The sight of confused Maxwell pensioners fearing a life of penury has moved even the greatest supporters of the system to question whether it can continue.
It is not just the victims of the Maxwell fraud who feel let down. Savers with Barlow Clowes, Dunsdale and other collapsed firms must wonder if the City can be trusted to regulate itself.
Most telling of all, people in the Square Mile are asking themselves the same question. Most do so in private but one or two senior professionals are prepared to put their heads over the parapet.
'The thing is broken,' Barrie Bennett, deputy managing director of Kleinwort Benson Securities, said. 'The question is whether we should try and mend it or take it away and buy another model. I would like us to go to an SEC.'
Mr Bennett is not alone in highlighting the attractions of the Securities and Exchange Commission, a government body, which has an awesome reputation for regulating markets in the US.
But would a statutory system be better than the current one? What difference would it make?
The difficulty in answering these questions is that words get in the way. What should be a debate about money, protecting investors and compensating them when things go wrong has become bogged down in misleading terms.
Take 'self-regulation' for a start. It is a misnomer that conjures up visions of cosy clubs of City professionals who will do no more than blackball anyone who steps out of line.
But that picture is out of date, except in pockets of the City such as the Lloyd's insurance market and the Takeover Panel.
Far from being a voluntary society, the Securities and Investments Board, the chief investment regulator, is a statutory body with powers set out in the Financial Services Act 1986 and delegated to it by the Treasury.
This point is often lost in discussions on whether we should have statutory regulation in Britain. In some ways we already have it.
That at least is the view of Andrew Large, who recently took over as chairman of the SIB.
In the City it is also said that the SIB is staffed by civil servants rather than men and women from the financial services industry. It is often criticised for being a government department.
Why then is the system said to be self-regulatory? There are two main reasons: the City rather than the taxpayer foots the bill and the SIB delegates its powers to 'self- regulatory organisations', which are indeed self-regulating.
It is here that the confusion arises. The names of these SROs are more suggestive of clubs than of statutory regulators. Their boards are made up of non-executives who spend most of their time in the markets they are regulating. One of the SROs, the Investment Management Regulatory Organisation, by its own admission failed to carry out its responsibilities properly in the Maxwell saga.
Following Imro's admission, Norman Lamont, the Chancellor, who recently inherited responsibility for City regulation, 'requested' a review of the way the SIB carries out its role.
Given the furore over Maxwell and other pressures arising from plans to merge the Financial Intermediaries, Managers and Brokers Regulatory Association with the Life Assurance and Unit Trust Regulatory Organisation, this 'request' is leading to serious self- examination. Whether it leads to a radical rewrite is, however, unlikely.
Mr Large is wondering how to get more people with experience of dealing in shares, managing portfolios and selling life insurance to work for the regulatory bodies. It is this rather than anything more radical that occupies his thoughts.
There is no doubt that the quality of the regulatory staff lies at the heart of the debate on the future of regulation. Had the inspectors of the Maxwell fund management company been more sceptical, they might have discovered that the stock lending occurring was more like stock transferring. Scepticism comes with experience, or so the theory goes.
But the SROs are keen to point to the number of practitioners they employ. The Securities and Futures Authority said that 30 of its 200 staff have worked in member firms. Lautro said most of its staff have industry experience.
Even Imro, which is at the heart of the Maxwell criticism, said 23 out of 47 staff involved in approving new members and monitoring their businesses have experience in financial services.
Mr Large nevertheless knows that he cannot attract high flyers from big houses to become inspectors. Apart from missing out on career opportunities, they are worried about status and pay. The average salary at the SFA, for example, is about pounds 27,000, hardly enough to attract a bright stockbroker who might expect to earn pounds 100,000. Another problem is that the system does not have the stature required.
This is partly because responsibility is delegated to the SROs and professional bodies. It is also because the SIB has spent far too much time making rules and too little enforcing them. Sir David Walker, Mr Large's predecessor, took the sensible step of simplifying rule books. But he then revisited issues that people thought had been settled, such as soft commissions - whereby brokers repay commission to large investors with Reuters screens and other 'non cash' items. This created uncertainty.
Mr Large is concerned that the reputation of the SIB and the SIB- lings should be such that they are no longer blamed when investors lose out from a firm's collapse. The system has to gain in stature.
A merged body of the SIB and its SROs might be the solution. It would make recruitment easier because there would be a clear career path. It would also improve co-ordination and, possibly, add to the SIB's authority.
Salaries are not the only financial element at the heart of the debate. Under current arrangements, the industry pays the costs of the regulatory system. The bill is already enormous, with some firms paying the SROs hundreds of thousands of pounds.
It is hard to see how they will agree to pay more for better inspectors, although a system of secondment may help. If the industry does not agree to pay more the Government may be forced to step in.
The Government had to pay compensation to Barlow Clowes victims and it may have to do the same for the Maxwell victims, if Sir John Cuckney's bucket- shaking fails to secure the required funds from the City.
Mr Large is believed to think the implications of government funding unacceptable. But then he is paid to run the present system.
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