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UK financial watchdog girds itself for lion's den
[LONDON] The British government's shift toward a more accommodative stance when it comes to regulating banks has left its financial watchdog between a rock and a hard place, with a bit of cack-handedness compounding the discomfort.
The political heat on the Financial Conduct Authority (FCA) will be turned up on Wednesday when lawmakers probe why it scrapped a review into culture at banks that have had to pay billions in fines for ripping off customers and trying to rig markets.
Specifically, parliament's Treasury Select Committee wants to know whether and how the finance ministry was involved.
The committee has been a tough critic of the authority, which is meant to be completely independent but is vulnerable to influence from the government which chooses its chief executive.
Former regulators, lawyers and board members of financial firms believe the FCA has fallen foul of a broader shift in regulatory mood that has also taken place in the United States and elsewhere in Europe.
More than seven years on from the crash of Lehman Brothers, the feeling is that the job of making the financial system more resilient has been accomplished, they say, and policymakers should now focus on lifting economic growth, with lending from banks at the core of that goal. "I think the FCA has got a far more complex agenda to manage now, and inevitably that leads to some friction between policymaking and the practical implications," said Etay Katz, a financial lawyer at Allen & Overy.
British finance minister George Osborne called for a "new settlement" with banks last June, signalling he wanted to see an end to the banker bashing that has become a national pastime since the 2007-09 financial crisis forced British taxpayers to bail out several lenders.
A month later Osborne ousted Martin Wheatley, the hardline CEO of the FCA who had promised lenders he would "shoot first and ask questions later".
The finance minister has also scaled back a balance sheet levy on big lenders after HSBC said it would review whether to keep its head office in London, and ditched a draconian element of a new regime for making senior bankers accountable for their actions.
Osborne has denied he had a hand in ditching the culture review, but his other actions add up to a significant change in the substance and tone of regulating a sector that remains one of Britain's biggest tax generators and a key to its "soft"power in the world.
A board member of an insurance company likened the cyclical nature of banking regulation to the way drivers react to a car accident on a motorway - they slow down for a few miles and then return to normal cruising speed. "The FCA is caught in a turn in the regulatory cycle and these turning points are messy," said David Green, a former UK regulator and now a consultant on regulatory issues. "The regulator is always in the wrong place because when the political mood changes, the legislative framework hasn't and the regulator cannot help but be out of sync," Green said.
Meanwhile, the general public still expects the FCA to play tough cop, especially when scandals at banks seem to never end.
Osborne is due to select a new CEO for the FCA soon, after acting chief Tracey McDermott said she did not want the top job.
McDermott was the one who decided not to pursue a broad review of banking culture that had been part of the watchdog's 2015 business plan, saying that dealing with banks individually was a better approach.
Andrew Tyrie, who chairs the Treasury Select Committee, has described her decision as "curious" and wants a fuller explanation of how it was reached and whether other bodies, like the finance ministry or the Bank of England, had a say.
No matter how the decision was made, critics agree it was not communicated well and showed a failure to learn from a prior incident in the insurance sector.
The FCA only confirmed the culture review move in December after it was reported by a newspaper. "It was badly handled. Communication is quite important, and this does not make filling the CEO job any easier," a former UK regulator said on condition of anonymity.
The FCA had come under criticism before for giving market sensitive details to a journalist rather than making a public announcement. The article about an insurance sector review triggered wild swings in share prices of insurance companies.
On Wednesday, McDermott will expand on her reasons why the review was ditched and detail how the watchdog is tackling bank culture in other ways, a person familiar with the FCA said.
Critics say the FCA could learn a lesson from Britain's other new post-crisis watchdog, the Bank of England's Prudential Regulation Authority, which ensures that banks hold enough capital to stay financially sound. "The PRA, which has had a softer, more collaborative approach with banks, seems to have managed transition in the regulatory cycle better than the FCA," the insurance sector board member said. "Osborne engineered the change in the regulatory cycle but the FCA faces the flak as that is where the buck stops."