In the wake of Martin Wheatley’s departure from the FCA, how is the regulatory
environment likely to change in the coming months? Independent consultant Richard Hobbs examines the issue and offers some thoughts on what Mr Wheatley’s exit may mean for the City and the Financial Services sector overall…
For Martin Wheatley leaving the FCA is a personal setback but for the City and practitioners everywhere it presents a set of confusing signals. It is simplistic to suppose that this is a triumph of the banks over the City regulator. And it is naïve to imagine that this signals the end of tough regulation.
To understand what his departure does mean it is necessary to compare his style of regulation with what has been done elsewhere and with some successful styles of the past. It is also necessary to consider the political derivation of regulatory policy and its execution.
For whatever reason, Martin Wheatley chose to project the FCA as the “bad ass” regulator intent on cleaning up retail and wholesale markets. He did that by a combination of public relations strategies intended to project the FCA into a position of power and eminence it could not sustain and remained aloof from the people in the markets he regulated because he did not want to be seen a victim of “agency capture”. In doing so he chose to run the risk, whether knowingly or not, that any particular media manipulating engagement could go wrong.
In the end one did. The Life Assurance Markets Review press briefing went spectacularly wrong and the FCA itself created a false market in life assurer shares for a number of hours. As one anonymous life assurer CEO was alleged to have said, “you couldn’t make it up”. The public letter of admonishment from the Chancellor, George Osborne, was the writing on the wall and with too few friends in the City Mr Wheatley’s days were numbered from that point. Once the Coalition was ended by the May general election there was no Lib. Dem. objection to parting company.
It is important to understand that Mr Wheatley did not invent the FCA’s policies on grabbing media attention to “big-up” its image. He may have uttered the “shoot first ask questions later” aphorism but Sir Hector Sants before him coined “be afraid, be very afraid”. This “unparliamentary language” may have garnered more column centimetres than more statesmanlike language but it demeans the office and the office holder. If a regulator is reduced to borrowing its language from Hollywood then there is a serious misconception in 25 The North Colonnade about how to regulate.
So what should the FCA’s approach to its self-image be? In the first place dis-engaging from City grandee types, and small businesses, for fear of agency capture is unnecessary. An effective regulator needs to gauge the mood of market leaders and be able to communicate its own message repeatedly. This is best done face-to-face. It improves understanding and increases confidence. It also leads to better decision-making on both sides. Agency capture can only occur where the regulators individually lack basic strength of personality. The perception of agency capture is myth provided goodwill has been built up by the simple diplomatic measure of talking to people.
However, the key requirement to successful image building is to have the right approach to regulation in the first place. Theodore Roosevelt’s guiding principle for American foreign policy cannot be improved upon: “Speak softly and carry a big stick”. Speaking softly does not mean light touch regulation or an effete manner. It means communicating in a quiet, consistent and determined manner what behaviours are sought and what will happen if they are not displayed. The big stick is already available since the FCA may impose unlimited fines and bans. But like the nuclear deterrent in foreign policy they should be just that, a deterrent. Sadly, the regulators have slipped into the practice of using their deterrents too often until the fear is lost and they become just another cost of business. (There is no room here to discuss whether fining shareholders rather than banning practitioners would have worked better but, in either event, once the deterrents are in regular use something has gone wrong with regulatory policy rather than markets.)
In case there is any doubt, other regulators in the World do it better and in our past we could do as well. In Australia APRA can do it and so can OSFI in Canada. In the UK the saintly Eddie George when Governor of the Bank of England could do it with consummate ease. It is fashionable to argue that the world has moved on since then. But anyone who witnessed him at work would doubt that. He was not afraid of agency capture and one word from him was sufficient to make bank boards jump.
The question remains whether Mr Wheatley’s departure heralds some change in the policy stance other than tone and approach. The answer is “No”. The reason for this is that markets must understand how their regulatory regimes come about. Public policy arises from the democratic process. We elect politicians and the complexion of the legislature (however imperfectly) reflects our preferences. Regulatory policy is a subset of public policy. Execution of regulatory policy is the great grandchild of electing politicians. There are no votes in being nice to financial markets; quite the reverse. Any short-changing of consumers will always be treated harshly: it is a consequence of how our democracy works.
So what George Osborne did was simply exercise the power granted to him by Parliament not to renew Mr Wheatley’s appointment on the grounds that his diplomatic skills and his organisation’s long-run approach to managing its reputation were not the right ones.
Richard launched Beachcroft Regulatory Consulting in 2002 following two years as an independent consultant during which time the FSA was a major client. At the FSA, he worked mostly on the project to reform polarisation. Previously a civil servant with the Department of Trade and Industry, Richard worked in the Insurance Directorate as the director responsible for the reconstruction of the Lloyd’s insurance market. At the Association of British Insurers he was Head of Life and Pensions for three and a half years where he led the co-ordination of the industry’s efforts to resolve the pensions mis-selling issue. Richard works on a wide variety of projects and deals with industry level issues. He also advises in M & A situations on the regulatory aspects of authorisation and changes in control, and is a Lansons alumnus.
If you would like to discuss any aspects of this blog, or how Lansons can advise you on regulatory policy in and around the financial services industry, please do get in touch either on email or on 020 7490 8828.