Wheatley denounces failed FSA rulebook explosion

Expanding the regulatory rulebook is not an effective means to prevent conduct breaches and has the potential to “remove our responsibility for deciding what’s right”, Martin Wheatley said yesterday (9 December) as he denounced the expansion in rules under the previous regulator.

In a speech in London, Mr Wheatley revealed that the Financial Services Authority grew regulatory guidance by a substantial 27 per cent between 2005 and 2008 - the period during which many major and systemic breaches occurred that the industry is still reeling from today, such payment protection insurance mis-selling.

Mr Wheatley said: “In other words, growing the rulebook did not prevent cultural weakness.”

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Quoting Roger Steare, author of the behavioural finance book Ethicability, he added: “’At their worst, rules, laws, regulations and red tape have a tendency to multiply because they remove our responsibility for deciding what is right’.”

He added by contrast, the Financial Conduct Authority is using “a broader array of judgement-based tools and techniques - including competition, behavioural economics and more sophisticated modelling - to get under the bonnet of the financial services industry and make sure consumers - across the markets - are treated more fairly.”

In particular he outlined how the regulator plans to crack down on asset management charging structures that have been the subject of concern over a lack of transparency and accountability, as well as conflicts of interest over the definitions of ‘research’.

In a consultation paper published in November the FCA proposed to tidy up the investment management market by more clearly defining research and corporate access.

Mr Wheatley said the FCA is focusing on three ‘cultural’ areas. First, he said the regulator is keen to ensure fund managers scrutinise spending to “ensure they are acting in the best interests of their clients”.

He said: “A case in point is research spend. Does it provide good long-run value for clients? If funding for research is linked to the trading volume that generates dealing commission, what is the incentive for the fund manager not to spend it – irrespective of value added?”

Second, Mr Wheatley said the FCA must “support investors to enable them to better understand what they are paying for, and whether their investment managers are getting value for money... [p]articularly when dealing commission is used to purchase bundled services”.

Third, he stated that the regulator was uncomfortable with the “current system of corporate access, which is often linked to bundled brokerage services”, and was concerned this may “compel asset managers to dig into their pockets more than they should, possibly at the expense of their clients’ best interests”.

Additional reporting by Ashley Wassall