March 28, 2013 6:40 pm

Miscreants on our radar – new regulator

Martin Wheatley, head of conduct at the Financial Services Authority releases his Review of Libor report at Mansion House in London, Britain, 28 September 2012. Wheatley announced major reforms to the way Libor will be set. Wheatley recommended that responsibility for Libor is stripped from the British Bankers' Association (BBA) and given to the new Financial Conduct Authority, which he will become chief executive of when it comes into operation in 2013. Libor lies at the heart of the world's financial system and is used as the reference rate for loans and financial derivatives and securities worth more than 300 trillion US dollar.©EPA

In the dark days after the near-collapse of the banking system in 2008, it was hard to find anyone with a good word to say for the Financial Services Authority. The general consensus was that “light-touch” regulation had been a disaster. The “tripartite” system had failed. Regulators had been asleep on the job.

Regulatory reform was inevitable, and the person leading it had to be untainted by past failings. Step forward Martin Wheatley, who had the ultimate alibi: while queues formed outside Northern Rock and the government part-nationalised high-street banks here, he was 8,000 miles away in Hong Kong, running the former colony’s stock and futures market regulator.

On Monday he will become chief executive of the Financial Conduct Authority, the regulator responsible for market integrity, consumer protection and competition (the Prudential Regulation Authority, part of the Bank of England, will be responsible for supervising individual banks).

Wheatley has already been director of the FSA’s Conduct Business unit for 18 months, preparing for the birth of the FCA.

A better name for the new regulator might be the FOA – the Financial Outcomes Authority – for Wheatley is very keen on ensuring that the quality of “outcomes”, a word he uses often, improves significantly.

That means a change of emphasis at the regulator, as well as a change of identity.

CV: Martin Wheatley

Martin Wheatley joined the Financial Services Authority in September 2011 as managing director of the Conduct Business Unit and as chief executive designate of the Financial Conduct Authority (FCA).

Before that, he spent seven years at the Securities and Futures Commission in Hong Kong, the regulator for the city’s stock and futures markets, including five years as its chief executive.

He worked for the London Stock Exchange for 18 years, launching its SETS electronic order-driven trading system in 1997, and eventually becoming deputy chief executive. He left the LSE in 2001.

Wheatley has an honours degree from York University and an MBA from City University. Outside work, his interests include cycling, golf and cabinet making.

“There will be a willingness to engage much more quickly and not do the
file-based statistical review that, in a sense, we were forced to do in the past, and which characterised, I guess, the response on PPI.”

The FSA warned on poor selling practices with payment protection insurance as long ago as 2005, but many more policies were sold before it issued new guidelines in late 2009. The redress bill for mis-selling now tops £12bn.

Its successor body has the power to act sooner. It can halt sales of products for a year while it considers the evidence – a sanction that critics describe as “shoot first and ask questions later”.

They contend that such “nanny statism” patronises consumers and discourages innovation. Wheatley is adamant it does no such thing. He points out that unlike many regulators, the FCA will have a formal mandate to promote competition, and says he does not want the mass market to be excluded from financial products.

Nor is the FCA’s job to stop people losing money. Wheatley sounds, to paraphrase Lord Mandelson, intensely relaxed about people losing money if that loss was down to their choices. “Clearly, there is a set of people who will make their own decisions and will not expect to have any comeback if, having made a decision, it turns out not to be a good one.

“But there is a set of people in markets for whom the ability to take those decisions relies upon some advice they’re given . . . Most of the time, the problems we find are not because people have chosen risky products, but because they have been put into risky products.

“There is a real key difference between buying, which at one level is consumers saying ‘actually I’ve seen x and I want it, so I’ll find a channel to get hold of it’ and marketing, which is the push side. It’s a firm saying ‘we’ve come up with a really interesting thing, so let’s advertise and market it as widely as possible.”

Does this imply that firms will not be able to market innovations or cross-sell to existing customers? No – but they’ll have to get smarter at segmenting their client bases and distribution.

“Products are created, and typically at the start they’re created maybe for hedge fund clients, the most sophisticated. After a couple of years you say ‘well, actually, these are really suitable for ultra high net worths’, and before you know it, what started out in a very complex space is being sold into the mass market.

“If it’s a niche product for a sophisticated client then that’s where you should be targeting your efforts, not trying to sell fairly high-risk unsecured products as if they are low-risk or secured.”

It’s for these reasons that the FSA banned traded life insurance policies, sometimes called “death futures” in 2011, and will consider a clampdown on the marketing of unregulated collective investment schemes next month.

Risky products usually come with lots of risk warnings. Shouldn’t there be an element of caveat emptor? “Often, you’re dealing with an information expertise asymmetry when it comes to financial products; just giving someone a 200-page document doesn’t absolve you of your responsibility to make sure it’s a suitable product.”

His approach is heavily influenced by his experiences as chief regulator in Hong Kong, a place once dubbed (by one of his predecessors there) as “the wild west of the east”.

Many retail investors lost money in “mini-bonds” backed by Lehman Brothers, and for a time he was the target of intense consumer anger over the mis-selling of these – although the vast majority of victims got their money back eventually. “What happened there was that people who had money on deposit earning 1 per cent were told ‘here’s a product that’s just as safe that will pay 7 per cent’. But it turned out this product was horrendously complex and had a binary risk-return. You either got everything back, or nothing.”

Consumers were duped into putting what Wheatley calls their “coffin money” – savings for funerals or children’s education – into these products, believing they were safe. “When the bank you’ve banked with for 25 years says ‘here’s a safe product’, most people will say ‘that sounds good’.”

Being proactive about stopping the sale of poor products or the unfair treatment of customers, rather than reacting to it after the event, means working in a different way, says Wheatley. “One of the things we’ve changed quite a lot is building up what I call our radar function, where we’re developing a much more sophisticated system of capturing data and intelligence.”

This ranges from surveying chat rooms, blogs and social media to using “mystery shopper” exercises and acting on tips from whistleblowers (there is an email address – whistle@fca.org.uk – for just this purpose).

“We go and actually find out, what does it feel like, what’s actually happening on the ground? Because, frankly, for some companies there will be a tendency to push the boundary beyond acceptability.” A mystery shopper exercise last April, for instance, found failings in the quality of investment advice from high street banks.

Are things getting better? Wheatley is optimistic, citing improvements in the quality of financial advice. “The moral compass in markets had just shifted [in 2008] to the point where anything goes . . . but I’m hoping that in the first year we can get to a point where most of that stuff is now in the past.”

Getting tough: FSA fines over £1m, 2012/13
Date Who? How much? What for?
Mar-13 Prudential group £46m Listing rules breaches, failing to open/cooperative
Mar-13 Lamprell £2.43m Listing rule breaches
Feb-13 Lloyds TSB group cos £4.32m Delayed PPI redress payments
Feb-13 Royal Bank of Scotland £87.5m Libor rigging
Feb-13 UBS £9.45m Failings in sale of AIG fund
Dec-12 UBS £160m Libor rigging
Dec-12 Cheshire Mortgage Corp £1.23m Failing to treat customers fairly
Nov-12 UBS £29.7m Failing to prevent unauthorised trading (Kweku Adoboli)
Nov-12 CPP £10.5m Mis-selling protection insurance
Oct-12 Bank of Scotland £4.2m Failing to keep adequate mortgage records
Sep-12 BlackRock £9.53m Failing to protect client money adequately
Jun-12 Barclays £59.5m Libor rigging
Jun-12 Sachin Karpe £1.25m For not being fit and proper
May-12 Martin Currie Inv Mgt £3.5m  Failing to manage conflicts of interest
May-12 Mitsui Sumitomo Insurance £3.35m Serious corporate governance failings
Mar-12 Coutts £8.75m Failures in anti-money laundering measures
Feb-12 Greenlight Capital/David Einhorn £7.29m Market abuse
Jan-12 Ravi Sinha £2.87m Fraud
Jan-12 UK insurance £2.17m Failings at Direct Line and Churchill
 Source: www.fsa.gov.uk

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