Business View: The Jeremy Paxman question is Sir Howard's real university challenge

Sir Howard Davies has rather jumped the gun by quitting the Financial Services Authority for the London School of Economics. Had he waited a few months I'm sure his dream job – manager of Manchester City – would have become available.

The FSA has until the start of the next academic year to come up with a successor. Nissé's nap (you heard it here first) is Liffe's Sir Brian Williamson and the hot money is saying that they will bring in an outsider for a less executive chairman's role and promote someone like the regulatory process boss Carol Sergeant to the chief executive's post. Also, Sir Howard has a few issues to resolve at the LSE. Another Nissé nap would be to bet that it will merge within a few years, either with neighbouring King's College or the hot-to-trot Imperial, run by former Glaxo guru Sir Richard Sykes.

Though Sir Howard's departure date has been set to fit in with the timetable of his new gaff, it comes at a timely juncture for the FSA. The Mancunian management consultant was forced to build the super-regulator from some fragile building blocks. As a result there were holes in the regulatory structure, through which the likes of Independent Insurance and Equitable Life slipped.

He has been castigated for these failures, even though they were not entirely his fault. The laws framing the FSA and granting its powers only came into force a year ago. And with such a powerful and far-reaching organisation, it takes time for the mechanisms to start working effectively. However, Sir Howard is a creator and a political operator. The FSA needs a different type of leader if it is going to use the powers Sir Howard won for it effectively.

If you want to see how big a task the new FSA boss has, look no further than the problems the regulator has in getting to grips with the way companies communicate with their shareholders.

The Financial Services and Markets Act, the longest piece of legislation ever to pass through Parliament, codifies what quoted companies should or should not say about their financial position. Since it came into force there has been a move towards making "pre-close statements", just before the end of their financial year (you guessed that, didn't you), which essentially tell you what is going to be in the interim results a couple of months before they are published. These statements are great for shareholders but awful for people like me, because they take all the fun out of guessing who is going to announce dreadful results. The idea is that if there are surprises around, everyone will be let into the secret at the same time.

The same is true about trading statements. These are supposed to be an admission by the management along the lines of: "Uh, oh, things aren't going quite as planned". They should tell the truth, the whole truth, etc. But recent events have shown us that the technique needs a little more practice.

Just over a week ago, Cable & Wireless had to admit to a potential £1.5bn tax indemnity in a statement put out when it was downgraded by the Moody's credit agency. On Wednesday BAE Systems came clean on its problems with a host of government defence contracts. In September, British Energy used a trading statement to admit it was close to collapse.

All these trading statements are now being investigated by the FSA after complaints by shareholders. Each has a different problem.

With British Energy it is whether executives misled investors during a conference call a couple of weeks earlier. With C&W it is why the tax liability was hidden for more than two years. And with BAE the issue is whether details of talks with the Ministry of Defence were leaked before the trading statement and whether the arms manufacturer then misled the City when questions were asked about the situation.

Each situation has created an aura of mistrust. Shareholders are starting to ask the Jeremy Paxman question: "Why are these lying bastards lying to me?" And this is not a healthy situation.

When investors cannot trust the statements of companies in which they hold shares, they have little option but to sell their stakes. As happened in the US post-Enron, this can destabilise the market.

The Yanks put people who mislead the market in jail. If Sir Howard is to leave a lasting legacy and an effective FSA, he has to make an example of somebody.

j.nisse@independent.co.uk