By Huw Jones
LONDON, Jan 18 (Reuters) - The British government's shifttoward a more accommodative stance when it comes to regulatingbanks has left its financial watchdog between a rock and a hardplace, with a bit of cack-handedness compounding the discomfort.
The political heat on the Financial Conduct Authority (FCA)will be turned up on Wednesday when lawmakers probe why itscrapped a review into culture at banks that have had to paybillions in fines for ripping off customers and trying to rigmarkets.
Specifically, parliament's Treasury Select Committee wantsto know whether and how the finance ministry was involved.
The committee has been a tough critic of the authority,which is meant to be completely independent but is vulnerable toinfluence from the government which chooses its chief executive.
Former regulators, lawyers and board members of financialfirms believe the FCA has fallen foul of a broader shift inregulatory mood that has also taken place in the United Statesand elsewhere in Europe.
More than seven years on from the crash of Lehman Brothers,the feeling is that the job of making the financial system moreresilient has been accomplished, they say, and policymakersshould now focus on lifting economic growth, with lending frombanks at the core of that goal.
"I think the FCA has got a far more complex agenda to managenow, and inevitably that leads to some friction betweenpolicymaking and the practical implications," said Etay Katz, afinancial lawyer at Allen & Overy.
British finance minister George Osborne called for a "newsettlement" with banks last June, signalling he wanted to see anend to the banker bashing that has become a national pastimesince the 2007-09 financial crisis forced British taxpayers tobail out several lenders.
A month later Osborne ousted Martin Wheatley, the hardlineCEO of the FCA who had promised lenders he would "shoot firstand ask questions later".
The finance minister has also scaled back a balance sheetlevy on big lenders after HSBC said it would reviewwhether to keep its head office in London, and ditched adraconian element of a new regime for making senior bankersaccountable for their actions.
Osborne has denied he had a hand in ditching the culturereview, but his other actions add up to a significant change inthe substance and tone of regulating a sector that remains oneof Britain's biggest tax generators and a key to its "soft"power in the world.
A board member of an insurance company likened the cyclicalnature of banking regulation to the way drivers react to a caraccident on a motorway -- they slow down for a few miles andthen return to normal cruising speed.
"The FCA is caught in a turn in the regulatory cycle andthese turning points are messy," said David Green, a former UKregulator and now a consultant on regulatory issues.
"The regulator is always in the wrong place because when thepolitical mood changes, the legislative framework hasn't and theregulator cannot help but be out of sync," Green said.
Meanwhile, the general public still expects the FCA to playtough cop, especially when scandals at banks seem to never end.
COMMUNICATION
Osborne is due to select a new CEO for the FCA soon, afteracting chief Tracey McDermott said she did not want the top job.
McDermott was the one who decided not to pursue a broadreview of banking culture that had been part of the watchdog's2015 business plan, saying that dealing with banks individuallywas a better approach.
Andrew Tyrie, who chairs the Treasury Select Committee, hasdescribed her decision as "curious" and wants a fullerexplanation of how it was reached and whether other bodies, likethe finance ministry or the Bank of England, had a say.
No matter how the decision was made, critics agree it wasnot communicated well and showed a failure to learn from a priorincident in the insurance sector.
The FCA only confirmed the culture review move in Decemberafter it was reported by a newspaper.
"It was badly handled. Communication is quite important, andthis does not make filling the CEO job any easier," a former UKregulator said on condition of anonymity.
The FCA had come under criticism before for giving marketsensitive details to a journalist rather than making a publicannouncement. The article about an insurance sector reviewtriggered wild swings in share prices of insurance companies.
On Wednesday, McDermott will expand on her reasons why thereview was ditched and detail how the watchdog is tackling bankculture in other ways, a person familiar with the FCA said.
Critics say the FCA could learn a lesson from Britain'sother new post-crisis watchdog, the Bank of England's PrudentialRegulation Authority, which ensures that banks hold enoughcapital to stay financially sound.
"The PRA, which has had a softer, more collaborativeapproach with banks, seems to have managed transition in theregulatory cycle better than the FCA," the insurance sectorboard member said.
"Osborne engineered the change in the regulatory cycle butthe FCA faces the flak as that is where the buck stops." (Editing by Sonya Hepinstall)
HSBC Holdings (HSBA)