FCA Chief Canned by UK Treasury

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Two weeks after the Financial Times ran a full page article attacking the head of the UK’s Financial Conduct Authority, Martin Wheatley, a leading champion of unbundling research from commissions, is stepping down. At a minimum, Wheatley’s departure reduces the risk that the FCA will implement a hard line interpretation of the unbundling language in the pending European regulation.

Wheatley appears to have been ousted by UK Treasury Chancellor George Osborne who was quoted by the London Telegraph as seeking ‘different leadership’: “Britain needs a tough, strong financial conduct regulator. The government believes that different leadership is required to build on those foundations and take the organisation to the next stage of its development.”

Wheatley did not have a fixed term, being appointed — and now discharged — by the UK Treasury. Insiders had predicted Wheatley would leave in 2016, when he would have served four years, but that was not to be.

Chancellor Osborne said that the UK Treasury will be conducting a search for Wheatley’s replacement. In the meantime, Wheatley will stay on in an advisory role until the start of next year and the FCA’s enforcement head, Tracey McDermott, will take over as acting chief executive until a permanent replacement for Wheatley is identified.

Our Take

Regime change at the FCA may very well soften its seemingly implacable hostility toward bundled research commissions. Ever since October 2013 when Martin Wheatley threw down the gauntlet in a landmark speech at an FCA conference, it has been clear that unbundling has been a personal hot button with the FCA chief.

Wheatley’s sacking does not directly impact the unbundling language in MiFID II, which has reached a stage where regulators no longer have input. However, the suddenness of Wheatley’s departure underlines the Conservatives desire to soften the FCA’s aggressive stance toward the City, which might carry over to the negotiations over the final MiFID II unbundling language.

The most politically expedient resolution to the contentious unbundling language in MiFID II would be to keep the current language, as was the case in the draft leaked to us in April, while issuing the rules as a directive. This allows the EU to kick the can to the national regulators, who will then draft the final interpretation.

The French regulators have signaled that they will interpret the language as allowing commission sharing agreements to fund the proposed research payment accounts. It is now more possible that a kinder, gentler FCA might follow suit rather going in the opposite direction and interpreting the language in its strictest construction.

In the end, the can gets kicked into the lap of the asset managers, who must decide how far to go down the unbundling path. Even if the CSA option is endorsed by a reformed FCA, it is likely some asset managers will choose to implement research charges under RPAs or to wash their hands of the whole mess by paying for research out their own pockets.

Under any scenario, Wheatley has engineered far more drastic reform to research payments than any of his FSA predecessors, even if he is not around to savor it.

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About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email: Sanford.Bragg@integrity-research.com

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