Self-regulation takes a back seat
27 May 1997
Will an all-powerful SIB solve the drawbacks of self-regulation? asks Robert Lindsay
The Labour government's plan for a "super-Securities and Investments Board" to create one of the most powerful regulatory bodies in the world is not before time, according to the City's leading regulatory lawyers.
Tim Herrington, financial services partner at Clifford Chance, who advised on the formation of two of the three self-regulatory bodies that will now be rolled into the statutory SIB, would like to think that a paper he drew up 18 months ago calling for just such a body helped influence Labour thinking.
He read the paper at a seminar at which Labour's then treasury spokesman, Alistair Darling, expressed interest. Herrington sent him the paper.
But as Peters & Peters senior partner Monty Raphael points out, what Labour is doing is virtually what was first advocated by DTI adviser Professor Jim Gower when he drew up recommendations for what became the 1986 Financial Services Act, which created the three self-regulatory organisations.
Gower's fear was that the then Tory government would not like the increased cost of an enlarged SIB with all the regulatory functions. He was right. But more important, says Herrington, was the Conservatives' anti-state-regulator philosophy. They preferred voluntary self-regulation.
City lawyers agree the final Act was something of a mess. Herrington attacks it for a "horrendous degree of complexity and a lack of clarity in key areas" largely because the government tried to sell it to City professionals as self-regulation while stressing its statutory basis to the consumer lobby.
By the 1990s, though, regardless of Conservative philosophy, market consensus was already driving the three self-regulatory bodies further toward arm's-length regulation, away from the involvement of practitioners.
"All sectors now talk of 'authorisation' by regulatory bodies rather than 'membership'," Herrington said last year in his paper. "None of the regulators has the word 'association' in its name."
But there was room for still greater control by a super-SIB. Herrington's paper pointed out that there was an overlap between the regulators which led to inconsistent policies, particularly on disciplining members.
For example, George Staple, the former director of the Serious Fraud Office, who re-joined Clifford Chance this month, points out that the Personal Investment Authority, Imro and the Securities and Futures Authority each have their own disciplinary tribunal, leading to needless duplication. The SIB's own tribunal - the Financial Services Tribunal - is underused. Staple believes the three tribunals should now be rolled into the SIB tribunal, increasing its status.
And there are other anomalies. Why, Herrington points out, should the DTI alone regulate insurance companies and the Bank of England alone supervise banks when both are increasingly moving into investment business? Labour agrees, at least partly. Gordon Brown said last week that the Bank of England's supervisory role will be given to the SIB.
Then there is the small matter of law firms providing investment advice. Why should the Law Society regulate them when other independent investment advisers have their own regulator under the SIB?
"I can see no reason why there should be an exception for solicitors," says Raphael. Herrington agrees.
When last week The Lawyer revealed the government's plan to scrap the Law Society's role the society and the Association of Solicitor Investment Managers said they were ready to fight the move. They may be on a hiding to nothing.
Nevertheless, simply putting the regulators under one roof will not solve all the problems. Herrington warns that practitioners will somehow have to remain involved in regulating. He wants to see them on committees appointed by the SIB "where they will have a much better ability to influence staff employed in the day to day implementation of regulations".
But not everyone thinks the idea of a super-SIB is a good one. When Labour first mooted its plan SJ Berwin's regulatory partner Charles Abrams claimed that the Barings and Maxwell scandals had nothing to do with self-regulation.
Rolling all three bodies into the SIB would create a conflict, he said, since each body had a different view of which investors they were supposed to be protecting. It is a point the government and the SIB will have to address.