Being the head of the FCA is a tough job. So why did Andrew Bailey agree to take it on?
Youâ€™ll know the name even if you donâ€™t think you do. Andrew Bailey, who has been named as the new chief executive of the UKâ€™s Financial Conduct Authority, was the chief cashier at the Bank of England between 2004 and 2011. As such, his signature adorned every fiver, tenner, 20 and 50-pound note printed during his tenure.
As the UKâ€™s number one financial watchdog â€“ a tough and largely thankless task â€“ Baileyâ€™s face is about to become a lot more familiar, too. When the next financial scandal hits (as it surely will), heâ€™ll be hauled in front of MPs and through the press to explain why it did so on his watch.
An effigy of Baileyâ€™s immediate predecessor Martin Wheatley was burnt outside his offices (admittedly during his time as head of the Hong Kong financial regulator); Wheatleyâ€™s predecessor, Hector Sants, retired from his job at Barclays with â€œexhaustion and stressâ€ soon after leaving what was then the Financial Services Authority. How can Bailey ensure he doesnâ€™t suffer either kind of burnout?
Â Photo: Paul Grover
Walk the line
The removal of Wheatley as head of the FCA in September was interpreted by many as part of the â€œnew settlementâ€ between the UK authorities and City signalled by George Osborne.
When appointed in 2012, Wheatley infamously claimed he would â€œshoot first and ask questions laterâ€ in his dealings with the City. But that ultra-aggressive stance no longer chimed (in January last year he told MPs he regretted using the phrase). But, equally, Bailey, head of the Prudential Regulatory Authority, will be keen to make it clear that Osborne hasnâ€™t overcompensated. The consensus is that he is no soft touch; â€œtough but fairâ€ appears to be the dominant assessment.
Rationalise the regulatory agenda
The FCA is working through a huge number of regulations (with incomprehensible names): Solvency II (insurance), Mifid II (market infrastructure), Prips (retail products), and the review of the asset management industry (on which more later). All have the individual potential to subtly but definitively reshape the financial industry; collectively they could transform it. Bailey would do well to review the collective impact of these regulations, how they interact with each other and, crucially, with those being imposed by European and global regulators.
Leave Bank behind
Bailey has worked at the Bank of England since 1985. So his appointment is bound to raise questions about the watchdogâ€™s independence from the Prudential Regulatory Authority and the Old Lady.
The tripartite regulatory structure â€“ between the Treasury, the Bank of England and the Financial Services Authority â€“ was widely deemed to have been one of Gordon Brownâ€™s biggest mistakes. It ensured no one authority had a complete picture of what was going on and many issues disappeared down the cracks.
Â Photo: Jane Mingay/The Telegraph
The Financial Services Act of 2012, Osborneâ€™s brainchild, was designed to remedy this by placing macro and micro prudential regulation under the Bank while leaving the FCA to oversee financial firms. That makes sense. But if those two authorities get too close, thereâ€™s a danger that the fractured oversight of the tripartite structure is merely replaced by groupthink.
Tackle the asset managers
Some asset managers have expressed concern that Bailey will bring a prudential mindset to his oversight of their sector. In other words, he might start thinking about whether institutional investment firms pose the same kind of systemic risks that large banks do.
Asset managers are fond of pointing out that they donâ€™t tend to collapse like banks can, donâ€™t need to be bailed out even if they do get into trouble and arenâ€™t as interlinked with each other.
This is all true. But Bailey, who has in the past noted that heâ€™s spent a quarter of his career dealing with the aftermath of the last financial crisis, knows as well as anyone that the only thing we know about the next crisis is that it will be totally different from the last.
Â Photo: EPA
In fact, new regulations designed to make banks safer may simply be shifting risk over to fund managers. One example: because banks face tougher capital adequacy rules, they can no longer provide liquidity in the market place. Regulators are worried this risk may now be sitting within funds that invest in illiquid securities but allow their clients to withdraw money at a momentâ€™s notice.
With the first tremors of a massive asset sell-off already being felt in the markets, it would be seriously remiss of Bailey not to run a prudential slide rule over the asset management industry.
Donâ€™t mess up
Baileyâ€™s appointment was met with surprise, mostly because it appears he didnâ€™t apply for the role and had to be courted by Osborne at the last minute when other candidates didnâ€™t pass muster.
Being the head of the FCA is a tough job. So why did Bailey agree to take it on? For one thing, the Chancellor is probably quite a hard guy to turn down. For another, and this is nothing but speculation, Bailey might be playing the long game. He has held every senior role at the Bank except that of chief economist and the top job.
Having set up the PRA and then run the FCA, Bailey would no doubt appear somewhere near the top of the shortlist to become the 121st Governor when a certain Canadian heads home.