Guns blazing: City sheriff rounds up the cowboys
Watchdog head Martin Wheatley says banking culture reforms will take time
Can you name an area of financial services that hasn't been found wanting, where consumers haven't been sold an overly complicated product for an inflated price, or traders haven't colluded so they can boost profits?
It is the question that Martin Wheatley, the watchdog appointed a year ago to police everything from insurance policies to foreign exchange trading, takes longest to answer in our meeting.
"An awful lot of the problem was that products were being supplied that weren't necessarily ripping off the consumer but they were being under-priced to the extent that they weren't making enough profit for the bank," he says, eventually.
Sliding the milk jug across the table until it clinks against his cup of tea, Mr Wheatley adds: "So the bank would say: OK, you want that product, you have to take that one with it. That's what payment protection was."
In 12 months, the Financial Conduct Authority, where Mr Wheatley is chief executive, has made its presence felt, weighing into annuities, mobile-phone insurance – "in some places, practices were abhorrent" – interest-only mortgages, Libor interest-rate rigging and payday lending. "It is a long food chain, with reasonable behaviour at one end and appalling at the other."
The dubious bundling of products was alive and well in the small-business loans market too, where banks have so far paid out £482m in redress for mis-selling interest rate swaps, which were designed to hedge against rising loan repayments but were also loaded with hidden break fees.
"Instead of just selling them a fixed-rate loan which people understand, they sold them complex swaps, which are then costing them a lot of money to get out of."
Has the new City sheriff – a former deputy chief executive of the London Stock Exchange who cut his regulatory teeth in Hong Kong – rounded up all the cowboys yet? Far from it. It would be nice to think he was still dealing with problems from 2007 and 2008, when banking was fast and loose before the crisis struck, but many of them are far more recent than that.
Mr Wheatley welcomes the touchy-feely culture changes unveiled at the top of almost every major bank, but will welcome it even more when it has percolated down from the boardroom to the rank and file.
"In fairness to major firms, everyone talks about a new, consumer-centric way of doing business with ethics being at its heart, but actually these organisations employ 100,000 people; and the people who have been used to significant rewards for bending the rules, breaking the rules, or committing acts that don't pass muster, try to carry on doing that, frankly.
"That is why a lot of what we try to do is not just looking at symptoms of what went wrong but also the root causes of what created that. Most cases are a combination of poorly designed incentive structures and a failure to manage conflicts of interest.
"Culture change in any organisation is hard work. You can't sheep-dip people on the trading floor and believe that makes the change. You've got to live it, breathe it, deliver it every day."
What may drive change is when regulators have some examples to hold up. Mr Wheatley expects successful criminal prosecutions in the area of Libor interest-rate rigging, and that means there will probably be prison terms for those caught in the net of the brewing forex rigging scandal too. Manipulation of that market, worth $5.3trn (£3.2trn) daily, is a far bigger deal for London, which houses about 40 per cent of all trades. So far 20 traders have been dismissed or suspended, as well as one of the Bank of England's staff. There are more dark corners to probe, Mr Wheatley warns.
"The interesting thing about Libor is the freedom of language in internet chatrooms or on recorded lines which suggests a complete disregard for any ethical basis for what was going on, but also an almost complete acceptance that what was going on was normal," he says. "In lots of ways that was the most shocking thing."
The FCA has styled itself as a consumer champion. It is a successor to the Financial Services Authority, which was itself a casualty of the banking crisis when half of its oversight role was returned to the Bank of England, in a shake-up designed to tighten up on wrongdoing.
But one problem with a crackdown is that players fail to abide by new rules if they don't think they can make enough profit. Mr Wheatley acknowledges that gaps have opened up as incentive-driven business models are exposed.
Lloyds was the most recent high street name to be lashed. The Black Horse bank landed a £28m fine for dubious sales tactics where branch staff were offered "grand in your hand" bonuses to push all sorts of savings and investments products on customers.
Rather than reform, banks are deserting that section of the market, with HSBC and Santander noticeably scaling back from offering in-branch investment advice.
The question is whether the financial services industry – and, to some extent, the City of London – can bounce back in the trust stakes as the FCA runs amok.
Mr Wheatley's view is that "it's a very difficult balance. By blowing something open you obviously take a reputational hit that that had been going on, but I hope you get some reputational benefit that by dealing with it, the future is not going to look like that."
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