The resignation of Ken Davy, the chairman of DBS Financial Management, from the Personal Investment Authority (PIA), is proof that having financial service practitioners on the boards of financial regulators does not work, according to Clifford Chance investment partner Tim Herrington, who helped establish the PIA.
Davy resigned after his company DBS - a network of independent financial advisers - was fined £425,000 by the PIA, which regulates investment advisers, for delays in reviewing its clients who could have been mis-sold pensions. The fine is the largest so far imposed by the PIA on one of its members.
The PIA and other self-regulatory bodies will be scrapped, with the formation of a single financial services regulator or "super-SIB" next year. Plans for the new watchdog, drawn up by Andrew Large, the outgoing chairman of SIB, in July left open the question of whether practitioners from the industries being regulated would take a decision-making role in the body.
Herrington said: "This sort of event confirms my own thinking that having practitioners with responsibility for determining policy and involved in supervising activity is untenable. It's just too difficult because of the conflict of interests that can arise when your own firm is in difficulty.
"Ken Davy had to resign because the public just couldn't have confidence in his ability to supervise the industry."
Current plans for Newro - the working title of the new regulator - stipulate that non-executive board members may be partly drawn from financial services industry practitioners but they "would not serve as representatives of any particular interest group".
Practitioners would have a minority role in policy formation and decision making, disciplinary matters and reviewing compliance costs.
Herrington believes that the practitioners' role in Newro should be strictly consultative.
The pensions mis-selling scandal appeared to claim another head at the PIA last week when its chief executive, Colette Bowe, announced she would be resigning in the new year and not applying for any of the new executive positions within Newro.
Bowe has had a rough ride from the press over the slowness of the review the PIA is conducting into pensions mis-selling.
Litigation partner Philip Ryley of Bristol firm Ringrose Wharton, who is acting for pensioners claiming to have been mis-sold private pensions, as well as for a group of independent financial advisers, warned that the larger proportion of mis-sold pensions was the responsibility of the life companies rather than financial advisers such as DBS.
If DBS was being fined around half a million, said Ryley, the life companies could expect fines running into millions of pounds if they did not meet the Government's deadline of dealing with 90 per cent of priority cases by the end of the year.
Clifford Chance is also lobbying the Government to give Newro the power to give companies "binding guidance" on whether a particular action they take will contravene the new regulations.
Partner Chris Bates said: "Our clients often complain about the lack of any UK equivalent to the US Securities and Exchange Commission's 'no action' letter."