Terminated: City Sheriff Shot Down

16 08 2015

The tough talking Martin Wheatley finally decided to resign last month. But it was for the wrong reason, i.e. vanity. He was unhappy about his boss George Osborne’s refusal to renew his contract as head of the Financial Conduct Authority (FCA) in March 2016. Whilst Wheatley does not accept the excesses of his four year stint as City Sheriff, many in financial circles are nonetheless breathing a sigh of relief that his reign of terror is over. A trigger-happy sort of chap, unlike his iconic predecessors (e.g. Howard Davies, Hector Sants etc) whose shoes he just couldn’t fill, Wheatley persistently failed to command the respect of the financial elite. The shot down sheriff will be temporarily replaced by his deputy Tracey McDermott (who will temporarily act as CEO from 12 September 2015) and Andy Haldane (the Bank of England’s Chief Economist) has been tipped as his permanent replacement. Wheatley, who became globally infamous for his fierce crackdown on the cheating that has historically infected financial services, reportedly said that he is disappointed to be leaving his job because he had some unfinished business to settle; apparently, the cure had not fully been delivered. The caped crusader’s legacy has been one of lumbering the banks with fines, authoring the Wheatley Review (which was germane to reforming LIBOR/benchmarks) and co-authoring the equally seminal Fair and Effective Markets Review with the Bank of England and HM Treasury.

Despite having resigned, Wheatley will apparently stay on at the FCA in an advisory role and he will be paid until July 2016 irrespective of his actual exit in January 2016. He received more than £700,000 in compensation last year. His work has been hailed as the blueprint for oversight of financial benchmarks and has come to form the bedrock of the conduct regime. Equally, his tenure had a lot to do with fear and loathing in the City and mischievous individuals in financial services must be hugely tickled that the terminator himself has been terminated. On the other hand, some were of the view, that his systemic efficiency was little more than a lot of huff and puff. For example, on the subject of third party rights the Court of Appeal – see the long read – thought that his FCA failed to follow proper legal channels and truncated procedures when wrongdoing was penalised and regulatory action was taken. As far as Gloster LJ (with whom Longmore and Patten LJJ agreed) could see, the wheels of justice had simply turned too fast and third party rights had suffered as a result: in other words, enforcement had become redolent of the law of the jungle, the judgment is being appealed to the Supreme Court.

The media spotlight, which he loved to bask in, ultimately contributed heavily to his undoing. The FCA’s clumsy and controversial scoop to the Telegraph (about investigating 30 million ancient “zombie” insurance policies) not only destroyed market value (almost £3 billion in just a few hours) and caused free-fall for companies such as Aviva and Prudential but also demonstrated his misunderstandings about his own role as regulator. That’s where he ended up throwing the axe at his own feet. But later on he candidly accepted that the debacle was a “screw up.” His termination, indeed his coup de grâce, is generally attributed to his lack of mellowness and extremely belligerent nature; the fact that he used radical methods in regulating the financial services industry probably made him few friends in capitalism’s elite circles. Yet despite all the negative press associated with the FCA’s highhanded tactics in pursuing regulatory action, he remains proud of his achievements over the last few years.

Imposing record fines will be his enduring legacy. For example, not long ago in 2009, the Times argued that “[t]he threat of fines from the FSA are seen as a footling expense.” Yet in 2014 the UK penalties alone added up to almost £1.5 billion and the upward trend in global conduct costs produces a striking analysis. For example, under Wheatley’s watch, from 2013 to 2014 the quantum of the FCA’s average penalty almost trebled. The starker five-year picture shows more than a tenfold increase in the magnitude of the average fine imposed by the FCA. (Notably, the Conduct Costs Project Research Foundation’s International Results Table for 2010-2014 reports a total of £205.56 billion in conduct costs/fines.)

Wheatley claimed that his cowboy approach was working: it was changing institutional culture, which after all is what he set out to do. In a post-financial crisis world where issues relating to rampant cheating remained the order of the day, Wheatley inherited a hard set of issues: as he said, in his role as City Sheriff he would shoot first and ask questions later. The expansion of the FCA’s powers in 2014 culminated in Wheatley seriously cracking down on pay-day lenders. But at times his aim was off target and his poor marksmanship injured innocent bystanders and, initially a boon, his rapid-fire approach became a thorn in his boss George Osborne’s side. Once that had occurred, his aura of infallibility dissipated.

His ouster as the chief of the financial services watchdog has heralded the end of banker bashing, a message which was part and parcel of George Osborne’s Mansion House 2015 speech – one where he veered towards competiveness and a new settlement with financial services. The son of a plumber, Wheatley was unpopular with the banks for his Stalinist attitude and authoritarian stance did little to enhance his appeal. So George Osborne had no other choice but to sacrifice his main man by pulling against him in quick draw style. The City, which found his reign to be a searing experience, will probably not miss him too much: it is probably fair to say. In his recent Debating trust and confidence in banking speech, Wheatley said wanted to make cultural change or the “honesty norm” to be the benchmark to measure conduct. He also made some statements about how his plans had changed boardroom culture and that the increasing intensity of fines for misconduct was producing a game-changing effect on the culture of banks. Wheatley opined that the banking industry has reached a “turning point” and he said that:

neither the Senior Managers’ Regime, nor the presumption of responsibility, [see here] correspond to a ‘heads on sticks’ strategy.

Wheatley had been attacked for his role as the head of the Securities and Futures Commission in Hong Kong, where he had unwittingly approved $2 billion of financial products linked to Lehman Brothers which were sold to Hong Kong investors prior to the bank’s collapse. Effigies of him were burnt and people shouted “disgrace” everywhere. But discontent in the former colony was probably less humiliating than being disgraced in the motherland, in London itself – the capital of Empire and the beating heart of global capitalism.

His failure in relation to lay down limits as regards the amounts payable in relation to PPI mis-selling was also seen as “screw up”: but to be fair, it was unrealistic to expect this of him because the tremors caused by the Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 (12 November 2014) judgment are still in the process of being measured. The titanic effects of this doomsday ruling by the Supreme Court, which are presently under consideration by the FCA, may well mean that the banks will have to reimburse some £33.5 billion in illicit commission/kickbacks for for PPI mis-selling. He was also seen as bossy and adopted a head master’s tone to senior bankers who came to resent his aggressiveness and bullying attitude as the financial services regulator. An awry accountant by profession, and a philosophy major in university, Wheatley also drew fire for not being wise to HSBC’s money laundering activities: a bombshell that had been ticking since 2007.

He is sad to be leaving his post indeed. Expressing his sense of achievement and pride in leading and developing the FCA into a “world class regulator”, Wheatley, who had roped in his job via a headhunter during a skiing trip, explained that:

Frankly, I am disappointed to be moving on and do so with a sense of unfinished business.

Colleagues, such as John Griffith-Jones, congratulated the so-called “grey vampire” for his “professionalism, high standards and unquestionable integrity.”

George Osborne is on a global search to find a replacement for a new market enforcer. Apparently, he is looking for a different style of leadership to take the FCA to “the next stage of its development” – the Chancellor explained that Wheatley’s successor would need to be equally passionate about the issues in order to make London “the best regulated market in the world.” Osborne’s search for a new chief executive for the FCA will inevitably involve finding someone who was “different”. According to him, Britain needs a “tough, strong financial regulator” but he thinks that fresh blood “is required to build on those foundations and take the organisation to the next stage of its development.”

McDermott, an FCA insider who has worked her way up to the top, is a lawyer by profession and is the public face of prosecutions involving insider trading and the imposition of fines for misconduct. With nearly a decade and a half long career in punishing misconduct, McDermott, who became the head of supervision last autumn, is a suitable candidate to temporarily replace her boss until a permanent replacement can be found for him.

Looking ahead to the transition, John Griffith-Jones wished his crusader boss well and said that:

… we owe him a lot … and I am pleased that we will continue to benefit from his wisdom and expertise over the next few months.

As for the man himself, he simply said:

I am incredibly proud of all we have achieved together in building the FCA over the past four years. I know that the organisation will build on the strong start and work so that the financial services industry continues to thrive.

However, prior to news of the departure, a clash of the titans had been brewing between Mark Carney and Martin Wheatley because they disagreed over the role of asset managers being systemically important financial institutions. The latter argued that “big questions” confronted global regulators – such as Carney who in addition to his governorship of the Bank of England also chairs the global watchdog known as the Financial Stability Board (FSB) – and needed to be answered prior to determining whether the world’s largest asset managers should be deemed “systemically important”. Despite his awkward relationships with bankers, Wheatley did have some fans. His approach to asset managers was met with open arms by investment managers – such as BlackRock Inc and Vanguard Group Inc – who made it plain to Carney:

… stop trying to regulate us like banks.

Yet there were yet more failures. Wheatley’s FCA dropped its investigation in relation to the so-called “London Whale” trades which totalled $6.2 billion (Whereas in 2009, at the height of its profitability, the mismarked synthetic credit portfolio had generated more than $1 billion in revenue.) Bruno Iksil, the notorious trader who caused the losses (translating to £51 billion in shareholder value), was let of the hook by the FCA after a costly three year investigation which amounted to little more than a waste of public money. Apparently, the Regulatory Decisions Committee (RDC) – composed of practitioners and non-practitioners representing the public interest and not part of the investigation team – did not think that the FCA had a good enough case and it decided not to take any further action. As an administrative decision-maker, the RDC does not engage in a judicial process. Although representations are made before the RDC, full evidential analysis and the examination and cross-examination of witnesses does not take place and the concepts of burden and standard of proof are not strictly relevant. (Now that the probe into Iksil’s conduct has been dropped, Mr Achilles Macris is the only remaining executive under FCA investigation for the portfolio’s losses.)

Moreover, the FCA has also decided to drop its investigation into the misconduct of Panagiotis Koutsogiannis, better known as “Pete the Greek” who used to be the head of UBS’s rates division. Like Tom Hayes, the UBS banker who was said to be central in LIBOR rigging and became the first person to have been convicted and sentenced to 14 years’ imprisonment, Koutsogiannis is said to have been at the heart of the scandal. He refused to testify in Hayes’s trial which was prosecuted by the Serious Fraud Office: Hayes  had sought to implicate Koutsogiannis in a “cut throat” move that seems to have backfired. In relation to Koutsogiannis, the RDC found that there was insufficient evidence for the FCA to ban him from the City for dishonesty. But perhaps this week’s decision in The Financial Conduct Authority v Da Vinci Invest Ltd [2015] EWHC 2401 (Ch) – where Snowdon J granted an injunction and more than £7 million in penalties for market abuse – will make the financial watchdog feel a bit better.

Martin Wheatley came in as the fresh new face of financial regulation. In comparison to Carney’s poster boy good looks and bourgeois background, Wheatley’s stern smiles came to symbolise the end of the free-for-all that had once been the world of financial services. Irrespective of his myriad failures, he pretty much terminated the widely held belief that crime in financial services would go unchecked or unpunished. Against that, we can salute his uncompromising stance to stamp out cheating and for striking fear into the hearts of the crooked: the evil bankers who prey on the public to roll in money. Only time will tell, but perhaps Wheatley’s Stalinist approach has done some good after all. Chair of the Treasury Select Committee (and the seminal Parliamentary Commission on Banking Standards), the redoubtable figure of Andrew Tyrie MP – who had criticised Wheatley for not accepting blame in relation to the Telegraph debacle – simply said this in bidding the sheriff goodbye:

Martin took over at an exceptionally difficult time. He was faced with the challenge of changing the culture of both the regulated community and the regulator, given the exposure by the crisis of the shortcomings of the FSA.


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31 08 2015
12 09 2015
The Senior Managers Regime | Global Corporate Law

[…] Carney and Martin Wheatley, who will be leaving the FCA and has been replaced by his deputy Tracey McDermott (who will temporarily act as CEO from today, […]

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[…] managers.” As noted on this blog in the past, the FCA’s fallen conduct Czar Martin Wheatley disagreed with the extent of Carney’s wisdom on the extension of the new regime to asset […]

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[…] In relation to the above, Tracey McDermott, the FCA’s outgoing head, has echoed her former boss Martin Wheatley’s position that the SMR is not meant to be a “heads on sticks […]

30 03 2016
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[…] contracts, was “not fit for purpose”. But of course, the review’s author Martin Wheatley was ousted from office because of his overt aggressiveness, or his “shoot first” and “ask questions later” policy […]

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