Split-cap trusts scandal will weigh on the Davies legacy

Internal links

Sir Howard calls it a day at FSA to take up top academic post

Split-cap trusts scandal will weigh on the Davies legacy

Outlook

Sir Howard Davies will be remembered for two things by the regulatory world – setting up the Financial Services Authority and hating the knighthood he felt obliged to accept two years ago. FSA staff were forbidden to refer to him by his full title, and it irked him that the media insisted on using it.

But it was characteristic of Sir Howard that he realised that a knighthood "came with the rations" for a job such as chairman of the FSA, so he went along with it.

He came to the FSA after a brief spell as deputy governor of the Bank of England, and consequently many people speculated that he was merely taking time out at the FSA before returning to the Bank as governor. However, that prospect was finally quashed last month when the Chancellor Gordon Brown announced that Mervyn King was to be the next governor.

Instead, he has had the huge administrative and management task of moulding the fledgling FSA into a fully operational regulatory body, complete with the legal powers it formally acquired a year ago.

Although Sir Howard never had to grapple with the regulatory implications of a major collapse such as Barings Bank or the Bank of Credit and Commerce International, he can count himself unlucky that the last three years have been dominated by the most savage bear market the stock market has seen for nearly 30 years, with all the implications that that has had for banks, brokers, fund managers and – worst of all – for the insurance industry.

Although one major general insurer – Independent Insurance – collapsed during Sir Howard's tenure, his time will be closely associated with the problems of Equitable Life and split-capital investment trusts.

Few commentators expected the House of Lords decision in 2000 that Equitable was liable to meet its commitments to holders of guaranteed annuities despite the fall in interest rates. The FSA could not be blamed for that, but it was widely criticised for not immediately either telling Equitable to cease taking new business, or telling the public not to invest in Equitable policies. That is partly the subject of an inquiry by Lord Penrose, which is due to report next year.

In 2001, the problems of the stock market were made worse by the terrorist attacks of 11 September, which made the outlook extremely uncertain for many insurance companies. The FSA's behind-the-scenes role in monitoring the industry without causing panic has probably not been fully appreciated.

However, the harshest criticism of the FSA during Sir Howard's chairmanship is likely its handling of the split-capital investment trust scandal, which highlighted an unsureness as to exactly where the boundaries of its responsibilities lay. While the FSA had no responsibility for the conduct of listed companies such as investment trusts, it most certainly was responsible for the way they were sold by stockbrokers and independent financial advisers.

Rise of a McKinsey's superstar

Born: 12 February, 1951

Educated: Manchester Grammar School and Merton College, Oxford

Career: Foreign Office 1973-74. Private secretary to the British Ambassador to Paris, 1974-76. HM Treasury 1976-82. McKinsey & Co 1982-87. Special adviser to Chancellor of the Exchequer 1985-86. Controller of the Audit Commission 1987-92. Director-general, Confederation of British Industry 1992-95. Deputy Governor, Bank of England 1995-1997. Chairman of the FSA 1997-2003