View from City Road: Not now, please, it would be too complicated

Andrew Large's review of the investor protection system reads like a civil servant's report to his minister, calculated not to ruffle too many feathers. No wonder, since drafts have been shuttling backwards and forwards to the Treasury for weeks.

No new legislation please, it says, because the parliamentary timetable is very crowded. Don't ask government to be too interventionist, because we will be blamed if things go wrong again. And don't ask for too much money, or the City will send us the bill.

Mr Large suggests that the Securities and Investments Board should establish a cost of compliance unit, ad hoc industry advisory groups, and a special project team. But these are details. The main thrust of the report amounts to no more than saying that the SIB should carry on doing the job it is supposed to be doing now - supervising junior regulators - in a more systematic, coherent and effective way.

To make it easier, the SIB wants fewer regulators to manage, and will encourage a reduction by withdrawing from direct regulation of financial services companies itself. This should ensure a successful start to the Personal Investment Authority, a merger of the regulatory functions of the financial intermediaries and the consumer investment firms.

Mr Large had better be right in his assessment that the banks and other dissidents are now ready to join the PIA, since he has missed an opportunity to recommend an amendment to the law that would allow him to force them into it. At present, the choice of regulator is with the firm concerned.

On other practical matters, the SIB's intention of reducing its involvement in drawing up detailed rules makes sense. So does the proposition that its supervision of the self- regulating organisations should be based on agreed objectives, formal review meetings and visits to the front- line regulators. The surprise is that it has not been doing that already.

The SIB has relied upon annual self-assessment reports, in which the SROs were supposed to offer a self- critical analysis of their performance. It does not take a genius to imagine how useful these were. 'We at Imro think we have been doing a jolly fine job this last year.'

One of the positive aspects of the report is Mr Large's admission that the SIB might take chief responsibility for enforcing insider trading, market manipulation and other similar legislation.

But the SIB's acceptance of the proposal is undermined by the way the review puts it: not now, please, because it would be complicated, expensive and require new laws. In the light of general concern over slack enforcement, this is a case for urgent action.

Indeed, without a demonstration of toughness from the City - especially in levying fines, which on the whole have been pitifully small - there will not be much public or political support for the introduction of plea-bargaining into the criminal courts, another idea Mr Large backs. A guilty plea should be exchanged for much more than the financial equivalent of a slap on the wrist.

Mr Large wisely wants to make greater use of the SIB's power to make public criticisms of miscreants, a vicious weapon indeed in a financial services industry dominated by marketing. But the SIB's legal powers in this area are restricted to organisations it regulates directly, which the review also says are being encouraged to switch to other regulators. Wider legal powers are surely needed, or this will become a nonsense.

The review is subtitled 'Making the two tier system work.' On a strict reading of the terms of reference, this is all Mr Large was asked to do, but it is a pity that he did not reopen the deeper questions of regulation more thoroughly.

He is 'reasonably confident' that the totality of costs of a successful two-tier system of the type we have now, with senior and junior regulators, should prove lower than those of any more centralised alternative. This assertion is not testable under the cost-benefit analysis that Mr Large is so keen on.

He suggests that a unified regulatory body, embracing the SIB and the SROs, might become too cumbersome, self-defensive and bureaucratic. But it might also have shorter reporting lines, generate less paperwork, be more responsive to early warning signals and be able to exercise statutory powers more aggressively.

A unified body could still have separate divisions to handle private and professional investors and markets. But its authority would be that much greater.