Mr Mann is rightly concerned that the Treasury appears to be interfering in the work and operations of the FCA as this could weaken the effectiveness of regulation.
In response, the FCA’s acting chief executive, Tracey McDermott, went to great lengths in interviews to emphasise that the FCA was not the puppet of the Treasury and that it had objectives set by statute (not by the Treasury) as well as a board of directors.
All of this is true, but that does not mean the Treasury does not wield significant power. There is a history of Treasury interference in the regulator’s actions. Sir Hector Sants, the incumbent chief executive at the time of the financial crisis, defended his light-touch regulatory approach by saying it was what the Treasury wanted. Sir Hector, expecting to carry the can for the lacklustre role of the regulator, let it be known inside the FSA (the predecessor of the FCA) that he would not be seeking an extension to his contract. By passing the buck to the Treasury, instead of being fired, Sir Hector was knighted.
His successor, Martin Wheatley, was appointed by George Osborne as part of the new coalition government’s plan to restructure the old FSA by carving out the banking prudential regulatory activity and returning it to the Bank of England, and changing the name of what was left to FCA.
Mr Wheatley’s message was that he was going to “shoot first and ask questions later”, which sounds like he was on a mission to clean up the sector. It probably struck the right note at the time when there was clearly going to be plenty of banker bashing.
But the problem with bashing banks is that it simply discourages them from lending, and this was a post-crisis problem that Mr Osborne needed to address in order to stimulate economic recovery. During the post-crisis years, banks have been slow to make new loans and instead have had to contend with a rising tide of regulation and regulatory investigations and fines – not a climate that encourages lending. Indeed, one major British bank was contacted with an enquiry about funding an investment opportunity, but the response of the person who took the call was: “Why are you calling me?”
The reluctance of banks to return to the lending business is quite apparent in the growth of non-bank lending – senior debt funds have been a new and growing source of debt capital for borrowers and a mechanism for investors to capture reasonable returns, particularly compared to the very low rates on bank deposits.
But even during Mr Wheatley’s reign, it was not all banker bashing. It was well known inside the FSA that internal reports concerning banking behaviour and practices were required not to adopt a critical tone, but rather a more sympathetic approach.
This was carried through into some major investigations. For instance, when the swaps crisis developed, small borrowers from high street banks discovered that even though they had paid off the loan there was still a large balance outstanding on the interest rate swap (a direct consequence of the fall in interest rates after the financial crisis). The FSA addressed the problem and persuaded the banks to make good the losses. However, the settlement was restricted to very small borrowers – high street fish and chop shops, for example. If you were a borrower, with a property, a £10m loan and a 25-year swap you got nothing.
The FSA argued that such borrowers should have known better – this was a major help to the banks as these loans and swaps were larger, and so the potential compensation payable by the banks would also have been larger.
Despite his rhetoric, Mr Wheatley was co-operating with Treasury policy to promote the recovery. So it must have been a surprise when he learnt last June that his contract would not be renewed by the Treasury. Once again, the Treasury was directly involved in FCA business. Subsequently, in October 2015, in evidence to the Treasury select committee, Mr Osborne elaborated on his decision, explaining that while Mr Wheatley had done an “excellent job” in setting up the regulator – although it was already set up in that the FSA existed immediately before it changed its name to the FCA – he was not the right person for the “next phase of the FCA’s development”.
Mr Wheatley’s position had not been helped by the fiasco surrounding the selective briefing of certain journalists about the regulator’s business plan. The plan included certain action in relation to insurance companies which led to significant share price movements in those firms. Had the FCA been subject to the listing rules, the regulator would have been entitled to seek a fine for poor management of price-sensitive information. The subsequent report by Clifford Chance lawyer Simon Davis, published in December 2014, led to the resignation of the heads of supervision and communications, and Mr Wheatley had to forgo his bonus – but he was already a marked man.
The uproar about Treasury interference comes at an awkward time for the FCA when a new chief executive needs to be appointed. The acting chief executive, Tracey McDermott, despite her obvious credentials, was previously snubbed by Martin Wheatley in his ultimately unsuccessful pursuit of his own candidate for head of enforcement from Hong Kong, his previous stomping ground. Ms McDermott has ruled herself out of the selection process for the chief executive position on the grounds that she did not want the job full-time.
There is a precedent for a part-time chief executive – Sir Hector worked from home on Fridays, an arrangement he was always at pains to attribute to an agreement with his predecessor, John Tiner. And once the chief executive had done it, then so could everyone else. Sir Hector appointed a head of markets who was allowed to work from home on Wednesdays. Some more junior staffers wondered what would happen if a crisis developed on either of those two days of the week.
Working from home (WFH) is well embedded in FCA working practices and goes back to the time of the first chairman of the FSA, Howard Davies, who famously telephoned a colleague who was “WFH” only to be told by the colleague’s wife that he was mowing the lawn (MTL).
Given the climate of overt Treasury influence, a strong candidate will think carefully before rising to the challenge. Mr Mann has also expressed concern that the Treasury might install its own candidate – second permanent secretary John Kingman is rumoured to be up for the job. But there are already former Treasury officials employed within the FCA in senior positions– for example, David Lawton, director of markets.
Should the effectiveness of regulation be determined by the rulebook or by how the Treasury dictates that the rules are applied – as an instrument of economic policy? Surely what is needed is for the directors of the FCA to exercise their authority and take responsibility for the appointment of the chief executive and to behave as if they are an independent organisation – exactly in the way that the Bank of England has responsibilities to set monetary policy. Is it time for an independent regulator and for Treasury interference to end?
Andrew Hampton is a former investment banker
Key Points
Labour MP John Mann is concerned that the Treasury appears to be interfering with the work and operations of the FCA.
The problem with bashing banks is that it simply discourages them from lending.
Should the effectiveness of regulation be determined by the rulebook or instead by how the Treasury dictates that the rules are applied?
