part of the transaction.

f) So, the sales person took a small loss on the Spot part of this GBP/CZK transaction, so as to beat the price of the other bank, but knowing that the client wished to roll it forward in three tranches, and knowing that the client was unaware of Forward pricing. He applied just under £30,000 Mark up to the Forward price.

This Lloyds Banking Group FM Pricing Framework encourages all of the same sales practises that the NYDFS discovered and punished Barclays for. However, when I escalated this policy and my repeated protected disclosures about it, and the excessive and undisclosed mark ups being taken by sales persons to the FCA, they did nothing.

In fact, after the NYDFS judgment was issued, the FCA turned on me, went to extraordinary lengths to smear and discredit me, and prejudice my Employment Tribunal. They even lied to my MP three weeks before my Tribunal.

I did not appreciate why until my Tribunal hearing and the witness testimony of Matthew Lawrence, Head of SME and Corporates in Financial Markets, that included the following:

Lawrence confirms that the FM Pricing Framework was approved by the FCA. The pricing policy that included sales practises that had just been deemed wrongdoing and criminal by the U.S. authorities, had been approved by the FCA.

To say that this was embarrassing for the FCA is an understatement. So, rather than investigate and sanction Lloyds Banking Group, they simply buried it and allowed SME victims to be denied appropriate review and remedy. Not just for FX but IRHP’s also.

The FCA would subsequently interfere with and prevent a criminal investigation in to these practises. Another story for another time.

It does not matter what bank you were a customer of, you will likely have been subject to any, or all of the above.

And to be clear, the FCA and banks are dishonestly applying a metric and criteria as to sophistication, so as to unlawfully deny customers appropriate review and remedy, that the FCA and the bank knew was never considered by the bank when selling the products in the first instance.

I will testify to that and so will others.

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