Increasing the level of fines on highly profitable financial institutions will not alter their behaviour, the head of the Financial Conduct Authority said on Thursday as he set out his vision for the new regulator.
Martin Wheatley, chief executive of the FCA, also admitted that there was a concern that the situation in Cyprus, where banks have been closed since Friday while the country hammers out details of a €17bn (£14.4bn) bailout, could cause problems elsewhere.
Wheatley said higher fines on firms would have no impact unless top management also took responsibility and customers were ready to move their accounts if they were fed up with the behaviour of the firm. "To be honest, to the banks that make billions of pounds in profits, whatever the level of fine it will get passed on to shareholders."
Raising the level of fines is not going to make firms change "unless individuals are held to account… and the consumers make a decision themselves that we'd rather bank elsewhere," said Wheatley.
This week the Financial Services Authority (FSA) said it was taking a tougher approach to fines by basing them on stock market value rather than assessments made by the enforcement division.
On Cyprus, Wheatley said an initial plan to skim €5.8bn from savers' bank accounts as part of the bailout could hit confidence in the banking system as it may undermine the €100,000 guarantee on deposits across the EU. Cyprus has now backtracked from the idea of putting a levy of 6.75% on deposits between €20,000 and €100,000 and a 9.99% levy on any deposits larger than that.
"From our point of view the confidence in the banking system was very strongly underpinned" by the guarantee put in place after the 2008 crisis, he said. He saw it as a "very important principle".
"It does undermine confidence in the banking system when what people previously thought were insured deposits [appear not to be]," Wheatley said.
The FCA is being spun out of the FSA, which is being disbanded at the end of this month, and will take on the existing investigations into Libor rigging. It will also take care of consumer issues and the conduct of firms, and be responsible for promoting competition. A new divisional head is being recruited. Banking regulation is moving a new body – the Prudential Regulation Authority – inside the Bank of England.
Wheatley attempted to set out a different tone to Hector Sants – the former chief executive of the FSA who now works for Barclays – who had previously warned the City to "be afraid" of the FSA.
"You won't hear from us the 'be afraid' tone," Wheatley said. "We want to get back to us having a discussion with the CEOs of firms."
Wheatley had previously said that he would "shoot first, ask questions later" in dealing with financial products that may not be appropriate for consumers, as the FCA will have the powers to stop banks and financial firms selling products that it has concerns about.
Wheatley said that the current payment protection insurance scandal – estimated to have cost the industry £12bn – was a reminder that it was "better to deal" with problems early. "We will be on the front foot when we see things we don't like," Wheatley said.
Wheatley refused to comment on the near-£40m of bonuses that had been released to nine Barclays staff on Wednesday, shortly after the budget. But said he "understood the point" after a year in which Barclays was fined £290m for rigging Libor. Speaking generally, he said: "It is a problem if rewards are taken that don't bear any relation to the risk that was taken by the institution."
He said the FCA had demanded that bonuses be clawed back from bankers at some institutions.
In addition to the potential for contagion in the eurozone, Wheatley said the regulator was also concerned that customers would start to seek out riskier products because interest rates were so low, and that once rates started to rise customers might start to have difficulty repaying loans.
John Griffith-Jones, who will be the non-executive chairman of the FCA, said the regulator could make "a fresh start."
"Prevention in this industry is much cheaper than a cure," he said.
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