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Aim and fire: What Wheatley’s exit means for the industry

FCA chief executive Martin Wheatley was forced out of the regulator over his handling of the closed-book debacle and tumultuous relationship with the banking industry.

It was announced last week that Wheatley will stand down from 12 September, with director of supervision Tracey McDermott acting as interim chief executive.

A statement from Chancellor George Osborne, which was issued after the official press release, made it clear the Government was behind Wheatley’s departure.

Osborne said: “Martin Wheatley has done a brilliant job of launching the FCA in tough circumstances.

“Now that phase is complete, the Government believes that different leadership is required to build on those foundations and take the organisation to the next stage of its development.”

He said a “worldwide search” is being launched to find his replacement.

So why has Wheatley been forced out? What will his legacy be? And what is the cost of his departure?

Writing on the wall

Many believe the writing was on the wall for Wheatley after the FCA’s disastrous handling of a media briefing on its review of closed-book life insurance policies.

The briefing sent insurers’ share prices tumbling in March 2014, after the FCA took six hours after the markets opened to issue a clarification statement.

An inquiry by Clifford Chance partner Simon Davis found the FCA’s decision to brief the Daily Telegraph ahead of announcing the review in its business plan was “high risk and poorly supervised”, while its response was “seriously inadequate”.

Osborne wrote to the regulator in the wake of the briefing to express “profound concern” over the regulator’s handling of the affair.

Wheatley faced calls to resign at the time, but his ability to weather the storm meant his departure has come as a shock to many.

Independent regulatory consultant Richard Hobbs says: “People within the FCA have described this as a bolt from the blue. But the writing was on the wall the day Osborne wrote a letter of admonishment to the FCA over its handling of the closed-book review.

“The only reason Wheatley wasn’t sacked at the time is because it was a coalition Government and the Liberal Democrats liked Wheatley’s banker bashing stance.”

A senior lobbyist adds: “The die was cast last April; there is no doubt about that. But the Government didn’t want to rock the boat before the election.”

Consumer champion?

Another factor in Wheatley’s downfall is the perception that he was overly tough on the banks and too close to the consumer lobby.

He presided over a period of record fines for the banks for scandals including forex and Libor rigging.

RPC partner and former FSA enforcement lawyer Richard Burger says: “The view is Wheatley had a very tough, ‘bank-bashing’ stance which was an easy win after the crisis.”

Lansons director Ralph Jackson says: “The regulator needs to take a balanced approach between the interests of consumers and the industry. Some were of the view that Wheatley was more consumerist than business focused.

“Osborne and the Treasury believe there should be a relaxation in attitude towards the banks in particular, in recognition of the importance of the competitiveness of the sector. Lobbying from the banking sector will have played a part in that.”

Yet others argue it is wrong for Wheatley to go for being too tough on the banks, given the extent of their misconduct.

Labour MP and Treasury select committee member John Mann says: “The Chancellor is rewarding wrongdoing in the financial services industry. He has sacked the head of the regulator who fined the banks that broke laws and yet not one banker has been held accountable before the courts for their repeated wrongdoing.”

Others say that the Chancellor’s intervention is the final nail in the coffin for the regulator’s perceived independence.

Jackson says: “The FCA was set up by parliament and it reports to parliament, but it is supposed to be an independent body.

“No one really believes it is independent, however, as the Chancellor’s intervention shows.”

Legacy

Wheatley was perceived as tough at the start of his reign two years ago, but has also been praised for making good on the FCA’s promises to be more forward thinking and to listen to industry feedback.

He struggled to escape his infamous “shoot first and ask questions later” quote, made in September 2012 when discussing the FCA’s new powers, such as the ability to ban risky products from being sold.

Pinsent Masons senior associate and ex-FCA lawyer Michael Ruck says: “Statements like this indicated a desire by the FCA to be tougher, but caused an increase in the ‘them-and-us’ attitude between the industry and the FCA. The regulator later tried to move away from this ‘stick’ approach through concepts like Project Innovate.”

Association of Mortgage Intermediaries chief executive Robert Sinclair says Wheatley’s regime “was a tale of two halves”, with constructive dialogue only in some areas.

He says: “The first half was open, helpful and constructive as the FCA, lenders and brokers worked together to deliver the Mortgage Market Review. There was great work to take action on interest-only mortgages before problems arose.

“Then came the badly managed PR on the closed-book review and the shutters came up.

“The second half has been more difficult with the issues on rising regulatory fees where we feel we are not being listened to.  We have seen a continuing desire to manage the message and the FCA’s relationships in Westminster rather than letting their actions do the talking.”

As a leader, Wheatley is invariably described as impressive and capable, but some add the caveat of “aloof”, which may have hindered his relationships with the industry.

The lobbyist says: “He is a very impressive individual, but a lot of what has been said about his coldness is fair comment.”

Hobbs adds: “Wheatley was perceived as being aloof and refused to engage with the banks. They felt they could not work with him.”

Wheatley began working his 12-month notice period on Friday. He will stay on as an adviser to the FCA board until the end of January, which is expected to be on a part-time basis.

He will then begin six months of gardening leave. In 2014/15 Wheatley was paid a total of £701,000, including a £92,000 bonus.

West Riding Personal Financial Solutions managing director Neil Liversidge says: “It is utterly wrong for regulated firms’ fees to have to pay for his salary for the next year, given we will have to pay for someone else to do the job.

“I have met Wheatley and found him to be intelligent and well informed, and believe if he had remained in post for a few more years we would have got a reasonable result out of him.”

On the succession, Jackson says: “The search will be exhaustive and international. Bank of England governor Mark Carney came from Canada, and Wheatley himself came from the Hong Kong regulator. It will take some time to find the right person…it is likely to be a year before a successor is in post.”

Hobbs says: “The right candidate will be someone who has the confidence and the wisdom to speak to the City in a sufficiently authoritative but approachable way.

“McDermott will no doubt throw her hat into the ring, but her candidacy has two handicaps: Wheatley promoted her, and she comes from an enforcement background. There have been endless press releases quoting her talking about the wickedness of the industry, which will make her unattractive if the Government wants a change of direction.”

A source close to the FCA board adds: “It is a huge job and the FCA has a much wider remit than any other regulator in the world. It is going to be incredibly difficult to find a replacement who can do the job better.”

Expert view: Writing was on the wall

People I know within the FCA said to me over the weekend that Martin Wheatley’s departure was a bolt from the blue and that they were amazed.

But the writing was on the wall the day George Osborne wrote a letter of admonishment to the FCA over its handling of the closed-book review. That is about as close as you can get to getting the sack. The only reason he was not sacked at the time is because it was a coalition government and the Liberal Democrats liked Wheatley’s banker-bashing stance.

The second stage in Wheatley’s downfall was the outcome of the general election, which gave the Tories a free hand to take action.

The issue is not with what the FCA does, but how it does it. Theodore Roosevelt famously said: “Speak softly and carry a big stick.” The FCA must have strong deterrents but use diplomacy to ensure it does not have to use them.

Where the regulator has fallen short is in having the wrong conversation with the industry.

Wheatley’s failure was one of strategy, and we saw that most clearly in the closed-book review debacle, when his public relations strategy was fully revealed. The size of the fines and tone of Wheatley’s comments is further evidence that the FCA was using PR to try and extend its image and reach.

A successful regulator is entirely consistent and predictable, and communicates to firms exactly what the consequences of breaking its rules will be, so they do not dare break them. But that requires building a relationship of trust.

Wheatley failed to have the right conversations with the banks. He made it look like he was courting publicity, and refused to engage with them. He would not have lunches or dinners with the banks but there is everything to be gained from that – it would have given the industry confidence in what the regulator’s approach would be. The banks and insurance companies felt they could not work with him.

You cannot go around terrorising people; you have to be sufficiently approachable and authoritative. That is a difficult balance to strike but that is the job and he failed to
get it right.

Richard Hobbs is an independent regulatory consultant

Martin Wheatley: In his own words

“We will not go hunting for scalps”

On new rules designed to increase accountability in banking

“Firms charging a percentage of product investment takes away product bias, but it does not take away dealing bias. If you only get paid if people buy a product, then you are going to want them to buy a product rather than pay off debts or do something else. There are some concerns about whether that is entirely compliant with the philosophy we have set out”

On RDR adviser charging

“This was clearly not the FCA’s finest hour”

In the wake of the FCA’s closed-book blunder

“The FCA is a very different animal to the FSA”

On the FCA’s approach

“If every time anybody made a mistake they lost their job, we would all be looking for jobs I suspect”

On the calls for Wheatley to leave following the closed-book debacle

“The utopia is people will see the value of financial advice, much as they see the value of going to the doctor or the dentist, and understand they are talking to someone who is qualified as a professional who they can trust is giving completely unbiased and unconflicted advice. That is what the RDR is about and that is where we want to get to”

On the aims of the RDR

“We do not like the phrase ‘regulatory dividend’. All firms have to live up to the standard and therefore they should all contribute to the cost of providing a regulated market”

On a regulatory dividend for advisers following the RDR

Adviser view

Philip Milton, managing director, Philip J Milton & Company

This is an incredibly difficult job and if the Government does not have anyone in mind to replace Wheatley, I am not convinced it will find anyone better.

There have been some mistakes and perhaps he is being punished for them after the event. But generally he has kept his head down and got on with the job. Having change at the top could create uncertainty for advisers and the markets.

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. I have no sympathy for Wheatley but it is somewhat ironic that for the first time I can remember a Chief Executive of a Financial organisation has been made accountable and responsible for his actions by the Government is the head of a Regulator. Just compare this with the CEOs of the banks some of whom are actually now occupying government positions. Also compare this with the treatment of Sants who was given a knighthood. Cynical or what?

  2. Mr Wheatley,s rhetoric was divisive and although a tough regulator was needed this was unhelpful and prevented having any meaningful dialogue between industry and regulator

  3. Julian Stevens 23rd July 2015 at 9:58 am

    The FCA’s handling of the closed-book debacle and tumultuous relationship with the banking industry are just two of its failures, though my reading of the latter is that it’s been very much driven by George Osborne. The banks do need to be forced to clean up their acts and the huge fines being imposed on them are surely very welcome receipts for the government’s coffers. On this front, Wheatley may well have been just the guy who was instructed to pull the trigger.

    The FCA is riddled with numerous other faults, all of which need to be addressed, though the closed book review is the one which seems finally to have ignited the power keg. (Word reaches me that the prime culprit on this was Zita Macmillan, the FCA’s now ex-head of communications, and that Clive Adamson wasn’t even in the country at the time. He had to go only because, as her boss, he had to take ultimate responsibility for her actions.)

    That aside, given that one of the biggest criticisms of the FCA, like the FSA before it, is its apparent inability to manage its finances responsibly (or just plain recklessness with OPM), why, as he’s leaving under a cloud (dishonourable discharge), is Martin Wheatley to be granted 6 months fully paid gardening leave? How can this possibly be acceptable?

    If the TSC manages to obtain the powers for which it’s now rightly clamouring, just one of the things at which it should take a good, hard and critical look is the FCA’s contracts of engagement. Golden parachute clauses in those contracts should be rigorously expunged from them, not least because one of the current government’s objectives is to clean up standards in public life.

  4. I think his attitude to anything that was not of his making was/is disgusting. The FCA leadership generally and Wheatley specifically have their own agenda and more importantly have their outcome set in stone (privately) before they announce this review or that review or “consultation”. They point blankly refuse(d) to listen to industry and advisers who would have to deal with the mess and all of the unintended consequences of all of their ideas/strategies. No one will ever convince me that Martin Wheatley did not have prior outcomes in mind and regardless of what the feedback was from “Regulator Consultations” he simply ignored it and ploughed on with their own agenda. They used terms like generally there was broad support for what we said, however they refused to state how much objection there was for most of what they were changing or bringing in. The introduction of the different definition of independent and introduction of restricted is just one classic example. He held the TSC in contempt as did his predecessor and his arrogance towards them was ridiculous, this is another. To say that a £118 million over-charge for some advisers over a 5 year period was “an anomaly” and that he would not be revisiting this repay those who were over charged typified is total arrogance towards those they were supposed to be properly regulating.
    I don’t know the man and have never met him however I think the Government was 100% right to do this.
    My own view is that the TSC and Chancellor have a superb opportunity to change the rules under which the FCA operate BEFORE they appoint a replacement so that they put in stone how the FCA will be fully and totally accountable the democratically elected politicians for their actions or inactions. I fear that this will not happen.

  5. Marty ~ Lack of accountability lies at the very core of most of what’s wrong with the FCA, like the FSA before it, and bringing about an enforceable system of accountability is one of Libertatem’s primary objectives. The TSC is aware of this and is seeking from the government the powers it needs to hold the FCA to account. Perhaps, in light of these latest developments, Osborne might just be persuaded to grant them.

  6. I recently ran a blog in LinkedIn “Peek a boo Accountability” which covered this. Last week I received a letter via a member in which George Osborne claimed that Treasury had nothing to do with regulation as they were “Non-governmental bodies” .

    Same day same man claims that he has sacked Wheatley. IF FOS FCA and FSCS are “Non Governmental Bodies” their staff is nothing to do with the Treasury. Otherwise the Treasury is responsible for the 3Fs and must be responsible for the same and come under proper parliamentary scruitiny.

    This “now you see me now you don’t” form of accountability is totally unacceptable in a Democracy and from it comes the abuse of power we have seen in the last few years

    If the new FCA CEO is going to be more friendly to the banks does that mean the small guys gets an increased rile as industry whipping boy?

    Advisers – how much more does it take before you fight back?

    Garry Heath Libertatem

  7. “The FCA is a very different animal to the FSA”

    On the FCA’s approach

    One of the FCA’s problems was that despite spending a lot of (our) money initially trying to show otherwise, the perception of our part of the industry -the IFA part- was that it was exactly the same animal. And as that failed, so did the FCA.
    Personally I’m not sure where regulation of the industry goes from here but as a start I agree with the several comments above concerning making the FCA accountable. I have more confidence in the the likes of Andrew Tyrie and his colleagues on the TSC than I have with the FCA

  8. I wrote to my MP, asking for bankers to face the criminal prosecution and banning which I would have faced had I done 0.05% of what bankers did. I received a mealy mouthed waffle reply.
    30 years ago there was much wrong with financial services. The industry was given several chances to clean its act and didn’t. 27 years of regulation and 4 regulators later (well 1 regulator with different names over the door) there is even more wrong. It’s a mess from which the UK and its citizens are suffering: personal borrowing up, insurance down in relative terms, pensions not trusted, everyone looking for someone else to blame.

  9. @Alan Kendrick..I quite agree with your sentiments but think conduct among insurers is hardly exemplary either! Particularly those running platforms! Reputation based on trust and integrity are running low with Judas behaviour in clear evidence. Yet most advisers trust THEIR clients to these people! I was at a recent investment dinner where a director from one of the compliance support networks warned advisers against using insurers’ platforms simply because they cannot be trusted. Elsewhere today there are huge numbers of criticism of one such company.

    So maybe there is a window of opportunity with Andrew Tyrie showing real independence of mind as chair of the TSC. Mark Garnier, Harriet Baldwin and others have been influential too in exposing inconsistencies in regulation. Despite the culling of numbers from the onset of regulation (down by 95%!!) the battle hardened 20,000 or so left deserve greater recognition, respect even. We do a great job on the whole in almost impossible circumstances. Remember the comments of Mark Hoban……. comparing the standard our training programme to that of McDonalds? I have long called for QCF6 as the ultimate standard as a means of getting the regulator off our backs but Hoban’s comment was pure ignorance/ prejudice and proof of the lack of understanding among those that ‘rule’ us! Yet a future generation of advisers could have added tremendous value to younger generations of savers but with our demographics we will be extinct before then!!

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