Flawed PIA nears moment of truth: Former chairman Sir Gordon Downey argues that a new agency would be preferable to the two-tier approach

IN TWO months the Personal Investment Authority is due to become the single retail regulator for the financial services industry. This seems unlikely at present: fewer than half the intended members have applied for admission; and only about 2.5 per cent have been accepted.

As former chairman of the PIA board, I am concerned that its credibility is still in question. Why is this the case, and what can be done about it?

It is worth remembering that the PIA's only purpose is to improve investor protection. The present multiplicity of regulators is confusing and there is much to be said for imposing common standards and a single point of enforcement. But the aim must be to safeguard the interests of consumers, not to establish a pecking order for big players.

The task was never going to be easy. It meant bringing together disparate sectors of the industry - banks, building societies, life offices, unit trusts and independent financial advisers; and doing so by consent since, under existing legislation, no one could be compelled to join.

Potentially, the need for consent was a strength and a weakness. If practitioners and consumers could agree on a blueprint, this level of commitment could provide the PIA with unprecedented authority. But there was always the risk that powerful prospective members would seek to dictate terms as the price. Regrettably, this has led to in-fighting that has had less to do with the public interest than with commercial advantage.

As chairman, I felt the PIA was not worth having unless it was based on consensus. But the Securities and Investments Board (the senior financial regulator) believed that if the banks could be persuaded to join, the rest would have no option but to follow. The board felt this would be easier to achieve with a chairman who had roots among the big players and no past attachment to Fimbra, the regulator for independent financial advisers. And since PIA had to be authorised by SIB, I agreed to step down.

On reflection, I believe this approach was wrong in principle. Consent still seems to be a problem - and a genuinely independent chairman had advantages over a former practitioner, however well-known to large institutions.

I also believe that too high a price is being paid to persuade the banks and others to join. It seems wrong in principle that, for example, they should be consulted over the appointment of the 'public interest' members of the PIA board. And it was largely at their insistence (and that of SIB) that PIA member firms are to be required to maintain capital of pounds 10,000, even if they do not handle clients' money. This requirement the Government successfully opposed in Europe on the grounds that it was irrelevant to investor protection. In my view it is also anti-competitive and likely to eliminate many small independent financial advisers providing a useful service to consumers.

The lack of commitment by all parties re-opens the question whether a system based on voluntary membership can work at all. I supported PIA because I thought it could enhance investor protection. In any case there was no obvious alternative since the Government had ruled out fresh legislation. But if consensus cannot be achieved without prejudicing consumer interests, new legislation may have to be reconsidered.

Assuming the PIA does survive, how can it be made effective? I believe two steps are needed. First, the present chain of accountability of PIA to SIB and SIB to the Treasury involves unnecessary duplication and expense. The concept of a two-tier system of regulation might have been justified on the grounds that a practitioner-based lower tier (PIA) would report to an upper tier (SIB), which would be the custodian of the public interest - the pattern envisaged by Parliament when it passed the Financial Services Act.

However, the position has changed. At the insistence of SIB, the PIA board is required to have a public interest majority. So what distinctive function does SIB perform? To avoid second-guessing, it might be better to make PIA a designated authority (like SIB), answerable directly to the Treasury. This would seem to achieve some of the advantages of a 'statutory' form of regulation some institutions have been pressing for.

Second, the PIA has to persuade prospective members that it is not a colonial outpost of SIB. Smaller firms, in particular, will need some reassurance that they are not facing an unreasonably hostile regulatory environment. Clearly, this has been made more difficult by having a chairman and a chief executive from that stable. But, if the accountability to SIB were broken, I am sure the board should be strong enough to adopt its own agenda.

Unless it can rapidly establish credibility among consumers and all parts of the industry, the only solution will, in my view, lie in fresh legislation rather than consent.

Before his appointment as chairman of the PIA, Sir Gordon Downey was chairman of Fimbra, the regulator for independent financial advisers. Last September, he was replaced as chairman of the PIA by Joe Palmer, formerly chief executive of Legal & General and a director of the Securities and Investments Board.

(Photographs omitted)

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths surrounding the enigmatic singer
Life and Style
life
ebooks
ebooksA special investigation by Andy McSmith
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Sport
Christian Benteke of Aston Villa celebrates scoring the winner for Aston Villa
football
News
Bill O'Reilly attends The Hollywood Reporter 35 Most Powerful People In Media Celebration at The Four Seasons Restaurant on April 16, 2014 in New York City
media It is the second time he and the channel have clarified statements
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn