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  • Making sense of the ousting of Martin Wheatley Posted on 03 August 2015

    The ousting of FCA chief executive Martin Wheatley has been reported as a signal from the Government that “bank-bashing” has gone too far. There have been suggestions that the “mood music” on financial regulation has changed, with the Government losing interest in measures that risk harming the economy.

    That doesn’t feel like the right way of interpreting the Chancellor’s decision not to renew Wheatley’s appointment.  

    The biggest regulatory issues for the financial sector are less about banking conduct and more about matters outside of the FCA’s mandate. However much PPI hits the headlines, prudential regulation (including ring-fencing) and taxation are more likely to be top of the agenda at banks’ board meetings. None of this will be affected by a change at the top of the FCA.

    So if it’s not about watering down banking regulation, what did the Chancellor mean when he talked about the need for someone else to take the FCA to the “next stage of its development”?

    A clue might come from Brussels, where in May the European Commission published its “better regulation agenda”. The agenda is about designing EU policies and laws so that they achieve their objectives at minimum cost.

    That seems a sensible ambition. Most people, including those in the financial sector, recognise the importance of regulation in avoiding a re-run of the global financial crisis that we saw in 1998.

    European lobby group Finance Watch said last week there are 14 too-big-to-fail-banks in the EU, a $630,000 billion derivatives market (many times world GDP), and a financial market for the most part disconnected from the real economy (e.g. interaction with the economy accounts for about one third of EU bank balance sheets). In a recent public hearing on the EC better regulation agenda, Finance Watch warned MEPS not to believe the ‘mission accomplished’ rhetoric about financial regulation, or the notion that we should focus on growth and jobs ‘instead’, as if regulation were an impediment to growth.

    Finance Watch needs perhaps to differentiate between the objectives of finance regulation and how the objectives are met. This can best be considered in very practical terms.

    Consumer credit regulation in the UK is a case in point. For most asset finance brokers consumer credit is a tiny part of their business. Yet the application process to obtain FCA authorisation can easily take a week. Could the application form have been designed to be 6 pages rather than 60 pages long? Certainly not today but perhaps Mr Wheatley’s successor will put in place a culture that forces FCA officials to seriously consider that question.

    To take another example, the FCA has rightly clamped down on the payday industry (albeit only after being virtually forced to do so through legislation). However did the solution need to be quite so heavy-handed? As we have written before, a simple cap on the total amount to be repaid at double the amount borrowed would on its own have eradicated most of the harm caused by bad practices in this sector. The FCA did that but layered onto it additional price controls that make most short-term lending (including most “good” loans that millions of users reported as being useful and paid back on time) uneconomic.

    There’s an important role for regulation that those lobbying on behalf of the financial sector need to respect. In return it’s vital that the regulators aim to meet the EC’s agenda of achieving their objectives at minimum cost. The FCA hasn’t always been achieving that and this might go some way towards explaining George Osborne’s decision.

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