Comment: Involving practitioners in City regulation

Comment

It is hard to know for whom the Personal Investment Authority's decision to fine DBS Financial Management pounds 450,000 is more embarrassing - DBS or the PIA. The PIA on Monday fined DBS this record sum for "serious failings" linked to the pensions mis-selling scandal. That's obviously highly embarrassing for DBS. But it is also pretty embarrassing for the PIA. DBS's chairman, Ken Davy, sits on the PIA board, or did until he was prevailed upon to resign this week.

Worse still, the PIA's chairman is Joe Palmer, a former chief executive of Legal and General. L&G was recently singled out for special criticism by Helen Liddell, economic secretary to the Treasury, for failure to correct the pensions mis-selling scandal. Admittedly Mr Palmer has had nothing to do with L&G for some years now, so he cannot in any way be blamed personally for the company's tardiness in compensating victims, but he was there while the mis-selling was actually going on and can therefore be held ultimately responsible for it. If Mr Davy's position on the PIA has become untenable, what about Mr Palmer? Very embarrassing all round, it seems.

What lessons does this episode hold for Howard Davies, head of the super- SIB, as he struggles with the managerial issues of setting up the Government's giant new City regulator?

Most people might reasonably wonder why it is that practitioners, the people the PIA and others are meant to regulate, are represented on these regulatory boards at all. The answer is that the PIA and its precursors were originally set up as self-regulating organisations. To all intents and purposes, the PIA is now a statutory regulator. The vestiges of self- regulation, nonetheless, remain. Seven out of the PIA's 17 directors are practitioners. The savings industry is also widely represented on the PIA's advisory panels.

And what's wrong with that, some will say? A regulator that regards itself solely as a consumer protection agency, refusing all compromise, will ultimately end up damaging the industry it is meant to police, and therefore the interests of the consumers it is there to protect. It would also plainly be highly dangerous for regulators to set detailed rules and regulations to govern practitioners in complete isolation. Moreover, the very fact that the PIA was prepared to take such heavy-handed action against someone who actually sits on its own board shows that the system works, that the PIA is not the organ of industry self-interest.

Unfortunately that is not the way the public will see it. There are usually a hundred good reasons why a complaint cannot or should not be upheld. The suspicion is that when regulator and regulated are one and the same, these excuses will always get the upper hand. It is just about possible for a poacher to turn gamekeeper, but the two roles should never be combined simultaneously.

The PIA will eventually be absorbed into the super-SIB, once the necessary legislation is in place. Plainly it is important that the needs and concerns of practitioners throughout the financial services industry continue to be represented in the new super regulator. But do practitioners really need to be represented at board level? Moreover, should they ever become involved in disciplinary matters? Strangely enough, experience at the PIA and other City regulators is that practitioners are among the most hawkish in disciplinary cases, presumably because of the perceived wider reputational risk of malpractice to their industries. Even so, they probably shouldn't be directly involved in it.

Finding a way of involving practitioners in the super-SIB in a manner that is meaningful but also acceptable to the new Government and the public is one of the main challenges faced by Mr Davies in the run-up to next April's launch.

What can Northern Rock gain from float?

Northern Rock's flotation at the beginning of next month brings to an end the pennies-from-heaven summer of windfalls. In theory, being last out of the blocks should give Northern Rock the advantage over the other converting building societies of learning from their mistakes. If that was the strategy, Northern has been only partially successful.

Listing particulars published yesterday show Northern has plumped for a flat share handout on the Alliance & Leicester model, so avoiding the complexity of a Halifax-style tiered handout. It claims this is the fairest approach. Nonsense. The effect is to reward Johnny-come-lately carpetbaggers at the expense of long-standing investors with more sizeable deposits.

More intellectually defensible is its determination to sell all unwanted shares in one auction before dealings in the open market begin. This should avoid the blatant market manipulation that has occurred in some of the other building society flotations.

Less clear cut is just why Northern Rock is floating in the first place, given its stated intention of sticking to its traditional businesses of taking deposits and offering mortgages. Unlike its peers, Northern Rock has no need to access the capital markets to fund an expensive expansion into insurance and long-term savings.

According to the company, floating is the best way of maintaining its independence, though why this should be is not adequately explained. In any case Northern Rock is less likely than many of its rivals to fall to a bid because it is better managed and more efficient than its peers. Moreover, Northern is saddled with a poison pill that will hand 15 per cent of its value to a charitable foundation in the event of a takeover.

Members are certain to pay for their new dividends through less keen borrowing and lending rates. There is a good case for arguing that members would have been better served had Northern foregone the pounds 32m of conversion and flotation costs and remained mutual.

Masters living on borrowed time

The continuing survival of Chris Masters at the helm of Christian Salvesen is one of those minor miracles of the modern age for which there is no rational explanation. Having seen Salvesen's management pass up a 405p- a-share offer from Hays last year, shareholders are having to make do with a stock price that languishes at just 276p. Chief executives have gone for a lot less. Fortunately for Mr Masters he has been given time to prepare an escape route. He'll be chairing the soon-to-be-independent Aggreko hire division, easily the best part of the demerged group.

Not before the group managed to skid on another banana skin, however. This time it was the dreaded pea crop, which was washed out by this summer's unexpectedly heavy rains. As Britain's biggest processor of frozen peas, Salvesen was hit hard. An act of God maybe, but one which has damaged Salvesen before.

Ian Adam, the finance director, has decided to call it a day. How long before shareholders decide that Mr Masters might apply his talents elsewhere as well?

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