Comment: Getting out of the regulatory soup

It is looking increasingly as though the City watchdog, the Securities and Investments Board, will be radically transformed in the next couple of years. If it is not, the alternative is even more radical: it may disappear altogether.

On Monday Sir Kenneth Clucas made the case for this latter course of action. Over the last three days this view has been gathering considerable support in the financial services industry and, while even a self-regulated industry does not ultimately determine how it should be regulated, the industry's views do matter.

So too do the views of Sir Kenneth. He was the author of a much-praised study, published in the spring, which looked at the way regulation of retail financial services was working. At the moment this is split between three self-regulatory bodies: Imro, which covers fund managers; Lautro, for the life assurance companies; and Fimbra, which covers financial intermediaries. In addition the SIB, besides being the umbrella body under which all these self-regulating organisations operate, is itself the regulator for some other important bodies, in particular the banks and building societies when they sell investment products.

Sir Kenneth concluded then that there should be a single body, the Personal Investment Authority, instead of the present alphabet soup of regulators. This PIA would take over the work of Lautro and Fimbra and about one third of the membership of Imro (the rest of the Imro members are 'wholesale' fund managers). The plan received widespread support, except from Imro, but since it had been the hapless regulator of the Maxwell pension funds, its political clout was minimal. The PIA plan has still to receive the official green light, but clearly something like it will be formed.

Slimmed down

This week Sir Kenneth has gone further. He has suggested that Imro should disappear altogether, with the rump of its members joining either the PIA or, more probably, the Securities and Futures Association, which regulates stockbrokers. This would cut the number of self- regulating organisations from four to two: one for the retail side of the business, the other for the wholesale. The SIB could be slimmed down and become a proper consumer body, more on the lines of Oftel. Question: if there were only two self-regulatory organisations, would you need an umbrella body like the SIB to sit on top and supervise them?

The answer of the present self-regulatory organisations would be: probably not. They are irked by the need to pay a large proportion of their members' fees to keep the SIB and feel they do not get much added value for their money.

The answer of the industry is a qualified yes. Since the speech, the idea of a slimline SIB has received support from a number of the more thoughtful people in the financial services business, including Keith Bedell-Pearce, chief executive of Prudential Financial Services, and Tom Kelly, assistant general manager of Norwich Union.

The answer of the SIB itself is not yet clear. Andrew Large, its new head, is carrying out a review for the Chancellor of how the SIB should work, which will be completed by March. He is getting some outside help here, so the report will not be just an in-house view. Bureaucracies have an inevitable tendency to protect their patch and this needs to countered.

There are also several other practical tasks that the SIB carries out, apart from looking over the shoulder of Fimbra, Imro and the like. For example, it has to oversee the four recognised investment exchanges and the various professional bodies, like the accountants, who also offer financial advice; it directly regulates unit trusts and the retail financial product business of the banks and building societies; it deals with the EC, the Securities and Exchange Commission and so on over international securities market regulation; it runs an investors' compensation scheme. There is no particular reason why the SIB should do all this, but someone has to. While there are good arguments for the SIB giving up its own direct regulatory role, there are few people who would like to see the Department of Trade and Industry getting back into the regulatory game.

What is, however, almost beyond dispute is that the present system is too complicated, and that there is no clear body representing consumers. If every organisation selling financial services were corralled into a retail regulator or a wholesale one, then the SIB could at least become simpler and smaller. It could also at some stage become a proper statutory body, rather than the curious hybrid it is at the moment: a self- regulatory body to which statutory obligations have been sub-contracted.

Consumer interests

It could be made directly answerable to Parliament, instead of to the Chancellor, who, after all, does have other more pressing concerns. And it could be reconstructed to give greater weight to consumer interests, in the first instance by setting up a consumer panel that focussed solely on that. It would never become a precise clone of Oftel, Ofwat, Offer and the like, for they are basically regulating monopolies where there is too little competition, whereas the financial services industry is a diverse one where there is sometimes too much competition. (Excessive competition encourages over-selling of unsuitable products and churning of investments.)

The horrors of setting up the present system from scratch should discourage any attempt to rip the present system to bits and start again. So the best way forward would be to allow, and maybe bully, the present organisations to evolve into something closer to the ideal. The trick will be to make sure that each step forward does not close off the next step.

Thus, when the PIA is set up it is important that banks and building societies, which increasingly are becoming distributors for other financial services, should come under its wing. Buying a life assurance policy from a bank should come under the same regulatory regime as buying a policy via a broker or from the direct sales staff. If they stay outside, the case for slimming the SIB is seriously weakened.

Ideally the SIB should be a small, aggressive 'hit squad' acting on behalf of consumers wherever they are being done down. Mercifully, it is already changing from the cumbersome, legalistic body it was at the start; it just has a way to go.