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.”
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.”
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
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.