The banking sector needs a regulatory structure that is firmly forward looking and anticipates and tackles issues before they become multi-billion dollar problems, the Financial Conduct Authority chief executive has said
Martin Wheatley told the British Bankers' Association annual international conference yesterday, that retrospection had been a deep-rooted problem in regulation in the period leading up to the financial crisis. He said there was 'too great a focus on near-term data versus long-term trend, rules over principles, enforcement over prevention'.
What the banking sector has now is a very different regulatory infrastructure, with the Prudential Regulatory Authority and FCA both mandated to promote stability, he said, adding that stability makes markets work well over the long run.
Citing some of the most significant events that shaped the banking industry around the world over the last five years - including London interbank offered rate (LIBOR) fixing, payment protection insurance mis-selling, interest rate swaps - Wheatley said that three key themes had emerged.
Firstly, sales that followed a lengthy pitch for the primary product were prone to mis-selling, making the decision less clear for customers.
'These mis-sales were often accelerated by the manner of presentation - the framing if you like. So PPI, when set against the full cost of a loan, might seem a relatively small addition to the main transaction,' said Wheatley.
Secondly, he observed: 'We do not live in a world where everything and everyone behaves entirely predictably. So what follows is an increasing susceptibility to issues like framing.'
The third key theme to emerge was that the current regulatory framework was too retrospective, with an excessive reliance on rules as opposed to culture.
'Taken in aggregate, these three themes - difficulties on supply side, demand side and official side - created a perfect storm. It reduced the regulator to the role of judge dispensing justice. It chiselled away at public confidence in financial services.'
Looking forward, the main concern must be to protect customers more effectively and to make a positive economic contribution, he said.
'In preventing a repetition of these conditions, the first step for regulators has been to look beyond legal compliance. To exercise judgement more authoritatively.'
Wheatley said the FCA was working towards this by developing a deeper understanding of the sectors it regulates, looking more closely into sources of revenue and examining the way a firm's business model interacts with customer expectations and behaviour.