Head of the Financial Conduct Authority Martin Wheatley has every reason to be committed to the regulator’s more intensive style of supervision.
His tenure at the helm of Hong Kong’s financial regulator the Hong Kong Securities and Futures Commission saw thousands of investors take to the streets in protest, brandishing pictures of Wheatley with devil horns and burning effigies of him outside his office after they were missold complex structured products linked to Lehman Brothers.
So it is understandable that Wheatley does not want to repeat the mistakes of the past.
Speaking at a British Bankers’ Association briefing in London last week, Wheatley set out how the new regulator will look to intervene earlier to prevent mass consumer detriment, from overseeing product design to banning potentially harmful products altogether.
He noted the guidance on structured products, published by the FSA in November last year, which set out a four-step pro- cess for providers designing and selling products.
It says firms should first identify the target audience, test that the products can del- iver fair outcomes, then ensure there is an appropriate app- roval process so that products are being sold to the right people. Finally, firms should monitor the sales to see how the product is working in practice.
Wheatley said this process can be applied across all products, and stressed the importance of going beyond selling to carry out ongoing monitoring of product sales.
He said: “My own experience in Hong Kong was that a product provider created a very complex product and said this is only fit for sophisticated investors who can understand what the product does and can afford to lose money.
“It passed it across to the distributors, who began selling the product in low denomin- ations to very large numbers of people. That is the sort of thing where I would expect you to question whether a product is reaching the target market.”
Wheatley also highlighted the warning the FSA put out in November on traded life settlements, also known as death bonds, which called for the products to be banned from being promoted to UK retail investors. He said this was a sign of things to come. He said: “These products are very complex, not suitable in many cases, but we found they were being distributed with limited understanding to the wrong audiences. We put out a very strong message that said we do not expect financial adv- isers to be selling these products to UK retail investors, and we put that out with a view to banning these products.
“We have done that at this stage as the FSA. In the future as the FCA, we will have more formal powers to intervene when we see something. In a sense, we are presaging the future structure of how the FCA will operate.”
After hitting the headlines last week, when he declared the FCA would work to protect “irrational consumers”, Wheatley sought to clarify what he meant.
He said: “If an investor makes a fully informed decision that subsequently goes wrong, we are not a nanny state. We are not here to say an investor has lost money, we will find some way to compensate. That is not what it is about, and if the new regulatory approach is characterised as that, that is wrong.”
But Wheatley argued while consumers have to take responsibility for their actions, the way products are sold to customers also has to be taken into account.
He added: “It is all a question of balance and the difficulty is many of these decisions are very complex decisions, requiring a high level of financial education, based on a relatively lim- ited face-to-face discussion with an adviser.
“We do think people have to take responsibility for their dec- isions but we also have to look at the facts and the process by which they came to that dec- ision. If it is based on an inad- equate explanation of the facts, or assurances that are made at the point of sale, or a simple failure to understand the circumstances of the individual, we will look at all of those factors very carefully as to whether misselling has occurred.”
Compliance consultant Adam Samuel believes Wheatley’s exp-erience in Hong Kong will undoubtedly shape how he imp-lements the FCA’s more intrusive regulatory approach.
Samuel says: “It made him acutely aware of structured products and their risks, and appropriately cynical about any product that is too complex to understand. We have now got someone at the head of the new regulator who is less interested in solvency, and is more interested in tackling things from a consumer perspective.”
BDO financial services risk and regulatory practice director Alex Ellerton says Wheatley’s challenge will be in spotting the next potential misselling scandal before it happens.
Ellerton says: “It is easy to identify the safest products, and at the other end of the scale it is easy to identify where exotic 10-year investment products are marketed to 95-year-olds. It is the bits in the middle where firms will want to push the boundaries to make a profit which will be more interesting.”
Ellerton says the regulator will have to earn firms’ trust in how it applies its new pro- duct intervention powers by ensuring it treats firms with similar product offerings in a consistent way. He says: “How is the regulator going to get the right people in who really under- stand where the risks are? There are things that you just cannot foresee until it is too late.”
Examples of when the FCA may use its product intervention powers
- Where products are found to be “inherently flawed”, for example, poor-value products or those with such negative features that most consumers would be unlikely to benefit
- Where there is widespread promotion or selling to unsuitable customers, for example, where consumers can easily lose all their money but are unable or unwilling to take on that risk
- Where there is a strong incentive to missell, for example, profitability means the product is sold to consumers regardless of whether it is appropriate
Examples of the types of product intervention powers the FCA may use
- Banning the sale of a product, either to all customers or certain categories of customer
- Mandating the inclusion or exclusion of specific product features
- Only allowing sales in specific situations, for example, with or without certain product features, limiting the sale to certain types of customer, or through certain distribution channels
Martin Wheatley CV
FSA managing director of conduct business unit, Financial Conduct Authority chief executive designate
June 2006-June 2011
Hong Kong Securities and Futures Commission chief executive
London Stock Exchange, various roles including deputy chief executive, director of business development and director of marketing
Wheatley has also sat on the FSA’s Listing Authority Advisory Committee, an independent body that reports directly to the FSA board