Director Alex Shaw’s article examines the FCA and the role the new CEO, Andrew Bailey, will play in the Organisation’s activities.
Martin Wheatley was ousted at the financial services regulator last year to be succeeded by the Bank of England’s Andrew Bailey. Since then a number of banking investigations have been dropped so is this a sign of things to come?
The first question to ask when considering the appointment of any CEO of the Financial Conduct Authority (FCA) is whether it actually makes any difference?
For many observers, the sacking of Martin Wheatley in July 2015 marked the point at which the FCA ceased to be a genuinely independent regulator, becoming a vessel for the furtherance of the government’s wider fiscal approach.
This perceived shift began with a distinct change in the mood music around banking, as a newly emollient Chancellor George Osborne matched rhetoric about a ‘new settlement’ with specific policy changes on the bank levy and the ring-fencing of investment from retail banking.
The change seemed to become a firm reality when, at the end of 2015, the FCA shelved a much-anticipated report into the culture of British Banking.
This decision, in any sense, was not an outlier. The report that never was came hard on the heels of a review that did not happen – the latter being a shelved investigation into the activities of the Swiss private banking arm of HSBC.
A focus on changing the culture of banking, and of doing so via what sounds suspiciously like a series of congenial meetings rather than the firm hand of regulation, is something that will come to play a central and recurring role in any consideration of the approach Andrew Bailey is expected to take to his new role as CEO.
The perception of Bailey as being more than somewhat in thrall to the Treasury was underlined when it emerged, after his appointment had been announced, that the deputy governor for Prudential Regulation at the Bank of England had never actually been formally interviewed for the post but was rather hand-picked as ‘the best person in the world for the job’, over and above four other candidates, by George Osborne.
In terms of concrete action, Bailey has thus far ordered banks to hold more in capital as a buffer against future problems than was previously the case, although, as he explained at the Barclays 2016 Financial Conference, the level was set with reference to the long term rather than to more recent volatility.
“To put it into context, the capital standard we have developed is based on the last quarter-century of bank performance – including the financial crisis – such that the probability of bank failure during that period would have been extremely low,” he said.
The introduction of the senior managers regime, part of the Bank of England and Financial Services Act 2016, is another of the steps taken by, or at least under the auspices of, Bailey. It is intended to prompt a cultural shift by introducing a system under which the bosses of banks can be personally punished for the failure of a bank and the irresponsible behavior of executives.
Actions of this kind may offer some reassurance to those who fear a lack of independence on the part of Bailey, while a more recent speech, given at the City Week conference in May, provided evidence for both points of view.
While suggesting Bailey ‘gets it’ and understands the need for a large cultural and behavioral shift in the banking sector, it also contained fodder for those who fear any attempt to instill such a shift will be lukewarm at best and rely far more on the carrot of persuasion than the stick of enforced regulation.
Identifying the culture of a bank as a key factor in determining its success or failure, Bailey offered a definition of the type of risk involved: “Culture has laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel.”
He also, however, set out the difficulties inherent in defining precisely what the ‘culture’ of a bank entails, and also the limits he clearly sees to the impact any regulator can have upon changing that culture.
“As regulators, we are not able, and should not try, to determine the culture of firms,” he said. “We cannot write a regulatory rule that settles culture. Rather, it is the product of many things, which regulators can influence, but much more directly which firms themselves can shape … It is not the job of regulators to enforce culture and to change culture.”
At a time, post-Brexit vote, when the political world is in a state of complete flux so the genuine independence and strength of purpose of a figure such as Bailey is more important than ever.
As with so many other aspects of UK life at the moment, it will take time to tell whether he is up to the task of filling at least a part of the vacuum of uncertainty that the Brexit vote has opened up.
Alex’s articles have been featured in the following publications:
Professional Adviser, 10th July 2016