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Sideways: Courage, stout regulators!

The dismissal of Martin Wheatley, head of the UK’s Financial Conduct Authority, by Chancellor George Osborne was widely interpreted as a step towards less intrusive regulation of the financial industry



Osborne had already announced a “new settlement” with the City in a shift that echoes the attempts by Republican politicians in the US to soften some aspects of implementation of the Dodd Frank banking reform laws that passed in 2010. With the Volcker Rule to reduce proprietary dealing by banks finally taking effect in late July, there is clearly a temptation among business-friendly politicians to declare victory in the war of financial reform. No senior politician has gone so far as quoting ex-Barclays CEO Bob Diamond’s line that the period of remorse and apology for banks needs to be over. Diamond delivered that gem in early 2011, a touch prematurely given that details of widespread manipulation of Libor and other interest rates by Barclays and peer banks would start to emerge the following year, costing Diamond and others their jobs.

But Osborne, for one, is certainly humming ‘Don’t let’s be beastly to the bankers’, even if he isn’t singing it out loud. This should not be taken as a sign to ease up on malpractice by regulators, even if there are legitimate questions to be asked about the cost of the box-ticking compliance culture that has developed in the wake of the multiple scandals in banking.


Wheatley made it plain that he was disappointed by the UK Treasury’s decision not to renew his contract and said that he left “with a sense of unfinished business”. There are certainly plenty of areas that are worthy of further investigation, as a recent report by German regulator BaFin on market abuse by Deutsche Bank makes clear. The interest rate rigging by Deutsche Bank was chiefly carried out in the firm’s London office, with some valuable input from Frankfurt and New York, highlighting the need for close cooperation by separate national regulators in policing global markets.

Rather than signalling to bankers that a new era of emollience is emerging, regulators should maintain a confrontational stance, at least where there are valid reasons for suspicion about market practices. 

Regulators could also learn some lessons from their charges in the financial industry, who have long been masters of game theory, if not the actual universe. Skewed incentives are at the root of most of the market abuse scandals that have emerged in recent years. Market insiders – whether they were high flying traders like Deutsche Bank’s Christian Bittar shooting for multi-million euro bonuses, or lowly brokers competing for scraps from the dealing table – understood all too well that the upside of their malpractice vastly outweighed the downside as it was perceived at the time.

Further reading


New questions for Deutche Bank and Jain

Regulators should try to think as clearly about their own risk and reward frameworks. Martin Wheatley may have been pushed out of his job because he was unwilling to play along with George Osborne’s new get soft campaign to help the banks, but he is unlikely to be out of work for long. Even if he doesn’t find a berth at a regulator trying to project an air of authority, he will have no shortage of job offers from financial services firms that are even keener to appear serious about tackling cultural and procedural deficiencies.

Compliance and risk management are the two fastest growing areas of employment within financial services, creating an effective lifetime employment guarantee for experienced regulators. 

So Wheatley’s temporary replacement as head of the Financial Conduct Authority, Tracey McDermott, should take courage from the fact that she has no real downside from wearing a frowny face to meetings with bankers. It is only likely to increase her market value.

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