London Regulator Brings Heavier Touch to Banking Rules

Martin Wheatley, who leads London’s top markets watchdog, says he wishes he could bike to and from his home in Greenwich, a borough along the Thames. He can’t because he’s lugging too much paperwork around.

That doesn’t stop Wheatley from applying a cycling analogy to his job, Bloomberg Markets magazine will report in its March issue. He compares cleaning up banking to eradicating doping in the Tour de France, which was rocked by Lance Armstrong’s admission that he cheated to win his record seven titles.

“The Tour de France is in many ways similar to banking,” Wheatley says, wearing an army-green camouflage Nike wristband that counts the miles he covers and the calories he burns. “I want to believe they’re all clean,” he says of bankers. “We hope beyond hope that actually the bad stuff is behind us. We’ve got a testing system that really goes in and validates, which is what we do with the banks.”

It took the U.S. Anti-Doping Agency 12 years to ban Armstrong from competitive cycling. Wheatley, 55, has had barely a year to uncover the Armstrongs of the banking world. He says any “cultural shift” will take time.

As head of the Financial Conduct Authority, created in April 2013, Wheatley meted out a record 474 million pounds ($778 million) in fines to financial firms last year, more than seven times higher than in 2011.

Among the top penalties: The FCA fined three firms 206 million pounds for manipulating the London interbank offered rate, or Libor, and charged JPMorgan Chase & Co. 137.6 million pounds as part of the probe into a $6.2 billion loss by Bruno Iksil, the trader known as the London Whale.

Widening Investigation

When it comes to punishing bankers, Wheatley made his mark as head of the consumer and markets business unit at the FCA’s predecessor, the Financial Services Authority, where he was posted in September 2011 while waiting for the new regulator to be created.

Wheatley has brought charges against nine people for insider trading, including Martyn Dodgson, a former Deutsche Bank AG managing director, and Julian Rifat, a former trader at Moore Capital Management LLC. Dodgson and Rifat deny wrongdoing. Their cases are ongoing.

More penalties may be on the way. The FCA is widening its investigation into price manipulation of financial benchmarks that have a direct impact on interest rates, currencies and the gold market.

Wheatley has initiated a probe into alleged rigging of the $5.3 trillion–a-day foreign-exchange market and is examining the ISDAfix benchmark, used by companies and money managers in the $379 trillion market for interest-rate swaps.

‘Failed Culture’

Wheatley faces a daunting cleanup. In 1997, then–U.K. Chancellor of the Exchequer Gordon Brown stripped oversight responsibilities from the Bank of England and created the Financial Services Authority.

The upshot was what U.K. Treasury Select Committee Chairman Andrew Tyrie later called a “failed culture of box ticking” at the FSA. Under a light-touch regime, regulators allowed banks to build up subprime holdings and other risky debt without enough capital to back them up.

When the financial crisis came, the U.K. government paid an unprecedented price -- 1.16 trillion pounds in loan guarantees and cash to bail out Royal Bank of Scotland Plc, Lloyds Banking Group Plc, Northern Rock Plc and two smaller banks.

‘Twin Peaks’

When George Osborne took office as chancellor of the Exchequer in 2010, he called for a “resetting” of regulation. He announced plans to disband Brown’s FSA over time and split regulation into “twin peaks”: the FCA, to oversee banking behavior and protect consumers, and the Prudential Regulation Authority, an arm of the Bank of England designed to supervise capital and liquidity requirements at banks, insurers and investment firms.

In 2011, Osborne gave Wheatley a transitional role at the FSA as it was being phased out. In a speech last year when the FCA came into force and Wheatley took over, Osborne said the regulatory changes would strengthen London as a financial center.

“They do away with the discredited system that failed to sound the alarm as the financial system went wrong,” Osborne said.

Sitting in his FCA office, Wheatley says he’s working toward the cultural transformation that Osborne espoused.

“We came through a period in 2007 and 2008 when everybody’s moral compass got slightly out of kilter,” he says. “The biggest concern is whether the business model of financial institutions can adequately adapt to the new world order, where you can’t just rip off your clients.”

Largest Fine

U.K. fines pale in comparison with those levied on banks by U.S. authorities. Last year alone, JPMorgan, the biggest U.S. bank by assets, said it paid out more than $23 billion to settle government and private disputes.

By contrast, the largest-ever fine by U.K. regulators was 160 million pounds in 2012 against UBS AG for attempting to manipulate Libor. The same year, Barclays Plc also became ensnared in the Libor probe. It paid out 59.5 million pounds and lost its Massachusetts-born chief executive officer, Robert Diamond, in a barrage of scathing publicity.

U.K. penalties haven’t been steep enough, says Tom Kirchmaier, a fellow in the Financial Markets Group Research Center at the London School of Economics and Political Science.

“Bankers are shell-shocked and more frightened than they were in 2007, so that will put a lid on some bad habits,” he says. “But the fines should have been bigger for Libor, in my opinion, given the damage done to society.”

Payday Lenders

Bolstered by an annual budget of 445.7 million pounds and a staff of about 3,000, Wheatley has the power to initiate criminal prosecutions for insider trading and market manipulation, issue subpoena-like requests for records and shut down businesses.

On April 1, the FCA will begin supervising consumer credit, cracking down on payday lenders that offer short-term loans at interest rates sometimes exceeding 4,000 percent a year.

“He’s setting a new tone,” says Peter Allen, managing director at London-based Lombard Street Research Ltd. “He’s taking on the role of headmaster and making clear to prefects and bullies what will be tolerated. He’s trying to bring back ethics rather than just rules.”

‘A Reformer-in-Chief’

Wheatley says he’s trying to position the FCA as a global leader on regulation. Under the auspices of the International Organization of Securities Commissions, he worked with Gary Gensler, then-chairman of the U.S. Commodity Futures Trading Commission, to promulgate the first global recommendations on how benchmarks should be set and regulated.

With U.S. Federal Reserve Governor Jeremy Stein, he’s co-chairing a Basel, Switzerland–based Financial Stability Board panel looking at whether the lack of benchmark oversight led to manipulation.

“The U.K. response has been to position itself as a reformer-in-chief,” he told a group of investors in London in November.

That’s a change. During the aftermath of the financial crisis, the old U.K. regulatory setup played catch-up. In the U.S., the CFTC began its Libor investigation in 2008. It took the U.K. a year and a half to follow suit, even though Libor is set in London.

In July, Wheatley announced plans to remove control of Libor from the British Bankers’ Association, an industry group. ICE Benchmark Administration, a unit of IntercontinentalExchange Group Inc., which acquired NYSE Euronext last year, was set to take over Libor in February.

Benchmark Manipulation

This time around Wheatley has gotten out in front, spearheading the foreign-exchange investigation that began in October.

The FCA has 60 people exploring benchmark manipulation, including whether a small group of senior traders at a dozen major banks colluded to manipulate currency rates. The banks have said they’re cooperating with the investigation. At least 17 traders have been suspended by their institutions in the probe.

“There is huge political impetus behind change,” says David Green, a former regulator who worked at the Bank of England and the FSA. “The FCA is bound to push out the boundaries. Having found abuse in one market, it was inevitable they would start looking at other markets.”

With a degree in English and philosophy from the University of York in northern England, Wheatley is the thinking man’s regulator.

Lehman Minibonds

He gained experience as a financial cop in Hong Kong after 17 years at London Stock Exchange Group Plc, where he rose to the post of deputy chief executive. He moved to the former colony in 2005, eventually becoming head of the Securities and Futures Commission.

When Lehman Brothers Holdings Inc. collapsed in September 2008, a credit-linked product structured by Lehman blew up and wiped out the savings of as many as 40,000 people in Hong Kong.

For months, protesters gathered outside Wheatley’s office, brandishing placards, including one that said “Wheatley Go Home,” and burning images of him. Within a year, Wheatley forced the 16 Hong Kong banks that sold $1.8 billion of the products, known as Lehman minibonds, to return more than 90 percent to most investors.

“Martin saw firsthand what’s involved in dealing with large institutions wielding more political power than regulators,” says Mark Steward, who worked with Wheatley as his head of enforcement.

‘Rearview Mirror’

Wheatley says he wants to end what he calls regulation through the “rearview mirror.” He says he’ll intervene when he sees trouble brewing as banks peddle their wares.

“Any product that’s growing very, very quickly in terms of scale is usually a good place to start to look,” he says. “We’re saying to major organizations, ‘Actually, your customers matter.’”

Julian Franks, a finance professor at London Business School, says it’s too early to judge Wheatley’s performance.

“We don’t know if regulation has gone far enough to prevent another crisis,” he says.

Given the pent-up public anger about bankers’ wayward ways, Wheatley’s success or failure depends as much on heading off the next crisis as on cleaning up the mess left by the last one.

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