An old hand who wants a radical rethink of City rules
THE MONDAY INTERVIEW; Nick Durlacher The new chairman of the SFA has put noses out of joint with his views on tighter financial services regulation.
Monday 11 December 1995
And the thing most likely to make that happen sooner rather than later, he says, is a "thumping awful accident", another regulatory failure that leaves the legislators little choice but to act.
His thinking is bold, and in today's tense regulatory climate, controversial. Openly expressing sympathy for Labour Party ideas about stripping the Bank of England of its supervisory responsibilities and placing them with a newly-created Banking Commission, which he believes should be widened to embrace the SFA's responsibilities for the securities industry, he calls for an "imaginative re-drafting of the system", which suffers from "illogicalities in the framework". In particular, he says, the rapidly changing global financial markets and the nature of the firms dealing in them, require a new approach, especially with regard to the Securities and Investment Board, the City's lead regulator, and the Bank of England.
"If we started with a blank sheet of paper, we would certainly not be where we are now. I am not immutably wedded to the current system. Some of the proposals of the Labour Party and the Treasury and Civil Service Select Committee are well worth considering by all of us in regulation."
In its report last month on financial services the Treasury committee, responding to deep dissatisfaction over the Bank of England's role in the Baring's collapse, raised the prospect of shifting supervisory responsbilities to an independent body, and asked the Treasury to look into this. Unsurprisingly, the Bank of England is hugely sensitive to the slightest hint that it is not up to the supervisory job. But Mr Durlacher, just a month in the chairman's seat at the SFA, seems little concerned about the Bank's feelings.
"I think you have got to grapple with the problem that the most important firms involved in the securities industry are bank-owned and therefore what they do through securities trading affects the standing and profitability of banks. They could cause a run on banks and therefore the lender of last resort role of the Bank of England could come into play."
This securities argument leaves regulators with two choices, in Mr Durlacher's view: they go down the US road of Glass-Steagall, the Thirties Act that put up a wall between retail banking and securities underwriting, or get the banking and securities regulators under one roof.
"Looking at the way of the world, people in this country do not have the stomach for re-inventing Glass-Steagall, which is being slowly unwound in the US anyway, and therefore they must have the stomach to look at the industry's relations with the Bank of England."
Few expect the Bank quietly to let go of one of its twin key functions, the other being responsibility for conducting the UK's monetary policy. But Mr Durlacher offers the following observation. "It is difficult to produce good news out of regulation, and most of us like good news. So intellectually and emotionally, the Bank may come to the view that the sexier activity is monetary policy. That might colour their attitude.
"If banking regulation is to be hived off, then I would like to see some way of the expertise and experience of the SFA having an important role in the new organisation, of seeing them integrated. We do not have a divine right to exist immutably, but in the meantime we can ensure we do a damn good job so that when people sit down to sort out the new system our voice is heard."
But the creation of a powerful Banking and Securities Commission, taking in the SFA, will inevitably raise questions about the shape of the rest of the regulatory system, and especially the place of the SIB, currently the overseer or holding company of the frontline City watchdogs. Stoked by Labour Party thinking about the possible advantages of integrating financial regulation into a central, powerful body, this year has seen unprecedented jostling for position between the SIB and its frontline watchdog charges, such as the SFA and the Personal Investment Authority. In virtually the same breath, MrDurlacher expresses his distaste for the public wrangling with the SIB, while suggesting a future role for it that will do nothing to cool the temperature within the regulators' fraternity. "The SIB could be the body that looks after the retail sector, the PIA and others.
"If we are tearing up the framework, it might be that we end up with two bodies directly responsible to Parliament, the banking commission and a retail commission."
In shooting from the hip this early in his tenure, Mr Durlacher is proving a worthy successor to Christopher Sharples, who was not known for his shyness with words. But then the 49 year-old new chairman comes with considerable knowledge of the regulators' world, and the self-assurance of deep-rooted City stock. He is third-generation Durlacher, the family that gave its name to the largest jobbing firm on the Stock Exchange prior to Big Bang. It was then subsumed into Barclays, as part of BZW, where Mr Durlacher continued his job running the futures business at Liffe, where he was chairman until last June.
He has been involved in securities regulation since 1986, moving to the board of the SFA at its creation in 1991.
In his time, he says, the financial regulatory environment has become much more demanding. This is not just because of the complexity of products and the size and scope of firms, but also reflects greater public awareness.
In the specific field of securities, the Barings collapse was a "therapeutic shock". "It rang the death knell of the cup-of-tea type of regulation in the City, where people implicitly trusted those they were regulating and just met them occasionally."
The most important thing to get right, he says, is striking the balance between learning the lessons from something as dramatic as Barings and maintaining a light enough touch so that businesses can continue to flourish. "We may be at fault in having massaged expectations of what regulators should deliver to the extreme case that no one should be allowed to go bust. That flies in the face of capitalism and that firms rise and fall. We cannot lay such a burden of controls, that as a result of trying to reach unattainable expectations, industry is choked off. In reality, it is not choked off, it just goes elsewhere."
But one area in which the new SFA chairman is acutely aware of the need for improvement is the speed, or rather lack of it, with which investigations are completed. There has been private criticism from the City and Whitehall of the length of time the SFA is taking over its investigation into Swiss Bank Corporation's dealings during Trafalgar House's failed takeover battle for Northern Electric.
"If self-regulation is presented by the SFA as a better alternative to criminal prosecution then one of the things it has to do is deliver justice quicker than the courts," says Mr Durlacher.
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